Last year, when oil prices were at about $140 (around Rs6,720 today) per barrel, various conspiracy theories were floated about the reasons for the surge. The US Commodity Futures Trading Commission (CFTC) then argued that the price spike stemmed simply from the forces of supply and demand. The explanation was reviewed after a new administration took over, and the CFTC, showing more courage than it did last year, has now suggested that speculators played a major role in the oil market volatility.
Having arrived at this conclusion, the CFTC has suggested putting position limits on all kinds of speculation. It also concluded that while it is difficult to quantify how much of the price rise was caused by speculators, there was evidence that it was substantial. A regulator adopting the Heisenberg uncertainty principle (you can’t see it, but we know it’s there) is disquieting.
Somewhat surprisingly, Nobel Prize-winning economist Paul Krugman concluded that there hadn’t been a lot of speculation in the oil market, a view at variance with the CFTC’s. What is puzzling in this particular situation is that a powerful government-sponsored body and a Nobel laureate came up with two polar opposite positions on the same issue, based on essentially the same data. Information is at the heart of efficient markets. If the level of transparency is so low that neither the regulator nor a Nobel Prize winner can explain what is happening, one can only conclude that the market for traded commodities needs more openness.
On a slightly different but still related note, The Wall Street Journal recently published a report about the dilemma faced by Citigroup Inc. when its lead energy trader pressed the financial services firm to honour a pay package that could total $100 million in the same year that it received $45 billion in bailout funds. It is likely that the trader in question is exceedingly skilled and his contribution to Citigroup was very tangible.
At the same time, shareholders and lenders provided funds for his trading, based not on his personal reputation but on Citigroup’s goodwill. The trader in question now seems to be prepared to sue Citigroup to receive what he believes is a contractual bonus. If senior managers in companies see themselves as distinct from their organizations to the point where they cannot share in the organization’s travails even during an extreme financial crisis, it raises some questions. Should public funds be used for activities where corporations are unable to fully control the action of their managers. If a financial services organization is just a loose confederation of individuals with little central control, should there be different rules for them?
Tags - Find More Articles On: