In the past, Bank of America Chief Executive Officer Ken Lewis has received an annual salary of $1.5 million. But this year he will get nothing.
That means no salary, no bonuses. In fact, he will have to repay Bank of America Corp. (BAC, Fortune 500) the more than $1 million he has already earned in his final year on the job.
Lewis agreed to the deal on Thursday after the Treasury department’s pay czar, Kenneth Feinberg, "suggested" it to him, said Bob Stickler, a spokesman for the bank.
Stickler added that Lewis "felt it was not in the best interest of Bank of America or him to get into a dispute with the pay master."
Lewis, who announced last month that he will retire at the year’s end, will still have $53 million in pension benefits waiting for him. The outgoing chief will also have other stock awards and deferred compensation for a total $69 million payout, said Stickler.
Feinberg does not have authority to modify compensation awarded before 2009, which includes Lewis’ retirement package and stock holdings from a four-decade career at the bank.
But Stickler asked, "Since when does law apply to this administration?" As a result, he said Bank of America is unsure whether or not Lewis’ retirement package is under review by the government.
Wall Street has been waiting for Feinberg to announce rules on compensation at the seven firms that have received large government loans last year as the financial system neared collapse. And while firms are expecting Feinberg to crack down on payouts, a complete cut is bold.
The deal comes before the Charlotte, N.C.-based bank announces its third-quarter earnings on Friday morning. Analysts polled by Thomson Reuters expect earnings per share to decrease by 21 cents from a year ago when they were flat.
The U.S. unemployment rate may rise above 10 percent as employers cut payrolls further, Federal Reserve Bank of St. Louis President James Bullard said.
“Unemployment is leveling off but we still may be headed toward double digits,” Bullard told reporters today after a speech in St. Louis. The rate was 9.8 percent in September, the highest since 1983.
“Labor markets are very weak,” Bullard said. “It is disturbing, and I find it upsetting that we are still losing jobs payday loan company. We would like to see nonfarm payrolls turn positive before the end of the year. I don’t know if we will get there or not.”
The economy lost 263,000 jobs in September, more than economists forecast. September’s losses brought total job reductions since the recession began in December 2007 to 7.2 million, the biggest decline since the Great Depression.
For a third time this week, TD Bank’s 6.5 million U.S. customers cannot see real-time updates on their account transactions and balances. And even that’s an improvement.
In a statement released Thursday, TD Bank (TD) said customers can only see their account balance and transactions as of Wednesday evening because the bank is "experiencing an unusual delay in [its] overnight batch postings."
Earlier Thursday, customers couldn’t even log in to their online accounts. But TD Bank spokeswoman Jennifer Carlson said that access was restored as of 3 p.m. ET.
TD Bank, which holds $80 billion in deposits, said it expects to complete processing transactions and have current balances later in the day, and will reverse fees, charges or interest incurred because of the disruption.
The system first malfunctioned Monday night when the Toronto-based bank tried to integrate its operating system with New Jersey-based Commerce bank, which it acquired last year. TD Bank said the problem was resolved Tuesday, resurfaced Tuesday night, was resolved again Wednesday, and then recurred.
Carlson said that "higher-than-normal transaction volumes are compounding and having to play catch up" and ultimately causing a "computer glitch."
She added that the bank, which has more than 1,000 branches along the East Coast, is "posting transactions as fast as we can using the system we have in place" and hopes customers will be able to see real-time transactions and balances later Thursday no teletrack payday loans.
Carlson said that "a vast majority of customers" can still access their funds, including Thursday’s deposits, continue to make transactions, and have their automatic payments completed. She couldn’t say exactly how many customers have that access.
Last week, the bank’s New England and upstate New York branches changed their name from TD Banknorth to TD Bank, bringing more than 1,000 of its units between Maine and Florida under the same name.
Lauren Ventola, 23, who started using the bank seven years ago when it was still called Commerce Bank, hasn’t found the bank to be as convenient as its "America’s Most Convenient Bank" slogan. As a medical student on the Caribbean island of Grenada, she relies on online banking to manage her finances.
"With the TD Bank Web site down I can’t check statements, make sure rent money has cleared or determine my credit card balance," Ventola said when she couldn’t log in at all.
Chevron Corp’s David O’Reilly will hand Vice Chairman John Watson the reins as the second-largest U.S. oil company brings several big projects online and navigates through a massive, potentially damaging lawsuit in Ecuador.
Watson, 52, becomes chairman and chief executive at the end of this year, Chevron (CVX, Fortune 500) said Wednesday. He has been at Chevron since 1980, in roles such as chief financial officer and head of exploration and production outside North America. He also led the integration of Texaco after the deal closed in 2001.
The California native, who currently oversees strategy and development, will take the helm at a time when oil majors face increasing competition from state-run oil companies for access to the largest untapped reserves. Two-thirds of the world’s top 20 oil companies are backed by governments.
O’Reilly, a 62-year-old from Dublin, has worked for the San Ramon, California-based company for 41 years and served in the top two roles for the past decade.
A new CEO is just the latest change at the top of Chevron in the past year, which has seen a new chief financial officer take over and the appointment of a new chief in-house lawyer.
While O’Reilly made headlines in June by debating the head of the Sierra Club, an environmental group, his public profile was lower than that of many top executives.
"We really like that O’Reilly wasn’t real outspoken and on a lot of different boards," said Alan Brochstein, senior energy analyst at Management CV, which rates executive teams.
"We sure hope Watson won’t be either because quite frankly we think Chevron has had, over the long term, one of the higher returns for its shareholders," he added, noting that Watson had "major skin in the game" with $30 million of Chevron stock.
Ecuador threat
Watson faces a potential crisis from a $27 billion claim in a lawsuit in Ecuador, where indigenous people blame Texaco for polluting the areas where they live and damaging their health.
A ruling in the 16-year-old case had been due in the coming months, but that is now complicated by the judge’s replacement amid allegations he was involved in a $3 million bribery plot.
The CEO change is a "mild positive" for Chevron shares by setting up a smooth transition, said James Halloran, consultant with Financial America Securities in Cleveland, Ohio.
But he said the road ahead looks tough since oil companies largely occupy a second tier after national oil companies.
"They can no longer show up at the doorstep of countries and get access to the oil," Halloran said.
In the face of this challenge, Chevron in January dropped its target for 3% compound annual production growth from 2005 to 2010, although in July it did bump up its 2009 output growth target to 5% from 4%.
O’Reilly will depart as a number of sizeable projects come online from Brazil to the Gulf of Mexico to Australia, where the $37 billion Gorgon gas project just got the green light.
"He’s left him with a well-stocked pond," said Fadel Gheit, analyst at Oppenheimer & Co, who also identified access to new reserves as Watson’s biggest challenge.
Chevron’s board elected George Kirkland, 59, to succeed Watson as vice chairman. Kirkland will retain responsibility for Chevron’s global oil and gas exploration and production.
Chevron shares were trading 0.8% lower at $70.32, in line with peers. Shares of larger rival Exxon Mobil Corp (XOM, Fortune 500) were down 0.7% at $68.61.
It’s time for Sheila Bair to stop worrying about bailout politics and hit Uncle Sam up for some dough.
Bair is the chairman of the Federal Deposit Insurance Corp., the federal agency that administers the insurance fund that stands behind the savings of millions of Americans.
The fund is paid for by the banks that benefit from it, but it has been depleted by a wave of bank failures that isn’t expected to abate any time soon.
The FDIC board is scheduled to meet Tuesday to discuss how to raise money to restock the fund. There aren’t a lot of good options.
Bair could easily borrow the cash from Treasury, where the FDIC has a standing credit line. But the agency hasn’t done so in nearly 20 years, since the trough of the last banking crisis. And with bailout rage lingering in the air, Bair has made clear she’s not eager to break that precedent.
She said last week that whether to tap the Treasury credit line is a "philosophical question" for bankers and their regulators. The central issue: Is the Treasury backstop there for foreseeable losses or for "unexpected emergencies?"
That comment reminded listeners that as heavy as the FDIC’s burden has been — 95 banks have failed this year, on top of 25 last year — the agency is still wary about the possible collapse of a giant, multibillion-dollar institution.
But another danger is that if the FDIC fails to take prompt and transparent action, the public could again lose faith in the financial system — at a time when bad news about failing banks is certain to continue.
"I don’t understand why Sheila just does not use her Treasury line to recapitalize the fund in the same way that she encourages banks in similar situations to recapitalize themselves," said Ken Thomas, a Miami-based banking consultant who has testified before Congress on deposit insurance funding.
"By doing this," Thomas added, "she would put an end to all of this growing and troubling uncertainty about the shrinking fund, which does nothing but detract from confidence in the FDIC which is the most important concern."
What Bair would rather do is what the agency typically does — collect funds directly from banks — or turn to what she describes as other tools, such as raising money by issuing debt to banks.
The FDIC has warned banks that they may have to pony up another special fee to support the insurance fund, whose balance fell to a 17-year low of $10 billion this summer.
But the banks, which have been socked with one special fee this year, are warning that a tax on their already weakened profits could push a number of them over the edge and stall the economic recovery that has gingerly taken hold since spring.
And for once, they may not just be blowing smoke. The industry posted a $3.7 billion loss in the second quarter, when one in four institutions were unprofitable. The FDIC classifies more than 400 institutions — nearly 5% of its membership — as troubled.
Whatever the industry’s problems, many commentators have dismissed the prospect of the FDIC using its Treasury credit line as another bailout. The agency has a $100 billion standing credit line with Treasury — and, thanks to a law passed this year, the authority to borrow as much as $500 billion through 2010 in an emergency.
Given that the industry paid essentially no insurance premiums for a decade, it’s easy to see why there might be some resentment over a fresh demand for taxpayer funds.
Between 1997 and 2006, the industry made $1.28 trillion in pretax operating profits, according to FDIC data. During that period, thanks to a 1996 law that prohibited the agency from assessing well capitalized banks, the banks paid just $672 million in insurance premiums.
Yet given the banks’ current problems — and the federal laws that oblige the industry to, over time, fully repay any Treasury borrowings — the option of drawing on the credit line is gaining backers in unexpected places.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services committee, said this week he believes using the credit line is the "cleanest" way to solve the FDIC’s funding questions.
And Thomas — who twice last decade proposed boosting the minimum size of the deposit insurance fund, so that the FDIC fund would never repeat its brush with insolvency in the early 1990s — dismisses the bailout talk as a red herring.
"This idea that she does not want to go to the Treasury because of the perception of a federal ‘bailout’ does not make sense, since everyone knows that FDIC is ultimately backed by the full faith and credit of the U.S.," said Thomas.
Whatever outsiders think, the FDIC board — led by Bair and staffed by two members of the FDIC and two other federal banking regulators — will soon decide. An FDIC spokesman said it’s likely the agency will put some proposals out for public comment Tuesday, rather than making a decision on the spot.
The shifting debate seems to have left even the politically savvy chairman a bit bemused.
"The political dynamic on this is interesting," Bair said this month after her speech at Georgetown University. "People are shifting from not wanting this to go to taxpayers to wanting it to go to taxpayers."
It has been 31 years since the last trains left Union Station. And 24 years since its $140 million renovation as a hotel, shopping and entertainment spot on Market Street. But today the station is a shell of what it once was.
Banana Republic? Gone. Talbot’s? Gone. Body Shop, Brookstone, Nature Co.? Gone, gone, gone.
The space formerly occupied by Nature Co. is a gift shop called Fat Sassy’s. Nearby, a shop that calls itself a newsstand has one magazine rack near the front door and several shelves of liquor behind the counter.
But don’t write of this downtown landmark just yet.
A large expansion by Marriott, which in December took over the station’s hotel from Hyatt, is about to get under way. Marriott will move the front desk to the atrium near the station’s western end, allowing greater use of the barrel-vaulted Great Hall for
private events. Marriott also will extend its meeting and restaurant space into much of the retail area along the midway.
As a result, Union Station’s shops will be concentrated along the eastern concourse, where the food court is situated beneath the arched train shed, which dates to 1894. Whether this transformation — the station’s most extensive since the 1980s — will revive the place is yet to be seen.
Barbara Geisman, deputy mayor for development, said city officials hope better times are ahead.
"We would certainly like to see as much retail as possible in Union Station," she said. "As the downtown residential and business population grow, we think there’s a market for more mainstream retail there."
Resuscitating shopping at Union Station will require "some big-time marketing," Geisman said.
"A lot of this is that you get a name draw and then that kind of sets the tone for the rest of it," she said. "We think the station presents opportunities for larger retail."
Bass Pro Shops, based in Springfield, Mo., took a look a few years ago but passed on Union Station, Geisman said. She added that shopping habits have changed since the 1980s, when "festival markets" such as Quincy Market in Boston, South Street Seaport in New York and Union Station drew big crowds. All have faded.
"Things have changed a lot since then," Geisman said. "Instead of people going there on a whim because they want to see a neat old building, you now have a lot of people with disposable income who like to shop."
Frances Percich, Union Station’s marketing manager, said "serious" discussions are under way with two retailers, including one that would be new to St. Louis. She declined to name them. Percich said the station will continue to market itself as a tourist attraction with numerous spring and summer events.
"When people walk in here expecting a mall, they will be disappointed," she said. "We’re not a mall. We have no anchor store."
Among the few Union Station visitors one afternoon last week were Russ and Donna Clark of Yuba City, Calif. They were staying at the Marriott for a meeting. The Clarks said they had been unsure whether Union Station’s emptiness resulted from a renovation still under way or from a lack of business.
Told that the renovation was completed in 1985 and that the station had been in decline for years, Donna Clark said: "Wow, that’s a shame. This looks like a great idea. It’s disappointing not to see a lot of people."
Union Station’s current retail occupancy is 79 percent, Percich said. Ownership has changed in recent years. In 2003, the inability of St. Louis Station Associates, the investment group behind the 1980s renovation, to pay the mortgage led to foreclosure by Regency Savings Bank of Oak Park, Ill. Park National Bank of Chicago bought the property from Regency and owns it through Union Station Holdings LLC.
Doug Dean, the Marriott’s general manager, said the hotel renovation will restore some of the inn’s original 1890s configuration. He noted that the original front desk was off the atrium, remarkable for its glass-block floor. All 539 rooms, including the 67 in the station’s original "headhouse," will be redone. Dean declined to specify the overall cost, saying it remained "a moving target."
Four meeting rooms and a restaurant will be built near the new lobby. One floor above, the existing restaurant will be used mainly for private events. Beginning with a ballroom freshening done by November, the renovation project will be completed in late 2011, he said.
Hotel and shopping areas will remain open during the renovation.
Across Market from Union Station is the western end of the Gateway Mall, the milelong park that extends east to the Old Courthouse. Tricia Roland-Hamilton, head of the project to redo the mall, said that to thrive, the Union Station area must have more offices, residents and stores.
"The key to livening up that space, not just Union Station but that part of the mall, is density," she said. "And we don’t have that right now."
Singapore’s largest sovereign wealth fund GIC said on Tuesday it had halved its stake in Citigroup to below 5%, making a profit of $1.6 billion as global equity markets rebound.
The stake sale came after Singapore’s smaller fund Temasek Holdings lost an estimated over $4 billion in Bank of America-Merrill Lynch and Barclays in hasty exits around the start of 2009.
Analysts said GIC, also known as the Government of Singapore Investment Corp., took advantage of a rally in world stocks to take some money off the table and the sale suggested the fund may have some concerns about the outlook for global banks.
"Perhaps timings-wise, GIC benefited from the rally," said Song Seng Wun, an economist at CIMB.
"The sale also reflects underlying concerns that although global institutions may have seen their darkest days, there could still be uncertainty ahead as OECD countries in particular could see patchy growth as a result of the recession," he said.
From late 2007, GIC ploughed billions of dollars into Citigroup (C, Fortune 500) and UBS (UBS) and like other sovereign funds, had suffered initial losses in battered global banks as the financial crisis hit companies.
Ng Kok Song, group chief investment officer of GIC, which manages an estimated $200 billion-plus in assets, said the fund realized a profit of $1.6 billion from the sale of Citigroup shares.
The Singapore investor had a profit including unrealized gains of about $3.2 billion based on Citigroup’s closing price of $4.43 on Sept. 21, he said.
On Sept. 11, GIC exchanged its $6.88 billion holding of Citigroup convertible preferred stock into ordinary shares at $3.25 a share as part of a rescue package, gaining in the process a more than 9% stake in the U.S. bank.
"A stake below 5% reflects GIC’s goals and desire to be a portfolio investor," it said in a statement. "GIC will continue its investment in Citigroup as we are confident of its long-term prospects."
Capping a week that highlighted the one-year anniversary of the financial collapse, a panel aimed at getting to the bottom of its cause is just now getting on its feet.
The Financial Crisis Inquiry Commission’s members want to "shed light" on why the collapse happened and make recommendations to avoid future crises. Their final report is 15 months away, but congressional leaders are already pushing ahead on bills to revamp financial rules to avoid the next crisis.
The congressionally appointed group, funded with $8 million, met for the first time publicly on Thursday and pledged that its work will serve as more than window dressing for politicians worried about the appearance that they allowed the financial crisis to happen.
"There’s no question that this commission had a political birth," said the committee’s second-in-command, Bill Thomas, a retired Republican congressman from California who ran the powerful Ways and Means Committee. "You can sulk about your birth or get on with your life. And frankly, this commission’s life is very, very important."
The commission plans to release interim reports as it gathers information, said the group’s chairman, Phil Angelides, a former California state treasurer who warned about financial sector abuses back in 2002 and lost a 2006 gubernatorial bid. It also plans to stay in close contact with Capitol Hill committees leading the reform of the financial system.
The group has subpoena power over records and can demand interviews with key decision-makers to figure out what caused the crisis.
One model for the panel is the Pecora Commission, which examined the 1929 Wall Street crash and other events that caused the Great Depression. That group came up with recommendations that helped redefine the financial system.
The group is most often compared with the Sept allied insurance. 11 commission, which found that the government had ignored warning signs of terrorist threats.
But unlike the 9-11 commission, which was made up of equal numbers of Democrats and Republicans, the financial crisis commission has six Democrats and four Republicans.
Such differences in opinion came out in opening statements, as panel members highlighted the issues they want to focus on.
Several Republican appointees, including former White House official Keith Hennessey, talked about the need to examine the housing crisis and "politically popular laws passed by Congress that exacerbated" the problems.
Hennessey, an economic adviser under President George W. Bush, wants to delve into the "relaxation of lending standards" and people buying homes they could not afford. Republican lawmakers often talk about such homeownership policies as a major cause of the financial crisis.
By contrast, former Sen. Bob Graham, a Florida Democrat, said the commission needs to explore how consumer protections went awry because that’s high on the congressional agenda.
Brooksley Born, former chairman of the Commodities Futures Trading Commission, called for stronger regulation of complex financial products like derivatives, which she warned about in the 1990s.
"The erroneous belief in the effectiveness of self-regulation has played a major role in bringing our economy to its knees and has cost the taxpayers trillions of dollars," Born said.
The crisis commission aims to hire top staff in October and start gathering information before the end of November.
General Motors was set to end months of suspense over the fate of its Opel unit on Thursday, and announce whether it plans to sell the European automaker to one of two rival bidders.
GM said in a statement its board had taken a decision on Opel after a two-day meeting.
A Sky News report, citing unnamed sources, said GM had decided to keep the Ruesselsheim-based automaker it first took control of some 80 years ago, but two bankers close to the negotiations played down that report.
A source in Berlin said senior members of the German government, including Chancellor Angela Merkel, had not been informed of GM’s decision as of Thursday morning.
Separate sources familiar with the proceedings told Reuters after the board meeting that GM had dispatched its chief Opel negotiator John Smith to Berlin, where he was expected to brief the trust supervising Opel and German government officials before a news conference scheduled around 10 a.m. ET.
The trust was set up in May to keep Opel from being swept into GM’s bankruptcy and has the final say on who buys the company. It comprises two representatives each from GM and Germany, as well as an independent chairman who is supposed to act as an arbiter between the two sides.
Politically charged
"General Motors’ board of directors approved a course of action for its Opel subsidiary and will be communicating its recommendation to the German government, other European governments, both bidders, employees and the Opel trust board over the next 24 hours," GM said.
It was not immediately clear what action the GM board had chosen after spending the past month weighing the merits of selling its European unit against the cost of keeping it.
The decision is being closely watched in Germany, where Opel employs roughly half of its 50,000 European workers at four plants making everything from three-door Corsa subcompacts to Zafira vans.
The automaker has two factories that produce automobiles under the Vauxhall badge as well as major sites in Belgium, Poland and Spain free credit score online.
Chancellor Angela Merkel, facing an election on Sept. 27, has thrown her weight behind Canadian auto parts group Magna’s bid for Opel, promising 4.5 billion euros ($6.6 billion) in government guarantees if GM opts for the Russian-backed offer.
Berlin believes the Magna bid guarantees the brightest long-term future for Opel, which traces its roots in Germany back to the 19th century.
Opel workers are preparing mass protests if GM fails to pick Magna, a labor leader said. "We will then tomorrow with many thousands of people go to Eisenach … and will symbolically protect the factory from access with a chain of people," Klaus Franz said on German television station ZDF.
But GM management has said a rival bid by Brussels-listed RHJ International, which Berlin is refusing to help finance, would be easier to implement.
Some elements within the board are known to have favored keeping Opel instead of selling it to either bidder, but all three options carry risks for GM, which is struggling to turn itself around under U.S. government majority ownership.
Magna wants to use plant capacity at Opel by tapping into its expertise in contract manufacturing and building rival models for outside automakers. It forecasts high growth rates, particularly in Russia, home of its consortium partners Sberbank and GAZ.
Under its proposed plan, Magna and Sberbank would each own 27.5% of the company, while Opel employees would hold 10% and GM the remaining 35%. Some 10,000 European jobs would be cut, 25% of those in Germany.
RHJ plans to take a majority stake in Opel and shrink production to return the company to profit. It plans about the same number of job cuts as Magna and would be expected to sell its holding in the company at some point in the future, possibly even back to GM.
Last year Andrew Hall, the head of Citigroup’s energy trading unit, made over $100 million, making him one of the highest paid people on Wall Street.
Meanwhile, Corey Carter, resident of an Alabama county where consumers’ gas price burden is greatest, spent more than 25% of his $240 weekly pay on gas.
Some experts argue that the experiences of people like Hall and Carter are linked by the economics of oil trading. They say it’s not a coincidence that Americans are paying more at the pump in an era when Wall Street has taken a greater interest in energy trading.
Even the government is reassessing its opinion of speculation’s impact on oil prices. In what could be a significant reversal, the United States may tighten the rules on energy trading.
"Using an essential commodity as [an investment tool] is crazy," said Judy Dugan, research director at Consumer Watchdog. "If you want a double dip recession, let’s just get $100 oil again."
Dugan is part of a growing chorus of people calling for greater government oversight of the commodities markets, where oil contracts are traded. The government agency that regulates those markets, the Commodity Futures Trading Commission, is starting to listen.
Last month, the agency held hearings about what it could do to restrict speculator activity. Possible measures include setting stricter limits on the amount of contracts people are allowed to trade, increasing the amount of money investors have to put up to buy contracts, or simply better reporting on who is buying what.
On Wednesday CFTC said it will begin listing speculative money in more detail in its weekly energy market reports starting this Friday, while additional hearings on broader market regulation continued Wednesday and Thursday.
The fact that the CFTC is even considering changing the rules is a big departure from its stance under the Bush administration. Last year the CFTC was adamant that speculators were not driving up the price of oil, with its then-director testifying as much before Congress several times. Now, under President Obama, the agency has a new head and that position may change.
It was reported last month that CFTC would soon reverse itself and say speculators were at least partially to blame for the $147-a-barrel prices seen last summer. Then the agency said those reports were not true. Now they will only say they will be "putting out additional elements of information."
Most analysts think additional restrictions will be placed on speculators, probably sometime this fall.
"Oil prices can’t triple and then fall by 85% within two years without a political response," Kevin Book, managing director at the research firm ClearView Energy Partners, wrote in a recent research note.
Big users of oil — as opposed to non-users like banks, hedge funds and others who are generally lumped into the "speculator" category — welcome any moves that might limit speculator interest.
"One day [last year] oil prices went up by $11 a barrel," said David Castelveter, a spokesman for Stop Oil Speculation Now, a lobby group made up mostly of airlines and trucking companies. "That’s not supply and demand."
Castelveter isn’t sure if tightening rules on oil trading will result in lower prices and less volatility, but he thinks it’s at least worth a shot business card.
The effect on prices
But what types of restrictions the government might enact and what that might do to prices is an open question.
Ken Medlock, an energy economist at the James A. Baker III Institute for Public Policy, thinks restrictions will bring down prices.
Medlock authored a recent paper looking at investment money influence on the oil market, and said it’s hard to see how it’s not pushing prices higher.
There’s just too much of a correlation between stock prices, the dollar and oil prices to think big investment money - as opposed to supply and demand - is not driving the price.
Specifically, he notes how "non-commercial" players — i.e., banks, pension funds and the like — now hold 50% of the contracts on the U.S. oil futures market. That’s up from 20% in 2002.
He blames a large part of investor interest in oil futures on a 2000 law now known as the "Enron loophole." That rule exempted banks, funds and other non-users of oil from reporting their positions on electronic markets. At the same time, proliferation of electronic exchanges took off, and is now where most oil trading takes place.
"That’s when there appears to be a fundamental shift in the market," said Medlock. "The technology has moved faster than the policy."
The lack of information brought about by the reporting exemption is what makes it so hard to figure out if speculators are unduly influencing oil prices.
Others have made projections.
Last week it was reported that Germany’s Commerzbank thinks oil prices will fall 30% if regulations that rein in speculators are passed.
But there are plenty of people who feel speculators are not behind the runup in oil prices, starting with the Bush-era CFTC and their counterparts in London.
Plenty of people point to the razor-thin margins between what the world was using and what it could produce last year when prices hit $147, and note that as soon as the economy collapsed, oil prices did too. They also say that OPEC and other big oil producers have a role in influencing prices.
The Citigroup energy trading unit did not return calls seeking comment. But others have said increasing market regulation in an attempt to lower prices may be futile.
Deutsche Bank, which engages in energy trading, noted in a recent report that during the recent commodity boom, items that increased most in price were mostly rare metals not traded on an exchange, and thus not subject to speculator influence. And even items like rice and steel, also not traded on an exchange, saw a big runup in prices.
The report noted how the U.S. government has been attempting to regulate speculators for that last 100 years in other commodities markets in an effort to bring down prices, often with little success.
"Alongside speculators we believe fundamental factors should not be forgotten in terms of the rapid rise in commodity prices," the report said, highlighting strong demand and OPEC influence. "Perversely focusing on regulation to curb speculative activity may possibly increase the pricing power of OPEC over time at a time when the U.S. government is attempting to do the exact opposite."
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