From The Folks Who Brought You The Mortgage Crisis

What the oil executives didn’t admit, however, is that these speculators are their pals.

They work for some of the biggest banks and investment houses in the world. And, they are not speculators in the truest sense of the word, because US federal regulations allow them to put down very little cash when they make their oil bets.

Here’s why.

Under current regulations oil speculators only need to have between 5% and 7% in the margin accounts that they use to trade oil futures.

That’s it. To place a $10 million bet that oil will go up or down only requires a maximum commitment of $700,000.

To put that another way, it would be as if your broker only required that you have $14 in your margin account when you buy by a single $200 options contract… and that’s not some made up number, a single options contract usually runs in the $200 to $400 range.

But, back to the oil speculators, because the vast majority of them work for name-brand investment banks, pension and hedge funds. In other words, they are Wall Street’s big guns.

You know, the one’s that just got burnt big time on the mortgage crunch.

Robber Barons Redux

Once they started going long on oil it was fairly easy to perpetuate the run… all they have to do is buy at the ask price and oil just keeps going up and up.

Now, I know you veteran commodities players are already shouting that commodities exchanges limit the number of positions an investor can take in the market.

And, that is true for you.

But, the Commodity Futures Trading Commission created a loophole that allows the big investment banks and institutions unlimited commodities speculation.

It exempts investment banks like Goldman Sachs and Merrill Lynch from reporting requirements and limits on trading positions. The loophole allows pension funds to use an investment bank for oil speculations. The bank then trades unlimited numbers of the contracts in futures markets for the funds.

In fact, the US Treasury Department even tracks the biggest exempt players. The top five are Bank of America, Citigroup, JPMorgan, Chase, HSBC North America Holdings, and Wachovia.

These are the same players who trot out their oil experts on TV, the Internet and in print media. Guess what their job is?

Cry wolf about the flying price of oil.

Fixing The Fix

There is, however, an easy solution to this problem of you paying anywhere from a $1 to $1.50 a gallon extra at the pump so some already super wealthy bankers can get mega wealthy.

But, sadly, it’s a solution that involves leadership.

You see, congress could quickly pass a law that requires oil futures speculators to have as much as 50% of their bets in their margin accounts. My brilliant equity options trading wife, Lynn, says that even 20% would likely do the trick.

That’s because those oil-futures bets would then require tying up a massive amount of cash… cash used for other bank investments.

And, such a requirement would have two positives effects.

It would slow down wild-ass speculation enough that oil prices would begin to slide back to a somewhat normal level… say $70 to $75 a barrel

And, it would prevent a banking disaster as big or bigger than the mortgage crunch… and it should matter to you. Because even though such a disaster would involve rich white guys and not middle-class homeowners – the Fed would rush in and rescue the banks with billions of your tax dollars.

This new crisis would begin with two words… “MARGIN CALL,” which in Wall Street parlance means, all bets need to be covered now. Pay up!

Of course, the moment higher margin limits were proposed the banks would howl. Their lobbyists would claim the regulation was un-American and anti-capitalistic.

And, they’d be right.

Because, there’s nothing more American than bleeding the middle-class host to an inch of its life.

Lock and Load.

Andy Carpenter

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

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Source: Speculators Are Bleeding You Dry

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