Streetwise Professor

February 26, 2016

The Notorious S.W.P., or, Dr. Pirrong Goes to Washington

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 8:20 pm

If Elizabeth Warren were to have her way, you’d see my mug on the wall of your local Post Office. What have I done to become to earn her nomination as Public Enemy? Having the temerity to oppose position limits, and co-authoring a report summarizing the deliberations of the CFTC’s Energy & Environmental Markets Advisory Committee, which strongly criticized the need for, and details of, the Commission’s proposed position limits rule.

The backstory is this. In 2015 I was an associate member of EEMAC. (As of 10 days ago, I am a full member.) The Committee’s sponsor, Commissioner Christopher Giancarlo, asked me to write the (Dodd-Frank mandated) report summarizing the Committee’s deliberations at two meetings in 2015. I agreed, and along with Jim Allison (who just retired from ConocoPhillips), I wrote a relatively short draft that just summarized the transcripts of the two meetings. The report went through some additional edits, and was then submitted to the nine full members of EEMAC for their approval. It was approved by an 8-1 vote.

The conclusions and recommendations of these meetings were rather straightforward to recapitulate, because there was considerable agreement on the major issues of (a) whether position limits were necessary, (b) the proposed rule’s bona fide hedging exemptions, and (c) whether to implement limits for spot months only initially, or to implement for all months.

If you read the transcript, and read the final report, you will see that the report is a faithful record of what happened during the meetings. As I said in yesterday’s meeting, I viewed my role to be that of “faithful scribe,” and that’s what I was.

But since the message in the report was NOT what Elizabeth Warren (and one of the EEMAC members, Public Citizen’s Tyson Slocum) wanted to hear, Warren, Slocum, and Warren’s journalistic creatures (most notably the New York Times) decided to kill the messenger. Warren wrote a letter to the CFTC, demanding that the report be withdrawn. Slocum wrote a dissent to the majority report. Assorted journos scurried along behind. Each called foul on my authorship. Here’s what Warren said about yours truly:

The second panelist I am concerned about is Dr. Pirrong. According to the New York Times, “Mr. Pirrong has positioned himself as the hard-nosed defender of financial speculators – the combative, occasionally acerbic academic authority to call upon when difficult questions arise in Congress and elsewhere about the multitrillion-dollar global commodities trade…. [who] has reaped financial benefits from speculators and some ofthe largest players in the commodities business,” and played a key part in “a sweeping campaign [by the financial industry] to beat back regulation.”10

With specific regard to the position limits rule, Dr. Pirrong served as a consultant for the International Swaps and Derivatives Association – a lead plaintiff suing to block the very rule he was asked to provide his views on for the EEMAC.11 There is no record indicating that these conflicts were even disclosed by Dr. Pirrong when he served as a witness, let alone addressed by the EEMAC.

Thanks, Liz! You’re too kind! Honored to be the kind of person your kind of person considers a threat.

One of the journalists slouching after her, the New Republic’s David Dayen weighed in:

The recent inclusion of Craig Pirrong on the committee is perhaps the most flagrant example. Pirrong, who co-wrote the first draft of the report with James Allison, is a professor of finance at the University of Houston, who has been paid by several industry participants and trade groups for his research into commodity speculation. He was also a paid research consultant for the International Swaps and Derivatives Association, the very group that got the initial rule overturned by the courts.

The CFTC report relies mostly on Pirrong’s research and a presentation he made to the committee last year, which did not include the opinion of anyone who believes in the dangers of excessive commodity speculation. In fact, 10 of the 13 witnesses at EEMAC meetings came from industry, two were representatives of CFTC, and the other was Pirrong. The meetings never mentioned that there would even be a final report.

This is amusing on several levels. The first is the fact that the New Republic became the dumpster fire of left-wing opinion rags under the ownership of Christopher Hughes (which ended today, with the magazine’s sale).

The second is that last sentence about no mention of a final report. Er, it’s mandated by law, genius. A law you no doubt love, no less–Frankendodd.

The third-and best-is the title of the piece: “Why Elizabeth Warren is on the Warpath This Week.” This is particularly hilarious. I could see a right-wing mag saying that, as a snarky allusion to the very blonde Warren’s exploitation an alleged Cherokee heritage to game affirmative action to work her way up the greasy pole of legal academia (thereby earning herself the nickname Fauxahontas). But for a lefty to title a piece that way is too precious.

My reply? Yawn.

This ad hominem ankle biting is old and tiresome. This is what passes for serious criticism on the left. It is particularly appalling that a former dean of Harvard Law School can’t do any better than this. No substantive criticism whatsoever. You’d think that if I was just a paid hack that the substance of what I’ve written would be readily dismantled. But Warren and her acolytes don’t even try.

Which is probably wise. That is revealing in itself: you don’t fight battles you know you would lose, so you choose other methods, such as ad hominem slurs, questioning motives rather than challenging facts and logic.

The gravamen of the criticism, such as it is, is also just plain wrong. Warren, Slocum, Dayen, the New York Times, and various Twitter trolls all cite to the 2014 New York Times article which claims that I did paid research for multiple speculators. As Slocum put it in his dissent: “The Times continued that Dr. Pirrong has a long list of paid contracts with energy speculators.”

Long list? The article lists three.

  1. CME. Not a speculator. My work for CME consisted of writing an analysis of the hedging performance of the WTI contract, and serving as an expert in patent litigation involving Globex. Nothing to do with speculation.
  2. Royal Bank of Scotland. Never did work for them. Not an energy speculator.
  3. Trafigura. Not a speculator. A hedger.

As I pointed out at the time of the NYT article, using Trafigura as the Gotcha! just demonstrated how clueless the author of the Times piece was. Now Warren and Slocum are exhibiting similar cluelessness. Trafigura is not a speculator. Its main use of derivatives is as a hedger, and on the short side. Further, contrary to the insinuation that Trafigura likes high prices, it is generally neutral as to price level because it makes money on margins not flat prices, and in fact can profit in low price environments–and has profited handsomely in the recent historic price decline.

People with such a limited understanding of the way things actually work are not worthy of serious attention. Those who are stubbornly and deliberately ignorant (like Warren and Slocum) just deserve scorn.

As for the ISDA connection, I did write a comment letter that ISDA submitted in conjunction with its comment letter on position limits. However, I was NOT paid for that. I directed that ISDA make a donation in my name to the Wounded Warriors Project.

This confusion about who is and who isn’t a speculator illustrates the cosmic stupidity of Warren’s (and Slocum’s and the journalistic clique’s) criticism of EEMAC and its make-up. There are no true speculators represented on the Committee–either its full or associate members. None. No banks–Warren’s usual bêtes noires. No hedge funds. No managed futures funds. No ETFs. Speculators qua speculators were conspicuous by their absence. It is impossible to argue that the EEMAC was doing Wall Street’s bidding.

Instead, the membership is dominated by end users-including public utilities, municipal utilities, producers, merchants-and exchanges. These entities are not speculators whose participation would be constrained directly by the limits, but are mainly hedgers who would face substantial compliance burdens and undue constraints on their risk management activities. Further, they rely on the liquidity and risk bearing capacity supplied by speculators to hedge cheaply and effectively. Constraints on speculation threaten to raise hedging costs. Moreover, if speculation indeed destabilized prices, these firms would suffer.

Thus, these are the firms that limits are intended to help. And they are saying loud and clear: don’t do us any favors.

But Warren et al are apparently incapable of–or more likely, unwilling to–distinguish among the diverse participants in energy markets. To them, everyone is a speculator, and opposition to speculative limits is some dark conspiracy among those who engage in destabilizing betting on commodity prices. Thus, Warren’s criticism of the make-up of EEMAC is extremely indiscriminate and profoundly ignorant. She is so invested in her black-and-white cartoon view of the world that she can only explain opposition to restrictions on speculation as some evil plot by malign corporate interests and their lackeys–including yours truly.

And considering all that, I wear Warren’s hatred like a badge. I must be doing something right. And I plan on keeping on doing it.

As Maria Callas said, “When my enemies stop hissing, I’ll know that I’m slipping.” With Warren hissing at me like a cobra, I guess I ain’t slipping yet.

As for the substance of the meeting, the EEMAC’s efforts may be for naught. Chairman Massad clearly signaled that he is hell-bent on proceeding with implementing the position limits rule. In doing so, he used a simile that rivals Gensler’s apple metaphor for inanity:

“It strikes me a bit like saying you’re against speed limits because they may make you late for work,” Massad said.

Huh? No, it’s not like that at all. The comparison is so off-base it’s not even worth trying to modify it to make it coherent.

As the participants in EEMAC clearly and almost unanimously stated, they are against position limits because they are all pain, and no gain. The “speed limits” aren’t necessary because the activity that they constrain does not create dangerous risks. Further, not only do they not produce any appreciable benefit, they constrain perfectly legitimate and salutary actions by large numbers of market participants.

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11 Comments »

  1. It’s all about the “speculation” boogeyman that drives so much suspect policy and regulation – e.g., short sale bans and restrictions.

    Comment by Kiffmeister — February 27, 2016 @ 8:04 am

  2. Elizabeth Warren is another mile wide inch deep intellect promoted by the media.

    Comment by Tom Hend — February 27, 2016 @ 3:03 pm

  3. “… has positioned himself…” Almost as if you are a hypocritical shill on the make, not an analyst.
    Positions are taken by politicians. Are you running for mayor of Chicago, professor?

    Comment by James Harries — February 27, 2016 @ 5:19 pm

  4. No smokum peace pipe, eh? That’s what happens when you cause facts to get in the way of a leftard’s ‘good story’.

    Good thing she didn’t hear about the revenge your ancestor took on that murderous native American somewhere out mid-west (I can’t find the link, sorry). Talk about throwing the cat among the pigeons.

    Comment by Ex-Regualtor on Lunch Break — February 27, 2016 @ 6:27 pm

  5. @James-Good observation. It’s revealing of their mindset, eh? One expresses views only as a calculated means of achieving some position. As you say, it’s the mindset of little people on the make.

    In fact, like Popeye, I ‘yam what I ‘yam. I call ’em like I see ’em. I say what I believe, not what I think is going to advance my political ambitions (of which I have less than none) or my profile as a commentator. To me, favorable reaction to what I say or write is meaningful only if I say or write what I myself believe and have created. Getting praise or “position” for expressing things I don’t really believe purely as part of some careerist calculation means is not the least bit satisfying. To the contrary.

    The ProfessorComment by The Professor — February 27, 2016 @ 8:33 pm

  6. Speculators tend to be long futures and hedgers tend to be short futures.

    Without speculators, hedgers would have nobody to be short to.

    They need each other equally. Limiting speculators’ ability to be long will harm hedgers.

    Comment by Green As Grass — February 29, 2016 @ 3:53 am

  7. Well done Craig, and keep up the good fight. The financially ignorant denunciation of speculators is one of our most tiresome tropes. Best, Matt

    Comment by Matt Jacobs — February 29, 2016 @ 7:39 am

  8. Thanks, @Matt! Don’t worry–I will definitely keep fighting. Attacks from Warren and her school of journalistic pilot fish just get my blood up.

    The ProfessorComment by The Professor — February 29, 2016 @ 11:56 am

  9. @Green. Definitely. As easy as A-B-C. But that’s apparently too difficult for our Solons to grasp.

    The ProfessorComment by The Professor — February 29, 2016 @ 11:57 am

  10. I’m a new reader to this blog because of this whole series of events that unraveled – blessing in disguise! Keep fighting the good fight. We’re behind you.

    Comment by Lawyer / new CP fan! — February 29, 2016 @ 10:13 pm

  11. @Lawyer-Thanks! Welcome to the club.

    The ProfessorComment by The Professor — March 1, 2016 @ 10:09 am

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