Over the years I’ve often heard the question “why are the U.S. House and Senate Agricultural committees given jurisdiction and oversight of financial firms?” This question sometimes appears in the managed futures course I teach at DePaul University.

With the testimony of Jon Corzine former CEO of MF Global before the House Agricultural Committee on December 8th, 2011 and his testimony with the Senate Agricultural Committee on December 13th, 2011 regarding the bankruptcy of MF Global, the 8th largest U.S. bankruptcy, this would be a good opportunity to discuss this question.

Let’s start with the basics:

The U.S. Senate Agriculture, Nutrition and Forestry Committee maintains jurisdiction on 17 topics including agricultural economics and research, agricultural commodities and price stabilization. Four of the five subcommittees including the Subcommittee on Commodities, Markets, Trade and Risk Management have oversight of the Commodity Futures Trading Commission (CFTC).

The U.S. House of Representatives Committee on Agriculture has jurisdiction of oversight on 20 various topics including agricultural economics and research, stabilization of agricultural prices and commodity exchanges. The General Farm Commodities and Risk Management subcommittee maintains oversight of the commodity exchanges.
Of course this begs the question, why are these committees given jurisdiction over commodity exchanges and the CFTC?

To find the answer, let’s take a walk down history lane:

By the 1840s agricultural prices were experiencing price volatility. We can use Chicago as an example of this. Farmers would bring their crops to market and try to sell it. If they couldn’t sell the crops, they sometimes burned it or dumped it into Lake Michigan. By 1848 the Chicago Board of Trade (CBOT) was organized with the intention to give farmers and other grain market participants the ability to manage price volatility risk. In 1898 the Butter and Egg Board began and renamed in 1919 as the Chicago Mercantile Exchange (Now the CME Group).

February 18th, 1859 the Governor of Illinois signs an act giving the CBOT a corporate charter. The act empowers the CBOT as a self-regulatory authority; it standardized grades of grain and gave CBOT grain inspectors binding decision of grain quality. Some have debated if 1859 is considered the beginning of futures trading of CBOT wheat, corn and oats.

The United State Dept. of Agriculture (USDA) was signed into law under President Lincoln on May 15, 1862.

By the 1880s many futures commodity exchanges were organizing around the country. Over the next 40 years, an estimated 200 bills were introduced in congress to regulate, ban and tax futures trading. Some bills were debated in the Supreme Court as unconstitutional. In the 1920s the Federal Trade Commission released a seven volume grain trade and futures trading report. Some of the volumes discussed the need for regulation of futures trading.

Click here to Read more.

Copyright ©2011 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com, www.shorecapmgmt.com. Mark Shore publishes research, consults on alternative investments and conducts educational workshops. Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures/ global macro course.

Risk Disclosure:
Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Always review a complete CTA disclosure document before investing in any Managed Futures program. Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.

If you are an investment manager with a position, long or short, in British Petroleum, you owe it to yourself to listen to this King World News interview with Matthew Simmons. In it, Simmons says BP is lying when it claims the cap on the oil well riser has stopped the flow of oil into the Gulf of Mexico. That’s because Simmons believes, based on his 40 years as an investment banker to the oil industry and information he’s receiving from various sources, that the real oil gusher is not the damaged riser, but a hole in the ocean floor nearby that is spewing crude oil and methane gas. This oil and gas is suspended in a giant lake-blob 4,500 to 5,000 feet below the surface in the cooler water there. His main concern with this is that if a tropical storm or hurricane stirs the Gulf waters and brings that cool water layer, with the oil and gas, to the surface, the methane will blow inland on the wind and sicken or kill many living along the Gulf.

“Peak Oil” theorists love Simmons because he has been saying for years that the Saudi oil fields are in decline and that we need to face up to a future with less oil. Because of his views on Peak Oil, and other stances he has taken, he is also dismissed by some in the oil and financial industries as some sort of crackpot.

BP’s stock price was down was down about 4.5% this afternoon to $35.40 per share. If Simmons is right, BP should be worth $0 and its executives should be headed to jail. Listen to King’s interview with Simmons, and decide for yourself.

Usually when I’m getting ready for work in the morning, we have the radio tuned to the local NPR station. Mostly it’s background noise but every now and then a key word or phrase will cause me to slow down and listen. One of those key phrases is “hedge fund,” and today it felt like I was hearing it every five minutes.

That’s because NPR’s “Morning Edition” program featured not one, but two separate stories on hedge funds. The first was an interview with Sebastian Mallaby, a senior fellow in International Economics at the Council on Foreign Relations and author of the book “More Money Than God: Hedge Funds and the Making of a New Elite.”

In the interview, host Deborah Amos picks up on the apparent theme of Mallaby’s book (which I have not read) by leading in to the conversation with this: “This is a book about finance, but you’re talking about some very eccentric people who are able to, in some ways, game the American financial system. Tell us about one of them.”

Mallaby opened with a story about Alfred Winslow Jones and how he had run undercover missions against the Nazis in the 1930s. Jones had gone to Germany ostensibly to work for the state department but instead fell in love with an anti-Nazi German activist. He signed up for the Marxist Workers School in Berlin. “So the father of this hyper-capitalist, financial vehicle actually had flirted with Marxism in his youth,” Mallaby said.

But when Mallaby interviewed people who had worked for Jones, none of them knew about his past life. This secretive trait became a recurring theme for Mallaby as he looked at more hedge fund managers. “So that kind of instinct for being under the radar has characterized hedge fund managers ever since,” Mallaby said.

He also touches on what I have always thought is the best part of the hedge fund industry, which is that it is essentially made up of entrepreneurs—mostly small businessmen taking a chance on their own ideas. He cites the example of James Simons. “If you take James Simons of Renaissance Technologies, who emerged as the highest earning hedge fund titan in the 2000s, this is not a guy who took orders from on high very nicely,” Mallaby said. “He never wears socks, he sort of, you know, drives his car at all kinds of speed, This is the kind of personality who is both free-thinking independent, self-reliant, a bit maverick, a bit crazy, who goes and becomes an entrepreneur, and that’s what the industry is full of.”

Later in the interview, talk turns to hedge fund regulation. Mallaby said he thinks larger hedge funds should be regulated like investment banks, “because that is effectively what they’ve become,” but that smaller funds should remain unconstrained by regulation.

On John Paulson and others making a killing betting against the mortgage bubble, Mallaby said the bets weren’t wild; they resulted from serious and well-funded research.

Then, a short time later, NPR ran a story reported by John Ydstie about machinations on Capitol Hill to change the carried interest tax rate.

Ydstie interviewed Len Burman, a fellow at the Brookings Institution and a professor at Syracuse University. Burman called the tax break on carried interest “a huge windfall to some of the best-off people in society.”

Jeffrey DeBoer, president of the Real Estate Roundtable, said hiking the tax rate on carried interest to 35 percent from 15 percent would hurt mostly real estate partnerships, and by extension construction workers. According to NPR, “with more than one in four construction workers unemployed and the commercial real estate sector struggling, now is not the time to raise the tax rates paid by real estate developers.”
“Those people hire construction workers,” DeBoer told NPR. “They hire all kinds of other people around the projects. And this proposal, again, discourages that kind of activity.”

I’m not sure which I’m less comfortable with at this point: the notion that a single human trader somewhere mis-typed an order entry on a keyboard, thus causing computerized trading systems to go wiggy and yank the floor out from underneath the stock market, or the notion that computerized trading systems, acting on their own and directly counter to the old-fashioned NYSE, went wiggy and yanked the floor out from underneath the stock market.

The investigation into what exactly happened last Thursday that caused the Dow Jones Industrial Average to briefly shed 998 points before regaining two-thirds of that continues. The latest theory is that the circuit breakers at the NYSE worked as intended … on the NYSE, but that trading then switched from there to electronic networks, where computers sought buyers in vain, thus driving prices down.

All of this happened over about 20 minutes. As interesting to me as finding the cause of the plunge is having someone explain to me what suddenly arrested it.

I recently started reading Saul Alinsky’s “Rules for Radicals.” Early in the book, Alinsky makes the point that agents of change—that would be “radicals”—need to stop seeing the world the way they want it to be and start seeing it for what it is. Taken out of context, it’s good advice, but tough to follow for me at times.

In my mind, I have this old-fashioned notion of stock exchanges as places where companies access capital provided by investors who believe in the companies in which they are investing. That’s the world as I would like it to be. The world as it is is an LTCM-on-steroids place where computer-driven programs act on their own based on algorithms written to vacuum up fractions of pennies, not even the nickels Roger Lowenstein describes in “When Genius Failed.”

What more could be written about Overstock.com and Patrick Byrne that hasn’t already been written—or said by Byrne himself?

Byrne is, after all, the man behind such gems as:

“As this went on I started realizing that there was actually some more orchestration here being provided, by what I’m calling here is the Sith Lord…He’s one of the master criminals from the 1980s, and he’s back in business. But I’m not going to. I’ll just call him the master mind today…

“So, in the words of Wayne and Garth, ‘Squeeze me?’”

And:

“On the coke head thing, and by the way, I’ve never, with one exception, I’ve never even seen cocaine in my life so in case you’re wondering, no, I’m not a coke head…”

Well, there was one thing: Overstock had never turned a profit. Until now, that is. Barely.

To recap, if you know Patrick Byrne’s name, it’s just as likely that you associate him with the term “Sith Lord” than you do with “Overstock.” In 2005, Byrne engaged in a lengthy and very public shouting match with Rocker Partners, Gradient Analytics, Jeff Matthews at RAM Partners and various others in the media and in hedge funds—all of whom Byrne suspected of being involved in, or at least apologists for—a conspiracy to drive down Overstock.com’s stock price via naked short selling.

Whatever legitimate points Byrne might have had about the problem of naked short selling were obscured by his belligerent approach to confronting those he believed were wronging him and his company. Recently, though, regulatory attention has focused on naked short selling, and both Gradient and Rocker have settled Overstock.com’s legal complaints. So Byrne had an added air of credibility, at least in some circles.

News headline: Goldman Capitulation on Dollar Shows Reversal on U.S.

Maybe it’s just me, but something about large investment banks betting on the decline of the home currency - any currency, really, but especially the home currency - rubs me the wrong way. I’m talking about speculation, here, and not mere currency hedging. Think George Soros and the pound. In my mind, with a firm as large as Goldman Sachs, currency speculation raises the spectre of currency manipulation for political purposes. Just a thought.

Although I guess it’s reassuring (maybe) to know that Goldman and Citi think the dollar is a good bet now.

People love lists and more specifically they love rankings. Journalists know this. Thus, in hedge fund land, we are treated to endless lists of who makes how much, which hedge fund firms are the biggest, which managers deliver the best returns, who took in the most money, who lost the most money. Some of these lists are of a higher quality than others. You readers of these lists know what I mean – some are little more than speculation while other are meticulously researched and documented.

Both kinds get loads of media attention, mostly because, although we deny it, we seem to be fascinated with how much money other people make and how successful (or unsuccessful) they are. We love to see the high brought low and get our indignation on at the eye-popping paychecks some in this industry regularly collect.

All of which is a way of backing into the latest ranking, from Pensions & Investments, of hedge fund assets. In its story accompanying the chart, P&I pointed out that three firms—Goldman Sachs Asset Management, Renaissance Technologies Corp. and Citadel Investment Group—lost enough in assets during 2009 to fall below $20 billion in assets, the cutoff for making the newspaper’s list.

Four other firms—Brevan Howard Asset Management LLP, Baupost Group LLC, Soros Fund Management LLC and Man Group plc—exceeded the $20 billion threshold to make P&I’s list.

J.P. Morgan was the largest hedge fund manager, with $53.5 billion in assets as of Dec. 31. That amount was divided between J.P. Morgan Asset Management and Highbridge Capital Management LLC.

Farallon Capital Management LLC saw 42.5% of its assets disappear, according to P&I. Goldman Sachs’ assets fell 45.2%, dropping the firm from sixth place in 2008 to off the list last year.

P&I also found that institutional assets managed by the top 11 firms fell by 22% to $151 billion. What to make of that? Some institutions probably moved money to smaller firms as they got more comfortable with the space, while others pulled money out of hedge funds as a strategy. But by and large, P&I found, institutions appear to prefer the larger hedge fund managers, which isn’t surprising. What’s that old adage? Nobody ever got fired for buying IBM stock? Same deal here, as P&I pointed out.

There’s a Darth Vader “… join us or die” joke in there somewhere, but since distressed investing isn’t really a matter of life or death, I’ll just leave it as an invitation.

Time is runnng out has run out to register to participate in our 90-minute web seminar (known in the lingo as a “webinar”) tomorrow at 11 a.m. Eastern Time. We‘ll be presenting presented the results of our third annual insolvency survey, which takes a snapshot of how investors viewed the distressed space last year and how they think it will play out this year. We’ll also engage in some hopefully lively discussion with our panelists:

Back in the Saddle

Unless the bottom really falls out this month, hedge funds are set to end 2009 up around 20%, roughly equivalent with broader equity markets. That should close the books on 2008—yes, 2008—once and for all. It’ll go down as an anomaly in hedge fund performance, with a bright red asterisk next to the negative 19% figure—or whatever it was in your hedge fund index of choice.

So the hedge fund industry should be celebrating, right? Back in black and all that. Well, maybe. (more…)

I’m trying to work out my morning schedule so I can get “Random Shots” up earlier in the day. This blogging thing is new for all of us, though, so please bear with me as I fiddle with the timing.

Lower Growth, More Inflation
I know there’s a name for this … if I could only think of it.

Oh wait, now I remember.

Sure, this is from way back in February, but it’s sometimes useful to look back at public officials’ pronouncements.
(more…)