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“The Brutality of Reality” - Speech By CFTC Commissioner Bart Chilton Before The Michigan Agri-Business Association, Mackinac Island, MI

Date 13/09/2013

Introduction

Good morning! It’s wonderful to be with you today in beautiful Mackinac. Jim (Byrum), thank you for the kind invitation. Thanks also for your government service at USDA. It was a pleasure to work with you then, and I continue to value our friendship. You are lucky to have Jim on your team. You’re also lucky to have two great advocates on your behalf in Washington, Senators Carl Levin and Debbie Stabenow.

When I was here in 2008, Jim said to speak about whatever you want. So, we talked photography. There was this wonderful Robert Cameron exhibit (some of his “Above” photos) here at the Grand Hotel. We discussed photographers like Ansel Adams and the importance of getting the lens aperture just right—not too much light, not too much dark. And we equated how finding that balance between light and dark markets, between not enough or too much financial regulation is important. It was helluva hoot to deliver and we had some fun, although there is still a question about whether we have things in correct focus. It’s an honor to be back with you.

Re-al-i-ty

Since Jim didn’t give any instructions—again—this time, it’s off to the races—maybe the ratings races—television ratings; yeah, really. Actually, reality: re-al-i-ty, as in reality television. I’m serious, why not?

You guys watch reality TV, right? There are hundreds of reality shows out there. There are multiple websites devoted to covering these shows. And, there’s actually been a great deal of research on this topic. Here’s what they found: ONE: Viewers feel good when compared to some of the reality personalities. Aren’t you glad YOU aren’t on Wildest Police Videos or Tattoo Nightmares? Glad we don’t have to do one of those Dirty Jobs. TWO: Viewers want to feel that they are a part of what they are watching; that they are connected and have some ownership in the process and are part of the action—not just looking at it through the window.

Do we get to vote? Can we vote? Can we, can we? How many times can we vote? Oh, it costs money to vote. Sure thing; we don’t care. We wanna vote for that singer on The Voice, or X Factor, or the best couple on Dancing with the Stars.

Say what? Ah, alrighty then, I can tell there are a couple folks who want something on commodity markets. There’s a new reality show called Farm Kings. Oh, fine; well, financial markets are getting along alright, I mean, when they aren’t plagued by computer glitches and such—don’t get me started. But, they are nearly bearable, I suppose.

Reality Ratings

Who knows the most popular television—best rated—show on the air right now? (Look, blame Jim!) C’mon guys, the most popular television show? I know there are some sportsmen in this group. It’s not Wanted: Ted or Alive, although I guess The Nuge filmed some of that here in Michigan; and it’s not Sarah Palin’s Alaska. Heck goose season is open in Michigan and ducks are just a few weeks away. There ya go: Duck Dynasty. The hour-long Season Four premiere drew an astounding 11.8 million viewers. Yeah, somebody is watching those guys whose duck calls and outdoor enterprises have made them quackdillionaires.

Alright, it’s apparent that a few of you actually want more on commodity markets…yeah? Yeah. Okey dokey, I’ll humor you.

Deadliest Catch

Sure we’ve had sporadic market bumps and burps when things seem to have veered off course, and there sure are some issues out there that need to be addressed, and fast.

We have Massive Passive investors who are, most of the time, going long in markets, contrary to what speculators have done traditionally. That’s an important issue because at times, they’ve contorted markets. The Massive Passives remind me of those guys on Deadliest Catch—ya know the fellas crab fishing in Alaska’s Bering Sea. The Massive Passives bring some definite dangers to markets. There’s a Fear Factor, yet we like the large amount of cash. It provides liquidity.

What about the high frequency cheetah traders? They have the machines of dreams that travel from zero to Captain Kirk in milliseconds. By the way, my warm and fuzzy feeling for our fine furry friends is a bit blunted. They now remind me more of World’s Scariest Animal Attacks. Those cheetahs are a problem predator issue much larger than ever imagined.

While it isn’t prudent for us get into details on these increased concerns about the cheetahs, let’s just say too many have accepted that all technology is good, without even raising an eyebrow. What? Who? Where?

You can guess why: there’s money to be made. Don’t let a little thing like the cheetahs jungle-izing markets by entering into a humongous number of potentially illegal wash trades, or manipulating markets, get in the way; heaven forbid.

Brutality of Reality

How about the re-al-i-ty of what you guys and others are trying to do? I’m talking about Average Joe end-users who are simply trying to hedge their legitimate business risks—whether it’s corn or beans; aluminum, silver or gold; nat gas or crude oil. The brutality of today’s reality is that these markets are so divorced from how they have operated historically—due in part to the Massive Passives and the cheetahs—it might seem like The Surreal Life. But, we aren’t being Punk’d. This is The Real World. That is, unless we do something.

Rock Star

Oh, almost forgot: earlier this year I was lucky to attend, at the invitation of a Wall Street Journal reporter, the White House Correspondents Dinner. It’s sort of a confluence of Washington, Hollywood and the media. There were a lot of politicians (past, present and future D.C. Barter Kings) and well-known news media personalities, and celebrities. I walked in behind Steven Spielberg and Daniel Day-Lewis. There were some reality TV personalities like Kim Kardashian and Kris Jenner—a lot of Celebrity Apprentice candidates.

I met Miss America (Mallory Hytes Hagen). There used to even be a reality show, Miss America: Reality Check, but I don’t think that’s on anymore. It might be called American’s Next Top Model; it’s unclear. The final Miss America Pageant is actually tomorrow night. Miss Michigan, Haley Williams (Miss Saginaw County), is impressive. She’s a helluva baton twirler.

Conan O’Brien was the Master of Ceremonies, and the President spoke. Before President Obama’s speech, the reporter and I stepped out of the ballroom to freshen up. On the way, there was a familiar looking fellow. He had long hair, a head band, beard and mustache. He looked a little like John Bonham back in the day. Of course that wasn’t it, Moby Dick. I recognized this guy from a band, though, just couldn't place him. A few minutes later, as we passed the fellow a second time, it struck me. I blurted out, “That's the guy from Duck Dynasty!” Turns out, it was Willie Robertson—not a Rock Star, or some Bonzo-spirited Ghost Adventures.

There was an immediate sense of regret at having acknowledged anything about Duck Dynasty. Of course, my Wall Street Journal host knew nothing of the show. People who work at the Journal don’t watch that so much. They aren’t really the target demographic for the Arts & Entertainment network. But now, it’s the number one show, so it isn’t too embarrassing.

Cops

We’re walking here. What about Kitchen Nightmares? Did you see that one episode, “Spew Fondue?” Wasn’t that gross? Jeezy cheesy was that unrefined.

That might be made up. Yeah, that was definitely made up, although I do like the show. Bar Rescue, however, has supplanted it for now. It’s best to focus on one food and beverage show. They’re sorta the same; another show, another dive to strive to revive. It’s great when the professional know-it-alls (Chef Gordon Ramsey or Jon Taffer) take on the neglectful owners and say, “That’s inexcusable! You should be ashamed of yourself.” There are some—not some, many—we have enforcement actions against (our America’s Most Wanted) that make me feel that way: That’s inexcusable. You should be ashamed of yourself.

Perhaps they should do a reality show on our enforcement cases. It seems like Cops, and now Cops Reloaded, is getting a little tired. One can only see so many meth heads in tank tops. American Greed on CNBC is great, but that’s an after-the-fact show about financial crimes.

A CFTC enforcement reality show would be neat. There are lots of cases to choose from and many Unsolved Mysteries. In fact, since the economy collapsed in 2008, we’ve seen historically large numbers of violations. We should give a shout out to Guinness World Record Gone Wild, because we have many hundreds of active investigations taking place right now, and so do others like the Securities and Exchange Commission and the FBI. The perps are persistent. (By the way, for those paying attention, there will likely be more cases filed by the CFTC in the next few weeks than we’ve seen in a long time. Stay tuned.)

And if the reality producers want to know what types of things they could cover, it’s easy to recall the horrific headlines of Wall Street malfeasance. There’s LIBOR (London Interbank Offered Rate) manipulation, MF Global and Peregrine Financial for starters, and many more to come.

For example, we all recall the “Mother of all Ponzi Schemes,” when creepy criminal Bernard Madoff “made-off” with an estimated $50 billion in what may have been the largest swindle ever. Even today, scores and scores of ponzis of all sizes and values continue to be unearthed. It isn’t just on Wall Street. The brutality of today’s reality is that we see these awful offenders on Main Streets nationwide.

By the way, Ponzimonium: How Scam Artists Are Ripping off America is now available for free as an ebook at gpo.gov. See, I hooked you up. That’s worth the price of admission. Oh, this talk is free? Then it is worth precisely the price of admission. That’s what we call “convergence” in the industry. How cool is that?

Shark Tank

The point of all this is that we are faced with a new reality ourselves—our financial world is a Shark Tank.

There are more and more violations of the law occurring, and we aren’t equipped to deal. The bam-ba-lam bad norms in the financial sector seem to be commonplace. A recent study queried 250 financial service industry insiders and 23 percent said they had “observed or had firsthand knowledge of wrongdoing in the workplace.” These guys are sooo bad, they think they’re good.

To make matters worse, while enforcement officials are working hard and busting some super bad-ass crooks, the resources don’t exist to keep pace. Enforcement efforts are under-funded. Congress hasn’t done its job of providing needed funds to ensure that those who do the crime do the time.

If Congress isn’t going to fund these efforts, here are two requests for what they can do:

  • Allow the CFTC to collect a transaction fee from speculators using commodity markets (both futures and swaps). End-users should be exempt. But, there’s a way to fund our entire agency if Congress will provide the legislative authority to do so. We are the only federal financial regulator that does not, at least in part, self-fund through fees.
  • this year, I provided a blueprint for such a targeted transaction fee. The Obama Administration’s Office of Management and Budget has, on Thursday, provided legislative guidance to Capitol Hill related to such a fee. The proposal exempts end-users.
  • decades, Republican and Democrat presidents have suggested such a transaction fee, but no administration, until now, had ever put pen to paper. I’m not only thankful, but proud that the Obama Administration has actually stepped up and offered a suggestion on this very important topic.
  • We have an out-of-date penalty regime. We can only fine bad guys $140,000 per violation. Yet, in today’s cheetah-driven markets, millions can be made in minutes; moves are made in microseconds. We see many trades per second by a single trader. How is a $140k fine going to dissuade folks from violating the law? It won’t. It hasn’t. It’s not rough justice; it’s just a cost of doing business.
  • should increase the penalty to $1 million per violation for individuals—take that Joe Millionaire—and $10 million for firms. Such penalties would serve as a needed deterrent.

With both of these fairly simple actions, Congress could not only allow us to meaningfully prosecute more offenders, but there would be fewer bad actors out there due to the deterrent effect. Plus, we could actually save hundreds of millions in taxpayer monies by funding our operations through fees. Tough on crooks. Save hundreds of millions. Any questions?

American Pickers

Back to the magic box. One of the entertaining and somewhat educational shows is American Pickers. Mike and Frank acquire all sorts of things in their rummaging around the countryside. One show featured a pick here in Michigan.

Sometimes they get a little out of their comfort zone with a purchase. They take an educated gamble. They end up owning something they don’t know much about. They often have to go check it out with an expert. How about Storage Wars? These folks buy a storage locker and all of a sudden they own something which they may know very little about.

That circumstance is rather like what the large investment banks have been able to do for the last decade as a result of amendments to the Bank Holding Company Act (of 1956). That law was put in place to prevent excessive concentration of financial and economic power. Yet today, a lot of that seems to have been overlooked. Banks can now be involved in activities that are obviously not financial.

Like some of our reality program friends, the banks have been acquiring and owning things that they didn’t know much about. They were not the experts.

It used to be that the banks focused on, ya know, banking; novel concept, right? Now they are into all sorts of other businesses: commodities, warehousing of commodities, and even the delivery mechanisms associated with those commodities. (Shipping Wars is fun.) At the same time, just like Mike and Frank often take a deep dive to a basement or a garage to find rusty gold, the bankers are heavily involved in the actual trading of the commodities. At the same time, they may have the capacity to influence prices through the related business ownership. Got the math there? They own a warehouse. They can charge storage. They can impact delivery, and they trade the commodities.

Of course the prices of commodities are supposed to be based upon supply and demand. However what if you control, or have significant influence upon, the supply or the demand? Seems like perhaps—I don’t know—maybe there’s a conflict of interest. Certainly there’s the potential of a conflict.

Mythbusters

I’m not suggesting there have been any violations of the law, (not ruling it out), but it just seems that we have gone too far down the Free-Marketeer road. This policy is really part and parcel to the Decade of Deregulation brought about by those very Free-Marketeers who gave us exemptions, loopholes and a light-touch regulatory regime for financial markets. For the most part, it didn’t work out so well, right? Like, ya know, 2008. There is that. We don’t need the Mythbusters to help us out on that one. We were Naked and Afraid.

For me, it’s simple: banks should get back to banking. Maybe it’s just me, but I don’t think the American public wants banks owning grain elevators, electric companies, large warehouses, or shipping and distribution interests.

However, for those who want to consider the policy merits of the matter in more detail, the first thing they might wanna do is get all of the ownership information. What do the banks own?

Well, it isn’t that easy to find. Perhaps we need Dog the Bounty Hunter to track it down. We can’t find the information. You don’t know. I don’t know. Are they Hoarders?

It seems like the information is something that the public should be able to easily locate and click on a link to find out. After all, the large investment banks have access to cheap money at the Fed window and they trade in derivative and equity markets. Transparency is the best disinfectant for dirty markets. Let’s just have a looksee at wassup. If we don’t, we may end up being The Biggest Loser.

So, here’s what I can tell you. In just the last few days, I found some more information and I’m pleased to share it with you now.

Starting in 2003, the Federal Reserve Board began issuing orders for banks that essentially allowed them to participate in commodity trading activity and actually deal in physical commodities. The list of banks getting this pass is relatively short, but they are names we all recognize: Citigroup, UBS, Barclays, JP, Deutsch Bank, Societe Generale, Fortis, Wells Fargo, BNP Paribas, Credit Suisse, Bank of America, Scotiabank, Royal Bank of Scotland, and Wachovia. An elite crowd!

And let me make clear what these orders allowed: These guys could, after receiving an order or letter from the Fed, engage in all types of commodity-related stuff, including trading actual physicals, which had not been previously permitted.

At the same time, what hasn’t been widely told is that two “special” large banks—Goldman Sachs and Morgan Stanley—got some extraordinary treatment in our old favorite, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999. There is a provision in that Act, codified at 12 U.S.C. 1843, the effect of which is to provide a specific exemption from the bank ownership prohibitions, and those two banks were the early recipients of that congressional largesse. (Actually, there were three banks that could have benefited. Solomon Brothers was the third, but when they were acquired by Citigroup, the provision did not transfer.)

But let’s not pick on these guys. After all, they probably paid dearly for the exemptions when they asked Congress to Pimp My Ride.

Those other investment banks needed to receive—and in fact, did receive—the all-clear approval from the Federal Reserve, through the orders or letters I mentioned, permission to engage in commodity-related activity. What a deal!

The most disturbing part of this is that it is still nearly impossible to figure out exactly what banks own. I told you who has them, but not what they own. We at the CFTC can see what they trade, but we don’t have a panoptic vision of their total related activities in commodities. Unless we can see that, we can’t reasonably and responsibly protect against market manipulations. That’s a Rescue 911-type problem.

Intervention

It’s time for an Intervention. Congress should not only do away with the statutory exemption that has been used by Goldman and Morgan, but also do away with the ability of the Fed to allow any commodity-related ownership by the banks whatsoever.

I have no issues with the banks making Big Fat Money, and boy, have they! Anyone recall that Van Halen song? Sammy (Hagar) would sing:

  • say money is bad for the soul
  • for the rock, bad for the roll
  • for the heart, bad for the brain
  • for damn near everything.

I’m cool with banks making boatloads of cash, just not owning the boats. They should make their profits through what they know and what they have done in the past…banking. They were so talented—America’s Got Talent—and exceptional at doing that for so very long.

Has anyone seen American Restoration where Rick and his crew restore all sorts of things and bring them back to life? Well, the banks built communities. They built our nation. Let’s help them do that again. Get back to making loans, helping to create jobs and being bankers. They can assist in restoring our economy. To do so, they don’t need an Extreme Makeover, but we do need to strip them of the perverse incentives that exist today as a result of that Decade of Deregulation by the Free-Marketeers.

Nuf said.

Airplane Repo

One of the newer reality shows is Airplane Repo. The pilots reposess planes for creditors. The show focusses on all the dangerous, tricky and covert things they must do to actually get the plane from a hanger or airfield. Then, if they are successful, they take off, up up and away! They get gone.

And that’s exactly what I’m going to do now—get gone. But to finish, I thank you for joining me in thinking about the brutality of reality—about what’s going on in our financial world—and a wee bit about reality television, too.

And Jim, you’re a Survivor, a Survivorman, and remain my American Idol!

Thank you. See ya.