Will Congress Aggravate Silver Manipulation?1
Tuesday June 19, 2012, 4:15am PDT
By Michelle Smith2 - Exclusive to Silver Investing News3
In 2008, the US Commodity Futures Trading Commission (CFTC5) began investigating silver manipulation. That investigation is still underway6 and manipulation continues to plague the market. Members of the silver community have grown increasingly cynical about the CFTC’s ability and willingness to reign in manipulative practices, and US lawmakers’ decisions regarding the CFTC’s responsibilities and funding are raising the question of whether it is reasonable to expect improvement.
In the past, the CFTC’s job was to oversee the commodities markets, ensuring that they were transparent and free of fraud and manipulation. Many believe the agency has executed these tasks poorly as silver price manipulation is considered ongoing and obvious.
Now, in the era of Dodd-Frank, lawmakers have decided that the CFTC should also oversee the swaps market.
Swaps are financial products that are so opaque and complex that US authorities have yet to define them. They played a central role in the 2008 financial crisis, and according to CFTC Chairman Gary Gensler, the swaps market is eight times that of the futures market.
Yet a recent budget vote7 by the House Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies revealed that lawmakers want the CFTC to oversee both the futures and swaps markets with reduced funding, which Gensler portrays as virtually impossible.
In 2012, the CFTC had a budget of $205 million. For 2013, the CFTC wants to increase that to $308 million. However, Gensler said8 the House Subcommittee wants to chop the CFTC’s budget to $180 million.
“Picture the NFL expanding eightfold to play more than 100 football games in a weekend, leaving just one referee per game, and in some cases, no referee. Imagine the mayhem on the field, the resulting injuries to players and the loss of confidence fans would have in the integrity of the game,” Gensler said.
According to the chairman, the effect of cutting the CFTC’s budget amounts to Congress siding with Wall Street instead of the American public.
Impact on silver manipulation potentially negative
That US legislators would vote for this cut while expecting the agency to take on such a huge set of responsibilities definitely raises questions about their commitment to regulation. And, given the potential “mayhem on the field” that Gensler describes, silver investors should be wondering if the CFTC’s handling of silver manipulation will improve or worsen.
At first glance, it would seem that an agency claiming to be underfunded and understaffed would perform poorly in the circumstances. However, according to Gensler, the oversight of swaps may help to spur progress in regulation of the silver market.
Individuals who allege that there is silver manipulation tend to believe that prices are artificially low because certain large firms – such as J.P. Morgan9 (NYSE:JPM10) (JPM), the poster child of these allegations – use massive short positions to cap the metal’s price.
Ted Butler of Butler Research is considered a leading authority on the issue of silver manipulation. He alleges11 that JPM has an inexplicable short position equaling about 25 to 30 percent of the total world market for paper and physical silver.
Butler says this type of concentration does not exist in any other major market. And, he has been waiting for years for the CFTC to answer one question: how can such a massive short position be anything other than manipulation?
Position limits needed
During his recent C-SPAN appearance, Gensler advocated transparency and regulation. He would not comment directly on the silver manipulation investigation because it is still active. However, he did reveal that his agency already has a solution in the works that will help to address the concerns.
“One of the things we are putting in place – it’s still a work in progress – are position limits,” Gensler announced.
He said the silver markets are concentrated and it’s critical that the CFTC completes these limits so that no one speculator can have an outsized position.
“Position limits goes to the heart of the matter,” said Butler, who noted that he has been fighting to have them implemented for 25 years.
You cannot have a free market when one party has an extremely large position on one side, according to Butler. Thus, the absence of limits facilitates market manipulation.
“To put position limits in place is like the putting the stake through the heart of Dracula,” Butler said.
Implementation of limits delayed
One of the holdups with implementing these limits is Wall Street’s substantial and staunch opposition to these measures. Last year, the International Swaps and Derivative Association and the Securities Industry and Financial Markets Association jointly filed a lawsuit12 against the CFTC after it proposed the rules.
Also, Gensler claimed there are rules that must be jointly established with the US Securities and Exchange Commission (SEC). He encouraged people to call the SEC and urge it to help finalize the rules.
Gensler portrayed the commission as committed to upholding its mission. And while position limits may help, there is also the issue of enforcement.
Gensler said a well-funded cop on the beat is needed to fight against fraud and manipulation.
But, he also admitted that the CFTC, with a staff of about 700, does not have enough people to directly examine market participants on a regular basis. He said it gets to the CME every several years and because it is thinly staffed, with hundreds of market participants to oversee, it relies on self-regulatory agencies.
With resistance from deep-pocketed Wall Street players and increased responsibilities that are not matched with adequate increases in funding, one can only wonder how much more thinly spread the CFTC will become and whether it is realistic to expect silver manipulation to be a priority.
As far as the CFTC’s need for increased funds, Butler said that when he looks ”at the agency’s performance in terminating silver manipulation as an indication of what they would do overall with additional funding, [he] wouldn’t give them a dime.”