By Rob Iati, Partner, The TABB GroupJULY 10, 2009

Testimony of

Richard R. Lindsey, Director,

Division of Market Regulation

Before the House Committee on Banking and Financial Services,

Concerning Regulation of the Over-the-Counter Derivatives Market

and Hybrid Instruments

July 24, 1998

The Securities and Exchange Commission (“SEC” or “Commission”) appreciates the opportunity to express its views on issues relating to the federal regulation of transactions involving over-the-counter (“OTC”) derivatives and hybrid instruments.1 These issues involve significant questions of public policy that require the attention of Congress, members of the financial regulatory community, and interested industry participants.

Benefits of OTC Derivative Instruments

It is widely recognized that OTC derivative instruments are important financial management tools that, in many respects, reflect the unique strength and innovation of Am erican capital markets. In fact, U.S. markets and market professionals have been the global leaders in derivatives technology and development.

OTC derivative instruments provide significant benefits to corporations, financial institutions, and institutional investors by allowing them to manage risks associated with their business activities or their financial assets. These instruments, for example, can be used by corporations and local governments to lower funding costs, or by multinational corporations to reduce exposure to fluctuating exchange rates. Because of the range of benefits these products offer, the OTC derivatives market has grown significantly during the past two decades.

The growth in activity involving this market has come, in part, as a result of the careful approach to regulation taken by Congress and by U.S. financial  regulators. That approach has focused on promoting legal certainty for OTC derivative transactions and encouraging the development of sound

industry practices.2 That approach has also relied on building consensus among U.S. financial regulators through their participation in the President’s Working Group on Financial Markets.
Concerns Regarding the CFTC Concept Release on OTC Derivatives

The recent concept release on OTC derivative instruments issued by the Commodity Futures Trading Commission (“CFTC”) represents a significant departure from the careful approach taken by the SEC and other regulators to the OTC derivatives market.3 In its concept release, the CFTC raises the possibility of applying a comprehensive regulatory regime to transactions involving swaps and hybrids as a condition for exempting such products from the requirements of the Commodity Exchange Act (“CEA”). Such a regulatory regime would necessarily be based on the CFTC’s conclusion that swaps and hybrids are futures contracts or commodity options and, as such, are subject to CFTC jurisdiction under the CEA.

Chairman Levitt joined the other members of the President’s Working Group – Treasury Secretary Rubin and Chairman Greenspan of the Federal Reserve Board – in objecting to the issuance of the CFTC’s concept release, citing grave concerns about the possible consequences of the CFTC’saction.4 In particular, these concerns focus on the risk that the CFTC’s action may increase the legal uncertainty concerning swaps and other OTC derivative instruments and, thus, destabilize what has become a significant global financial market. Uncertainty created by the CFTC’s concept release and concerns about the imposition of new regulatory costs also may stifle innovation and push transactions offshore.

Any consideration of the issues facing the OTC derivatives market, such as legal certainty, the concerns of industry participants, and the role of U.S. financial regulators, must begin with an examination of how this market has evolved and which products are involved in the bilateral transactions conducted between market participants. A convincing argument has not been made that developments in the OTC derivatives market since 1994 – when the members of the Working Group last testified before Congress on this market – or since 1995 – when the SEC and CFTC worked with the Derivatives Policy Group to develop a framework for voluntary oversight of OTC derivatives – merit the CFTC’s consideration of a vast, new scheme to regulate this market. Indeed, questions relating to what kind of regulation, if any, is appropriate for this market are ones that should not be addressed by an agency acting under a statute intended to govern only exchange trading in futures and commodity options.
Swaps

In its concept release, the CFTC sets out a broad regulatory agenda for regulating the OTC derivatives market and implies that the CFTC has jurisdiction over this market. We disagree with the CFTC’s approach. First, this approach necessarily involves examining the extent to which swaps may be futures subject to regulation under the CEA. On this issue the SEC has been clear – traditional swaps that are not traded through a multilateral transaction execution facility are not futures and are not subject to regulation under the CEA.5 This view is shared overwhelmingly by the industry.

Second, as Secretary Rubin, Chairman Greenspan, and Chairman Levitt suggested in their joint statement, we have serious doubts as to the CFTC’s authority to regulate OTC markets. The CEA provides for the regulation of exchange-traded futures, making off-exchange futures transactions illegal under the statute. Nowhere in the CEA has Congress articulated an intent that the CFTC regulate off-exchange markets, nor has Congress established standards for the protection of the public interest should the CFTC assert jurisdiction over these markets.

Moreover, the CEA should not be used as a foundation on which to build a system of regulation for the OTC derivatives market. Because of the difference in goals between exchange markets for futures and OTC derivatives markets, the CEA should be interpreted as providing for exclusive CFTC jurisdiction only over futures contracts that are traded on an exchange. For example, it is critically important to prevent manipulation of exchange markets that perform a price setting function. The OTC derivatives market does not set the price of underlying cash commodities. This difference should be acknowledged in the regulation of these two markets.

Third, we disagree with any plan by the CFTC to regulate the OTC derivatives market through exemption. In enacting the Futures Trading Practices Act of 1992, Congress gave the CFTC broad exemptive, not regulatory, authority regarding OTC swap transactions.6 Congress granted this authority to the CFTC without making any determination regarding the status of swaps and other OTC derivative instruments under the CEA. We disagree with the potential exercise by the CFTC of its exemptive authority as a means to regulate areas that have not been determined by Congress to fall within the CFTC’s authority. This is very different from the exercise by an agency of its exemptive authority to provide regulatory relief

in circumstances where the agency has clear jurisdiction over the activities or products that are subject to the exemption.

Moreover, regardless of the characterization of these instruments under the CEA, both the plain language of the CEA and the legislative history

indicate that Congress did not intend for the CFTC to use its exemptive powers to establish a new regulatory regime for the OTC derivatives market.

Notably, Section 4(c) of the CEA places certain conditions on the exercise of the CFTC’s exemptive authority. These conditions include the requirement that any exemption be in the public interest, that exemptions be limited to transactions that would be effected between persons meeting the definition of “appropriate persons,” and that exempted transactions not have a material adverse effect on the ability of the CFTC or any contract market to discharge its regulatory or self-regulatory abilities under the CEA. Beyond these general requirements, Congress did not direct the CFTC

to impose substantial additional requirements as a condition for exercising its exemptive authority, choosing instead to allow the CFTC to either exempt transactions unconditionally or on stated terms or conditions.

Given the willingness of Congress to allow the CFTC to exempt transactions without imposing conditions beyond those contained in Section 4(c), it is unlikely that Congress anticipated that the CFTC would establish exemptive conditions that, in effect, would require compliance with a new, comprehensive regulatory scheme for conducting off-exchange transactions. In fact, Congress specifically reserved for itself issues of regulatory policy relating to the OTC derivatives market. As stated in the Conference Report for the Futures Trading Practices Act of 1992, the purpose of giving the CFTC broad exemptive powers was to provide “a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development (could) proceed in an effective and competitive manner.”7 The objective was legal certainty for swaps, not expansive regulation of an evolving market.
Hybrids

The CFTC’s concept release also raises significant concerns regarding the current exemption for hybrid instruments contained in the CFTC’s Part 34 rules.8 Hybrid instruments are depository instruments or securities products, such as debt or equity securities, that have one or more commodity-dependent components with payment features similar to commodity futures or commodity option contracts. Under the CFTC’s Part 34 rules, such instruments may be exempt from regulation under the CEA if the sum of the commodity-dependent values of the commodity-dependent components of the instrument is less than the commodity-independent value of the commodity-independent component.

In its concept release, the CFTC indicates that some experienced practitioners have stated that the definition of hybrid instrument under the Part 34

rules is complex and difficult to understand and apply. We believe that the current definition is working well and that the mathematical computations

required under the definition are generally well understood. However, if industry representatives believe that the Part 34 rules are difficult to apply, we

would be interested in working thoughtfully with the industry, bank regulators, and the CFTC to address those concerns.

More generally, it seems the CFTC is proposing to substantially narrow the scope of the current hybrid exemption. In addition, the exemption’s

availability would depend on compliance with a scheme of regulation that would be implemented based on the CFTC’s exercise of its exemptive

authority. It is important to recognize that all hybrids are already regulated as banking or securities products. Where the commodity-dependentvariables are not paramount, there is no need to add another layer of regulation under the CEA.

Concerns of Market Participants

The CFTC’s suggestion that swaps and hybrid instruments might be futures or commodity options – derivative products regulated under the CEA – represents a significant departure from traditional views about the status of swaps and hybrids under the CEA. A conclusion to this effect would be of great concern to participants in the OTC derivatives market who have long considered the CFTC’s current exemptions for swaps and hybrids to be non-exclusive safe harbors from regulation under the CEA. Consistent with this view, market participants believe that a broader range of swaps and

hybrids than those described in the exemptions – such as products based on equity securities – also are not subject to regulation under the CEA. If

swaps and hybrids in general are considered to be futures or commodity options, as the CFTC suggests, concerns will be raised not only that the CFTC might restrict its existing exemptions, but also that contracts executed outside the terms of these exemptions might be deemed illegal off-exchange contracts in violation of the CEA. Fears regarding the legality of swaps and hybrid instruments could seriously disrupt the derivatives market.

The SEC’s “Broker-Dealer Lite” Proposal In contrast to the CFTC’s actions, which have raised concerns about legal uncertainty and the imposition of new regulatory costs on participants in the OTC derivatives market, the SEC’s OTC Derivatives Dealer, or “Broker-Dealer Lite,” proposal is intended to reduce the regulatory burdens faced by broker-dealers that conduct an OTC derivatives business. 9 Under the SEC’s current regulations, firms that effect transactions in OTC derivative instruments that are securities (such as OTC options on government securities) must register as broker-dealers and comply with the

SEC’s capital and margin requirements. In some instances, these regulatory costs have resulted in firms dividing their activities, placing

non-securities activities in separate, unregistered affiliates located in the United States, and conducting their securities activities abroad.

In proposing special rules for a limited class of broker-dealers, called “OTC derivatives dealers,” the SEC recognized that, in some instances,

fragmenting a firm’s OTC derivatives business may hinder its ability to manage risk and compete for business. If adopted, the proposed rules would

provide U.S. securities firms with greater flexibility in structuring their OTC derivatives activities by allowing them to conduct transactions involving

both securities and non-securities derivative products through one entity. It should be emphasized here that flexibility is the goal. The proposed rules

would reduce, rather than increase, the regulatory impediments to doing business.

Registration as an OTC derivatives dealer would be a voluntary alternative to registration as a fully regulated broker-dealer under the SEC’s current rules. Modified capital rules would be applied to these registered dealers, under which they would be allowed to use value-at-risk models for determining market risk charges. OTC derivatives dealers would also be subject to the more flexible margin provisions typically applied to banks.

This would make it more economical for the OTC derivatives dealers to conduct transactions involving both securities and non-securities OTC derivative products in the same place. However, this entire structure would be optional, including the determination as to which, if any, instruments a dealer chose to place in the separate entity, along with its securities OTC derivative products.

The SEC’s “Broker-Dealer Lite” proposal does not expand the SEC’s jurisdiction, nor does the proposal claim that OTC derivative instruments generally are securities. Under the proposal, OTC derivatives dealers can opt to trade a wide range of derivative products; of these, the SEC can only regulate securities transactions engaged in by the OTC derivatives dealer. This does not represent any change in the exercise of the SEC’s jurisdiction. Moreover, any activity involving futures transactions by an SEC regulated entity would remain subject to the CFTC’s exclusive jurisdiction – as is the case today.

In short, the SEC’s proposal for OTC derivatives dealers is intended to promote market development and innovation and encourage dealers to keep business in the United States. It also is, in effect, a laboratory in which the SEC can test the operation of new concepts, such as value-at-risk, in a controlled environment, before introducing them into its rules for all broker-dealers. The OTC derivatives market has grown substantially in recent years, and this growth is indicative of the strength and vitality of U.S. capital markets. In contrast, conclusions drawn from the CFTC’s concept release raise concerns regarding legal uncertainty for OTC derivative instruments and the imposition of new regulatory costs. These concerns may stifle innovation or push transactions offshore.

The Working Group’s Request for Legislation

As noted earlier, the growth in the OTC derivatives market has resulted, in part, from the careful consideration of market issues and consensus

building among financial regulators. To address the legal certainty concerns raised by the CFTC’s concept release, Secretary Rubin, Chairman

Greenspan, and Chairman Levitt have requested a temporary legislative response to provide Congress and the regulatory community time to

consider the important public policy issues raised by activities in this market.10 The request was not made lightly, but was necessary to prevent any

perception that the U.S. regulatory system imposes an unreasonable amount of legal uncertainty on transactions in the OTC derivatives market, and

to avoid litigation that could increase this uncertainty.

In particular, the requested legislation would require the members of the President’s Working Group to study the OTC derivatives market to evaluate

whether any additional safeguards are warranted. The scope of the study would be OTC derivative instruments, including swap agreements, and

hybrid instruments. Following completion of the study, the President’s Working Group would develop recommendations, as may be appropriate, for

changes in statutes, regulations, and policies to improve operation of this market and to enhance legal certainty for swap agreements and hybrid

instruments. The legislation would require the President’s Working Group to submit a report to Congress describing the study and setting forth any

recommendations.

Because of the importance of legal certainty to market participants, the legislation would also maintain the regulatory status quo by imposing a

temporary moratorium on the CFTC’s ability to restrict its current exemptions for hybrid instruments and swap agreements. More specifically, the

legislation would require that prior to the enactment of legislation reauthorizing the CFTC, the CFTC would not be permitted to promulgate any

proposed or final rule, regulation, or order – or issue any interpretive or policy statement – restricting or regulating activity in any hybrid instrument or

swap agreement currently eligible for exemption under the CFTC’s regulations. The legislation would also provide legal certainty to derivatives based

on non-exempt securities.
Financial Derivatives Supervisory Improvement Act

In an effort to address legal certainty concerns in the OTC derivatives market, last month Chairman Leach introduced a bill, entitled the “Financial

Derivatives Supervisory Improvement Act of 1998.” Like the legislation requested by the President’s Working Group, this bill would impose a

moratorium on the CFTC’s ability to restrict or regulate swaps and hybrid instruments, and would call for U.S. financial regulators to conduct a study

of the regulation of the OTC derivatives and exchange-traded derivatives market.

Under the Leach bill, this study would be conducted by a new Working Group on Financial Derivatives, which would be chaired by the Secretary of

the Treasury and would include the Board of Governors of the Federal Reserve System, the SEC, the CFTC, the Office of the Comptroller of the

Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Federal Reserve Bank of New York. While we agree

that a study of OTC derivatives markets is appropriate, we believe that the study should be conducted by the President’s Working Group in its current

form.

As constituted, the President’s Working Group represents a diverse and balanced group of regulatory bodies. The four agencies that make up the

Working Group are those having a principal interest in the operation of the OTC derivatives market, and bring to the group perspectives relating to

the relationship of this market to securities and futures regulation, as well as the operation of the nation’s banking system. Adding more bank

regulators to a group formed specifically for the purpose of addressing derivatives issues would make the operation of the group more cumbersome,

without adding points of view not already represented by the Department of the Treasury and the Federal Reserve Board. Moreover, the additional

agencies that would participate in the proposed Working Group on Financial Derivatives already participate, as appropriate, in the discussions of

the President’s Working Group.
SEC–CFTC Merger

In connection with recent discussions regarding regulation of the OTC derivatives market and hybrid instruments, the idea of a merger of the

Commission and the CFTC again has been raised. While a merger of the two agencies might make sense in certain ways, the benefits of such a

union may not be as immediate or dramatic as its champions might expect.

The cost savings associated with a merger may be limited, because the new combined agency would still need to retain operating divisions to oversee each of the regulatory areas within its jurisdiction, such as corporation finance, investment management, the securities markets, and the commodities markets. It is true that merging the Commission and the CFTC would streamline regulatory oversight, reduce jurisdictional uncertainties, and eliminate some administrative costs, but we must take care not to be distracted from the urgent business before us today. Calming the OTC derivatives market is our top priority.

A merger of the Commission and the CFTC would entail a substantial commitment of time, money, and resources, both for Congress and the two agencies. Accordingly, the Commission is wary of the costs and distractions of an agency merger at this time.

Conclusion

In short, the CFTC’s concept release raises important policy questions that should not be addressed by the CFTC alone, but rather require the attention of Congress, members of the financial regulatory community, and interested industry participants. The OTC derivatives market is a rapidly growing and extremely vital global market that crosses jurisdictional boundaries among the regulatory community. The legislative proposal put forward by Secretary Rubin, Chairman Greenspan, and Chairman Levitt recognizes the need to protect the market from unreasonable and potentially harmful legal uncertainty, while also providing the time needed to allow the President’s Working Group to study the issues raised by activities in the OTC derivatives market and to develop, as a group, appropriate recommendations to Congress.

The Commission appreciates the opportunity to offer its perspectives on the OTC derivatives market, and to re-emphasize its serious concerns with the CFTC’s concept release and the damaging consequences that concept release could have on this market. The President’s Working Group should be provided with the opportunity to carefully study the OTC derivatives market and to analyze the current regulatory structure. The Commission and its staff welcome any questions on these issues that the Committee may have, and look forward to continued discussions with Congress, the President’s Working Group, and industry representatives on these important issues.
Footnotes

-[1]- The Commission’s staff also has participated in developing draft legislation recommended by the President’s Working Group on Financial Markets to revise the banking and bankruptcy insolvency laws. This proposal clarifies the treatment of certain financial contracts upon the insolvency of one of the parties to a transaction, and this will reduce systemic risk. The Commission believes that it is important to strengthen netting arrangements and provide certainty to the treatment of financial contracts when an institution becomes insolvent, and looks forward to the enactment of legislation that achieves these goals and strengthens our financial markets.

-[2]- See, e.g. , Derivatives Policy Group, Framework for Voluntary Oversight (Mar. 1995). The Derivatives Policy Group was comprised of principals representing six major U.S. securities firms, specifically, CS First Boston, Goldman Sachs, Morgan Stanley, Merrill Lynch, Salomon Brothers, and Lehman Brothers.

-[3]- Commodity Futures Trading Commission, Concept Release on Over-the-Counter Derivatives, 63 FR 26114 (May 12, 1998).

-[4]- Joint Statement by Treasury Secretary Robert E. Rubin, Federal Reserve Board Chairman Alan Greenspan and Securities and Exchange Commission Chairman Arthur Levitt, dated May 7, 1998.

-[5]- Letter dated Jan. 4, 1993 from Jonathan G. Katz, Secretary, SEC, to Jean A. Webb, Secretary, CFTC, commenting on CFTC proposed rules regarding the regulation of swaps and hybrid instruments.

-[6]- P.L. No. 102-546; 106 Stat. 3590 (1992). Using the exemptive authority granted to it under the Futures Trading Practices Act of 1992, the CFTC promulgated rules under Part 35 of its regulations exempting certain swap transactions from the provisions of the CEA, other than provisions prohibiting fraud and manipulation. 17 C.F.R. Part 35.

-[7]- H.R. Rep. No. 102-978, 102d Cong., 2d Sess. 81 (1992).

-[8]- 17 C.F.R. Part 34.

-[9]- Exchange Act Release No. 39454 (Dec. 17, 1997), 62 FR 67940 (Dec. 30, 1997).

-[10]- See Letter dated June 5, 1998 to The Honorable Newt Gingrich, Speaker, U.S. House of Representatives, from Robert E. Rubin, Secretary,

Department of the Treasury, Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, and Arthur Levitt, Chairman, Securities

and Exchange Commission.

http://www.sec.gov/news/testimony/testarchive/1998/tsty0898.htm

Jim Hamilton

A bill introduced by Senator Tom Harkin would bring all OTC financial transactions and credit default swaps currently traded without federal oversight onto regulated exchanges. The Derivatives Trading Integrity Act, S. 272, would establish stronger standards of transparency and integrity in the trading of swaps and other over-the-counter financial derivatives as a critical step toward restoring confidence in the financial system. Senator Harkin is Chair of the Agriculture Committee.

The broad goal of the legislation is to establish the standard that all futures contracts trade on regulated exchanges. According to the chair, it will bring these transactions out into the sunlight where they can be monitored and appropriately regulated. Senator Harkin envisions that the regulated exchanges will work with the CFTC to ensure that trading on the exchange is fair and equitable and not subject to abuses. In calling for the regulation of credit default swaps, SEC Chair Christopher Cox recently told the Senate Banking Committee that the credit derivatives market is a regulatory hole that must be closed by Congress.

Senator Harkin has noted that, while swaps contracts function much like futures contracts, they are not regulated as futures contracts because of a statutory exclusion from CFTC authority. Since they do not have to be traded on open, transparent exchanges, it is impossible to know whether credit default and other swaps are being traded at fair value or whether institutions trading them are becoming overly leveraged or dangerously overextended. Financial derivatives like credit-default swaps must be traded on a regulated exchange, said the senator, so that regulators can know the value of the contracts, who is trading them, and if they have enough assets to back the contract.

The SEC’s current authority with respect to these instruments, which are generally security-based swap agreements under the Commodity Futures Modernization Act, is limited to enforcing antifraud prohibitions under the federal securities laws. The SEC is prohibited under current law from promulgating any rules regarding credit default swaps in the over-the-counter market. Thus, the tools necessary to oversee this market effectively donot exist.Over the years, the CFTC and laws enacted by Congress have allowed instruments that are essentially futures contracts to be privately negotiated without the safeguards provided through exchange trading. In this economic downturn, said Senator Harkin, Congress does not have the luxury to sit back and let the markets work.

The Derivatives Trading Integrity Act will bring more transparency and accountability into the marketplace. Specifically, the bill amends the Commodity Exchange Act to eliminate the distinction between “excluded” and “exempt” commodities and transactions versus commodities and transactions traded or conducted on regulated exchanges. All commodities and transactions of the same nature would be treated the same.

In addition, the bill eliminates the statutory exclusion of swap transactions, and ends the CFTC’s authority to exempt such transactions from the general requirement that a contract for the purchase or sale of a commodity for future delivery can only trade on a regulated board of trade. In effect, this means that all futures contracts must trade on a designated contract market or a derivatives transaction execution facility. Virtually all contracts now commonly referred to as swaps fall under the definition of futures contracts and function basically in the same manner as futures contracts The bill seeks to eliminate the negative consequences from the lack of price transparency and the failure to properly measure and collateralize the risk in trading over-the-counter derivatives. Similar problems have not been seen in the trading of financial futures on regulated futures markets, subject to CFTC oversight.

OTC credit derivatives emerged in the mid-1990s as a means for financial institutions to buy insurance against defaults on corporate obligations.

Credit default swaps are executed bilaterally with derivatives dealers in the OTC market, which means that they are privately negotiated between two sophisticated, institutional parties.

They are not traded on an exchange and there is no required recordkeeping of who traded, how much and when. Although credit default swaps are frequently described as buying protection against the risk of default on, for example, corporate bonds, they are also used by investors for purposes other than hedging. Institutions can and do buy and sell credit default swap protection without any ownership in the entity or obligations underlying the swap. In this way, credit default swaps can be used to create synthetic long or short positions in the referenced entity.

The BM&F Bovespa (IPA: [bo.'ves.pa]; Portuguese: Bolsa de Valores de São Paulo) is a São Paulo-based stock exchange. It is the second largest stock exchange inThe Americas and the third largest in the world.^.The BM&F Bovespa is linked to all Brazilian stock exchanges, including Rio de Janeiro’s Boverj (BVRJ), where only government bonds are traded. The benchmark indicator of Bovespa is the 50-stock Índice Bovespa. There were 450 companies traded at Bovespa as of April 30,2008^[3].

King of the Club: Richard Grasso and the Survival of the New York Stock Exchange by Richard Gasparino.

Some quotes :

John Phelan was an imposing man. He rarely raised his voice but when he did, it was like a volcano . . a former Marine and long-time floor trader who had inherited a specialist firm from his father. Phelan had built a small fortune on his own and now was one of the  most powerful members on the Exchange.  When critics of the NYSE called it a monopoly, he countered it was a public trust that served the needs of all investors regardless of size . . .   Phelan had a dark side. Like most traders, he never showed emotion and rarely gave people any insight into the motives behind his acions. He was also a control freak. He needed to approve just about every major decision, every move . . He could be mean. “He could kill you by looking at you the wrong way”.

When asked to describe his difficult journey to the top of the NYSE, Grasso often characterised it as a horse race – one in which they “made me run around the track twice” before he took over as King of the Club.

Grasso became known for his wild stunts to bring publicity to the NYSE.  Once he was on the podium of the exchange with a mascot for mining company AngloGold, a real African lion.

Referred to by Grasso as the “empty suit”, William Donaldson succeeded John Phelan as NYSE chairman. Grasso bristled under his leadership and succesfully convinced the exchange Board that the job should be his.

New York State Republicans could barely muster an attorney general candidate against Eliot Spitzer in 2002, and when they did, Spitzer won in a landslide. He also won a bigger battle for recognition. Spitzer and his staff had now all but concluded that Citigroup’s former star analyst, Jack Grubman, would be their next opportunity.  . . . . . . .  Grubman mad a perfect villain. He was arrogant. He made a ton of money – as much as $20million a year during the 1990s. He bragged about the conflicted nature of his job; how he snared deals one minute and then posted research the next. But most appealing of all was the evidence of Grubman’s possible fradulent behavior. It was massive – particularly evidence invollving AT&T, one of the few stocks Grubman had hated in the telecom world. But in late 1999, Grubman abruptly changed his tune, upgrading AT&T shares just before the company was to select firms to underwrite a massive stock deal. Citigroup won the banking work. . . . . . Citigroup CO Sanford Weil, one of the most powerful men on Wall Street, who was leading one of the world’s biggest firms, had personally intervened in the ratings decision by giving Grubman a “nudge” to upgrde the shares. It wasn’t just the $45million in underwriting fees Citigroup received . .  AT&T CEO Michael Armstrong was on Citigroup’s board and Weil was on AT&T’s board . . . . Grubman said in an e:mail ” . . Armstrong didn’t know what hit him . . that he later downgraded the stock and that Sandy had “nuked” Reed.” As payback, Grubman said, Weill got Grubman’s twins into an exclusive Manhattan preschool, the 92nd Street Y. . . . Weill had made large donation from Citigroup to the school . . . 

The above chart shows the prices for the continuous electronic futures contract for crude oil traded at the New York Mercantile Exchange. In the earlier years the prices show the pit equivalent(contract size twice the electronic contract of 500 gals), while the more recent values reflect the electronic mini contract.

My interest in financial markets include commodities. Shown above is a weekly chart for the electronic futures market for soybeans traded at the CMEGroup in Chicago. Before the electronic markets were introduced about 2 years ago, agriculture products were traded in the pits at the Chicago Board of Trade(CBOT). The CME and CBOT merged in 2007. For the moment just note the tripling in price of soybeans over the last 24 months. Why ? Reasons to be provided later, so stay with me as I steadily expand coverage on this blog and explain why.

Agriculture product prices are rising very quickly resulting in dislocations and misery around the world. Here is a typical story from Reuters:

FACTBOX-Clashes over food prices trouble political leaders

Tue Apr 1, 2008 8:04am EDT

(This is the latest in a series of stories on rising world food prices and their consequences)

April 1 (Reuters) – Anger over high food and fuel costs in recent months has spawned violent unrest across the world.

Surging food prices due to global supply concerns and heady world futures markets have posed a particular risk to poor economies, especially in Africa, where food makes up a disproportionately large part of household spending and imports.

Here are some details of recent price rise unrest:

* BURKINA FASO:

– Burkina Faso announced a reduction in customs duties on basic foodstuffs in February after several towns were hit by protests in which over 300 were arrested although most were discharged by the courts.

– Unions marched earlier this month demanding further cuts in taxes and prices, as well as public sector wage increases, and also threatened a general strike on April 8-9.

* CAMEROON:

– President Paul Biya raised state salaries by 15 percent and suspended custom duties on basic foodstuffs like fish, rice and cooking oil to ease discontent over high prices after days of rioting.

– In late February, taxi drivers went on strike to protest at fuel price hikes; the stoppage degenerated into rioting in several towns against the high cost of living and Biya’s intention to extend his 25 years in power.

– The government put the death toll from the clashes at 24, although human rights activists put it at over 100 and said most of the victims were shot dead by police in the commercial capital Douala. The government said 1,671 people were also arrested.

* MAURITANIA:

– Violent protests against food price increases in Mauritania spread last November to the capital Nouakchott, where police tried to disperse about 1,000 demonstrators. The unrest was triggered by sharp rises in the prices of grains and other basic foodstuffs.

* MOZAMBIQUE:

– Mozambique agreed to cut the price of diesel fuel for private minibus taxis in February to end a wave of protests over high fuel prices and the rising cost of living.

– The protests killed six people and injured more than 100 after police clashed with crowds of demonstrators who looted shops, destroyed vehicles and burned electricity poles.

– Commuters were angered by high fuel costs and a decision, later scrapped, to raise transport fares by 50 percent. The price of petrol has climbed 46 percent and diesel by nearly 90 percent.

* SENEGAL:

– In late March, Senegalese police raided a private television station after it repeatedly transmitted images of police beating demonstrators during an illegal protest over high food prices.

– President Abdoulaye Wade cut the number of ministers in his government by more than a quarter last December in a belt-tightening show of solidarity with citizens hit by rising fuel and food prices.

– Wade had previously pledged to trim his cabinet to “lessen the suffering” of the country’s poor, who have seen the price of basic foods like rice and bread rise sharply.

– Riots swept the normally tranquil capital Dakar in Nov. 2007, with stone-throwing protesters complaining about widespread unemployment and rising prices at a time when the government is building luxury hotels and four-lane highways.

* ARGENTINA:

– Earlier this month Argentine farmers blocked highways with tractors in an anti-government protest that paralyzed the country’s main grain market.

– The country’s four leading farming associations called the strike after the government introduced a new system of sliding-scale export taxes on grains and oilseeds, which significantly raised levies on soy and sunseed products.

* PERU:

– Peruvian farmers upset over a free trade deal with the United States blocked rail services to the famous Inca ruins at Machu Picchu and closed key highways in February.

– Frustrated by rising fertilizer costs, farmers wanted debt relief and said the free trade deal would flood local markets with imports of subsidized U.S. agricultural goods.

* INDONESIA:

– Soaring soybean prices have cut into the earnings of thousands of tempeh makers and vendors in Indonesia. Tempeh is Indonesia’s traditional soybean cake and is a source of livelihood for millions. This has sparked protests among producers and consumers already struggling to cope with surging prices for many basic food items such as cooking oil.

– About 500 protesters, from the Muslim group Hizbut Tahrir Indonesia, took to the streets of the capital Jakarta in mid-March to demand the government bring down food prices after media reported of cases of starvation.