Lieberman Proposes Barring Institutional Investors From Commodities

Whether it comes to fruition is to be determined, but taken at face value, Connecticut senator Joseph Lieberman’s proposal to bar institutional investors such as pension and index funds from investing in commodities is a Nixon-goes-to-China moment, a significant indicator of Wall Street’s fallen standing.

Lieberman has been a staunch defender of the securities industry and repeatedly stymied the efforts of the last pro-enforcement SEC chairman, Arthur Levitt. But now he’s not simply willing to support legislation that will put a crimp in the financial services money machine, he’s leading a charge.

Now this move could be deeply cynical. Opponents may argue that this will simply drive investing in commodities overseas. Perhaps, but funds regulated under the Investment Company Act of 1940 (most US fund managers) don’t have that sort of latitude, and ERISA investments could similarly be reined in quite easily. And it’s US investors, plagued by (until recently) an ever falling dollar who have had particularly strong reasons to look to a hedge like commodities.

As a move to drive any speculative froth out of commodities, this one isn’t bad (but one wonders how all those commodities index funds get unwound). Although some have called for increases on margins at commodities exchanges, that hurts commercial actors as well as speculators. A move like this focuses on the underlying issue more directly.

Goldman in particular would suffer, since as the biggest manager of commodities funds based on its index, GSCI, it not only earns fees, but as we have discussed elsewhere, earns even more from an unsavory but hugely profitable practice called “date rape” around the monthly futures contract roll.

Now before the wealth-holding class howls that they’ve just been done a dirty by being deprived of inflation protection, there is an asset class that, unlike commodities, supports productive investment. and provides inflation protection, namely, infrastructure investments. The cash flow from infrastructure projects (toll roads, airports) goes up over time, as do the payouts, so they have fairly secure cash flow that increases over time. Although there is some debate about how to view them, they seem closest to an inflation-indexed bond (although any investor would need to study the ability of the enterprise to increase charges versus the drivers of operating expenses).

Overseas. investor allocations to infrastructure are often as high as 10%, while in the US, they are less than 1/5 that level.

From the New York Times:

A prominent Washington lawmaker said Wednesday that he would propose next week to ban large institutional investors, including index funds, from the nation’s booming commodity markets.

The idea is one of several outlined by Senator Joseph I. Lieberman, independent of Connecticut, who is chairman of the Senate Homeland Security and Governmental Affairs Committee. That committee will hold a hearing on June 24 to continue examining whether financial speculation is affecting the prices of crops and fuel.

“There is excessive speculation in the commodity markets that is driving up the cost of food and energy,” the senator said in an interview. “The question is, do large institutional investors play a positive role?” His concern, he said, is that they do not….

One steady source of money has been the growing number of new funds that mirror specific commodity indexes, like the Standard & Poor’s Goldman Sachs Commodity Index. More recently, exchange-traded funds — popular new investment vehicles that trade on stock exchanges but track commodity prices — have followed the index funds into the market….

Besides what he called the “aggressive” idea of banning institutional investors from the commodity markets, Senator Lieberman said he would also put forward other ideas for discussion at the hearing on June 24.

One less-sweeping proposal would be to strengthen existing regulatory limits on the size of the stake that each speculative investor can hold in a given market, called speculative position limits.

And he plans to propose barring investment banks from using the regulated futures markets to hedge speculative bets their clients are making in the vast unregulated global swaps market — what he called “the swaps loophole.”

Print Friendly, PDF & Email


  1. Melancholy Korean

    It’s ironic that regulators want to get involved at market tops. I understand why they do, of course, but still, their timing is impeccable at marking inflection points.

    Whether such a move would lower oil prices is not as interesting a question, since the trade is to short oil at these levels (or, since that’s extremely risky given the potential upside explosion before the very top, getting long the dollar as a proxy).

    The question is whether legislative solutions, the kind proposed by Senator Lieberman or other proposals, will hurt us competitively in the future, after oil prices have crashed to “reasonable” levels. (Reasonable means maybe around 60 – 70 dollars.)

    Attempting to fight the market, which is forward looking, with political solutions, which always “prepare for the last war,” (apologies for the lazy metaphor) seems difficult, to say the least. A timing mismatch.

  2. Anonymous

    Or you could simplify this by simply saying that one high government muckity-muck, Lieberman, is barring anyone from storing their hard work in anything except depreciating Federal faith notes. The government demands that the peasants support the king.

    that is all

  3. Anonymous

    SIFMA needs to nip this in the bud and get this clown out …. ASAP! Good Lord, there’s still money to be made in this food bubble and with hyperinflation, anything is possible!

  4. Anonymous

    Lieberman, is barring anyone from storing their hard work in anything except depreciating Federal faith notes. The government demands that the peasants support the king.


    I’m quite astound about the incredible US inflation stuff and the so low “federal faith notes” real interest rate.

    How can one believe in democracy when this so-called democracy lies on a permanent basis? Does a lie stop beeing one when its fits everyone?

  5. Michael McKinlay

    Here we Go !

    “provides inflation protection, namely, infrastructure investments.”

    The privatization of American infrastructure. When are America’s investments in its people going to be left alone from speculation? Do we have to mortgage the whole damn country before this selling of America stops? We build it they monetize it … BS.

  6. Yves Smith

    Did I say ANYWHERE American infrastructure deals? There are plenty of good foreign deals in the market.

    However, since investing in infrastructure is one of the proposed ideas for fiscal stimulus, would you rather have it added to various government deficits, or packaged into infrastructure deals, which would be partly sold overseas? The latter lets the investing classes pay for these projects, as opposed to the public at large, and also lets people pick what they are exposed to.

    We do not have great choices here, only bad and less bad ones.

  7. Greg


    “.. We build it they monetize it ..”

    What’s your problem? Nonbody bars Americans from investing in American infrastructure, right? And who are “they” anyway?

    Btw, there are a lot of US investors playing the infrastructure theme in Europe and Asia fro a long time now. Buying underground parking lots in big cities and alike. So don’t complain when it goes the other way round too occasionally.

    I wonder where all this “selling out America” phobia sudenly came from anyway. You see that a lot in recent days. Anheuser-Busch vs InBev for example.

  8. minh

    It’s a terrible justice that when you guys are manipulating the number game (Arabic 0,1,2,3,4,5,6,7,8,9) you bomb the hell out of the Iraqis and threaten to bomb Iran. Wasn’t they the heir of that algebra.

    Algebra is a branch of mathematics concerning the study of structure, relation and quantity. The name is derived from the treatise written by the Persian[1] mathematician, astronomer, astrologer and geographer, Muhammad bin Mūsā al-Khwārizmī titled Kitab al-Jabr wa-l-Muqabala (meaning “The Compendious Book on Calculation by Completion and Balancing”), which provided symbolic operations for the systematic solution of linear and quadratic equations. Al-Khwarizimi’s book made its way to Europe and was translated into Latin as Liber algebrae et almucabala.

  9. Danny

    Years of trade and current account deficits are coming back to haunt us. Now all those unwilling to attack the problem which took years in the making are becoming protectionist hawks. This is going to get ugly. The foreigners are the only people who can save us from this mess we’ve created. We need to accept what we’ve done to our currency like big boys, and this downturn won’t be so bad. If clowns like Lieberman continue bad economic policies, we will be burning our dollars for heat in a few years.

  10. Anonymous

    Isn’t this just Clinton vs Obama in another forum, New York vs Chicago? Btw, gas prices are going to make many toll roads uneconomical over time.

  11. fuguez

    Looks like it is a job for structured products. Financial Engineering can turn a commodity into a security or a swap or a fund. This regulation is meaningless w.r.t. risk exposure. The whole of the equity bull run in Europe was driven through by Protected Equity Notes (PENS) – bonds designed to payout returns linked to equity.
    Anyway Barclays have already set up commodity-linked derivatives that the exchanges were trying to get banned.

  12. mxq

    This industry wasn’t exactly struggling with oil at $60bbl. As Yves pointed out, there is a lot of capital that is simply being wasted with oil moving this high, this fast.

    The massive intertemporal disconnects between the physical market reaction and paper market reaction is creating an unnecessary waste of capital…i.e. XOM spending more on buybacks than on E&P, simply because they can only move so fast (though, i’m sure that’s open to debate). Of course, XOM’s (among others) disposition is at the center of the “miserable energy policy” can-of-worms…but, in either case, that requires more regulation – does it really matter that capital markets are regulated before physical markets?

    And backing up, if everyone recognizes that its ok to regulate energy policy, why aren’t they open to regulating the vagaries of futures markets?

  13. MM

    The whole argument is absurd. Futures markets aren’t about the price of real oil, as 99% of them are closed without delivery. Without speculators to take the other side, there aren’t enough hedgers with countervailing risks to make a liquid market.
    And basic finance theory tells us that limiting investment choices raises risk for the same level of return. The last stress the US government’s finances need is riskier pension funds, which are guaranteed by the nearly insolvent PBGC.
    It’s easy for Lieberman to talk– his pension is already a government guarantee so why should he care?

  14. mxq

    MM: “basic finance theory tells us that limiting investment choices raises risk for the same level of return”

    And basic behavioral finance theory tells us that humans are prone to move prices well in excess of equilibrium (from both directions), given that their role is one of agency (aka driven by job risk).

  15. Anonymous

    I agree whole heartedly with Senator Lieberman’s proposal, however, I believe that in order to protect our children, all fines and prison terms should be tripled if any institutional investor is caught trading commodities within a thousand feet of a school.

    Best regards,


  16. Anonymous

    PSSSS…. psss…. Hey kid…. wanna buy some sweet crude….? here check this out I gotta a thousand barrels… it’s good shit… i ain’t kidding….

  17. Anonymous

    All that one needs to interpret Lieberman is the Israeli position.

    Obviously, the Fed induced commodity bubble is hurting Israel, now. That’s it. That’s all.

  18. mxq

    Anon @ 11:57

    Aside from your ignorance and that you’re a total sissy, posting racist comments, anonymously, on a finance blog… You almost sound robotic, as your comments reflect that you have zero accountability.

    Your brainwashed comment also reflects your weakmindedness, as you blame everyone but your own miserable self for your miserable disposition…In fact, I see this turning into, almost, a vicious cycle, as you post more ignorant comments, people will recognize and point out your ignorance more and more, making you even more angry and more ignorant.

    So, good luck. You’re gonna need it. You ignorant asshat.

  19. Anonymous

    Randy Waldman might or might not be wrong more often than Yves Smith, but I suspect he’s wrong about Yves being a woman.

  20. MM

    mxq: “And basic behavioral finance theory tells us that humans are prone to move prices well in excess of equilibrium (from both directions), given that their role is one of agency (aka driven by job risk).”

    I agree, but what’s the point? Politicians are humans too (at least nominally), at least as prone as markets to overshoot equilibrium, operating in a far less transparent market, and their decisions are MUCH harder to reverse back to equilibrium. Give me the futures market, thanks.
    And lest I be tarred a knee-jerk Republican, I generally vote Democratic, and I believe ideally in a role for sensible regulation. Unfortunately, most politicians aren’t sensible, and most regulators’ skill-sets are years behind the markets they regulate.

Comments are closed.