Commentaries

Moulton’s parting shot at Alchemy

Real Business is running a copy of what it says is Jon Moulton’s resignation letter from Alchemy.

It is full of wonderful nuggets about the private equity boutique he set up in 1997 and gives insight into a wider malaise in financial services.  Moulton is not saying if the letter — which is addressed to investors — is authentic.

The letter’s parting words capture the tone: “I would do it again – but better“.

(Photo: Reuters file photo)

The revenge of Madoff’s victims

By Lynnley Browning
(Lynnley Browning is a guest columnist. The views expressed are her own. She is a frequent contributor to the business pages of The New York Times and is a former Moscow-based correspondent for Reuters, where she covered energy and commodities.)

Some have argued that the victims of Bernie Madoff’s enormous fraud should simply take their lumps for having trusted their money to the greatest con artist in history.

CFTC lifts lid on large commodity positions

   By John Kemp
   LONDON, July 29 (Reuters) – Data presented to yesterday’s public hearing on energy markets show the U.S. Commodity Futures Trading Commission (CFTC) and exchanges have granted so many exemptions from hard position limits and soft position accountability levels that the traditional position-limiting system has become meaningless.
   CFTC chairman Gary Gensler noted that exemptions have become so numerous they risk “swallowing the rule”. There’s no danger, the rule has disappeared without trace. The scale and frequency it has been broken has seen to that.
   It’s clear from the figures that traders’ positions can be big enough to raise the risk of distorting prices which set fuel costs across the globe.
   Gensler’s slide presentation provided the first comprehensive insight into how exemptions have been used — giving detailed data on the number of times limits have been exceeded since mid-2008 for the Big Four energy contracts on NYMEX (crude oil, natural gas, heating oil and RBOB gasoline). 
    Last week (July 21) there were 37 exemptions in force in the crude contract for an average of almost 5,700 lots (5.7 million barrels of crude oil), and 43 exemptions in force for natural gas for an average of 2,930 lots (29.3 trillion BTUs or 28.5 billion cubic feet).
   These were exemptions from spot-month limits (contracts approaching expiry and therefore most vulnerable to squeezes or settlement failure). They take no account of exemptions in force for contracts further out along the curve.
   For the 12 months between July 2008 and June 2009, 43 traders received dispensations from the single-month limit on the NYMEX crude contract, exceeding the notional limit by an average of 10,000 contracts (10 million barrels) and with excursions lasting an average of 87 days. In other words, it was routine practice to run positions in a single month at twice the notional “accountability level” set by the exchange.
   For natural gas, 26 traders received dispensations from the combined all-months limit, and exceeded it by an average of 32,000 lots (311 billion cubic feet) (four times the usual limit) with excursions lasting an average of 80 days at a time.
   Positions on this scale utterly defeat the objective of setting limits.
   As Gensler noted, the CFTC’s avowed aim has always been “to ensure that markets were made up of a broad group of diverse participants with a diversity of views. The intent was to avoid the concentration of positions of any single party”.
   “In 1980, the CFTC reiterated its goal to prevent market concentration. In its rulemaking, the Commission stated that ‘a trader’s net position has a continued effect on price, and if sufficiently large can become a perceptible market factor’”.
   “Speculative position limits serve to decrease the potential for positions to influence the general price level”.
   But massive exemptions have produced the opposite effect. For NYMEX natural gas, the CFTC data shows 13 traders had positions amounting to more than 10 percent of the open interest in a single month at some point over the last year, 4 traders had positions over 20 percent, and 3 traders had positions over 30 percent. With this much concentration, price setting is hardly the result of a “diversity” of views.
   For the CFTC, the policy question is whether to make minimal changes to the process for setting limits and granting exemptions to restore public confidence in the system’s integrity, or be more aggressive and try to use tighter limits and more narrowly drawn exemptions to reduce the average position size and cut concentration levels.
   (Editing by David Evans)

Investors go mad

The global financial meltdown apparently has prompted some German investors to take justice into their own hands.

If the press reports are true, it appears a group of investors allegedly kidnapped and tortured a financial advisor who lost them a boatload of money. Now revenege is never the way to go, especially when there are authorities to take care of this sort of thing.

The Top Secret PE Exit Strategy

The problem with being a private equity investor is that you’re subject to long lockups for withdrawing money–sometimes up to 5 years.

That wasn’t much of an issue back in the halcyon days for PE firms–say three or four years ago–when investors could regularly look forward to high double-digit rates of returns. But today those long lockups are feeling like balls-and-chains, with PE firms having to take writedowns on their portfolio investments and investors seeing returns sag.