Tag Archives: CFTC

Allegations about Cantor Fitzgerald, the Hollywood Stock Exchange and the Cantor Exchange

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Please, note that these allegations are made by left-wing people. Midas Oracle has not checked and does not endorse these allegations.
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News Dissector:

HOLLYWOOD: THE NEXT TARGET FOR SUBPRIME SPECULATION

Mother Jones has the story:

• The Wall Street wizards who gave you credit default swaps want to turn the movie industry into their next casino — By Nick Baumann

If you thought the mortgage-backed securities and other complex financial instruments that crashed the economy were risky, you’ll love Wall Street’s latest brainwave: a new financial market in which players can gamble on whether upcoming Hollywood movies will be blockbusters or bombs.

For years, Cantor Fitzgerald, a Wall Street investment firm, has been operating the “Hollywood Stock Exchange,” a fake-money game in which players trade “stocks” to bet on how films will do at the box office. Now Cantor could soon get government permission to make a real-money version of the game—a market in which players can gamble on the success or failure of, say, Pirates of the Caribbean 4. Critics are worried that this new market could be vulnerable to insider trading and create bizarre incentives for moviemakers—and that it will also enlarge the risky family of financial products that helped trigger the economic crisis. [More here >]

Last week, I carried a report that Cantor Fitzgerald, the firm that lost many people in the World Trade Center collapse, has been up to some shady business but I have been told there are many questions still unanswered about this firm. Below, a confidential report on the shenanigans, according to a source I trust:

CONFIDENTIAL

Cantor Fitzgerald has not yet paid the HSX Holdings Inc. shareholders a penny for the “deal” that transpired in 2001.

Background:

A “transaction” occurred in 2001 &#8211- that transferred HSX Holdings Inc. voting rights to Cantor &#8211- giving the hundreds of investors &#8211- who invested $40 mn. dollars into HSX from 1996 &#8211- exactly NOTHING.

When queried by lawyers, Cantor claims they lost all the paper work in the 9/11 attacks (they moved the company from Santa Monica Ca. to the top floor of the WTT during the Spring of 2001).

What I know is that a board member of HSX &#8211- Woody Knight of SBS (Scandinavian Broadcasting Service) &#8211- engaged in a pre-arranged, third party transaction that passed voting control to Howard Lutnick at Cantor &#8211- in exchange for $2 million in eSpeed stock (Cantor’s publicly listed entity at the time) that was immediately sold to ‘wash’ the sale.

Cantor is now going to launch ‘box office futures contracts’ based on intellectual property and technology they don’t have the rights to &#8211- with the blessing of the CFTC.

According to my sources who are close to this &#8211- the CFTC &#8211- run by Gary Gensler &#8211- a former Goldman guy (of course) &#8211- took 25 mn. in ‘lobbying’ fees from Cantor to get these new contracts green lit. But did they do any due diligence? Did they spot the absence of any bona fide transaction between HSX and Cantor?

Does the world really need more weapons-of-mass-financial- destruction from the sickos on Wash. and the CFTC?

Why should we assume that Cantor will operate this market honestly when the circumstances of their “ownership” including the patented “Virtual Specialist” technology used for online CDA (Continuous Double Auction) technology, are dubious at best, if not outright fraud.

Will anyone be able to resist these new products that combine tinsel with wall st.?

Is this the new bubble the CFTC hopes will take people’s mind’s off the current spate of fraud on Wall St.?

Also, can you think of a market that is any easier to manipulate by insiders?

We understand that a former CEO of HSX got calls from people like Jeffrey Katzenberg asking to move prices of their projects up to change the perception in the market place (and media) and to free up more marketing dollars.

Just one example of many, many ways to game this market.

Why does the CFTC allow the Cantor Exchange and not InTrade?

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Joe Weisenthal has a small opinion piece on why the CFTC allows real-money prediction markets on movie business, and bans those on politics or sports. The problem in the piece is that Joe is 100% wrong.

  1. Joe says that there can&#8217-t be hedging in politics. Wrong. You can hedge your political ads on InTrade.
  2. Joe says that there can&#8217-t be hedging in sports. Wrong. Businesses that operate inside a stadium could hedge the risk of the home team losing (which means less business for them).

So. why does the CFTC shy away from hedging on sports and politics? &#8211-&gt- Politics. The CFTC is afraid of the US Congress, who would object to politics and sports &#8220-gambling&#8221-.

The CFTC is a weak institution, in the DC sphere of power. In the recent past, the CFTC lost one important battle against other parts of the US government &#8212-even though it was the CFTC that was on the right side of the issue at the time. With politics and sports betting, the CFTC does not want to lose another battle. It is a question of survival.

Ayn Rands influence on Alan Greenspan is responsible for the 2008 financial crisis.

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Or so is PBS&#8217-s thesis in &#8220-The Warming&#8221-.

Pretty convincing.

ADDENDUM

Wikipedia:

Brooksley E. Born is an American attorney and former public official who, from August 26, 1996 to June 1, 1999, was chairperson of the Commodity Futures Trading Commission (CFTC), the federal agency which oversees the futures and commodity options markets. During her tenure on the CFTC, Brooksley Born warned Congress and the President of the need to regulate financial instruments known as over the counter (OTC) derivatives, but her warnings were disregarded. Lack of regulation ultimately led to the crash of the derivatives market, and helped trigger the economic and financial crisis in the fall of 2008.

The Commodity Futures Trading Commission and Securities and Exchange Commission will have authority to decide what derivatives must be centrally cleared rather than letting private parties make the call.

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&#8220-Central clearing interposes a regulated clearinghouse between the original counterparties in a derivatives transaction and so creates an opportunity to make dealing more transparent.&#8221-

CNBC video


American Civics Exchange = CFTC-regulated Exempt Board of Trade

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American Civics Exchange is enabling what InTrade (circa 2006, when they applied for the eBOT status) couldn&#8217-t&#8230- &#8212-getting the CFTC stamp of approval, and running a real-money prediction exchange from within the US territory (as opposed to offshore). The ACE does not have any direct domestic competitor, right now, but HedgeStreet could enter the political turf, later on.

ace

American Civics Exchange is a play-money and real-money prediction exchange focused on politics. Its contracts pay out depending on whether given political outcomes (e.g. enactment of legislation, regulatory decisions, etc.) take place. The contracts are based on the idea of &#8220-event derivatives&#8221- &#8212-pretty much like the weather derivatives that enable companies that are financially exposed to deviations in temperature (utilities, farms, etc.) to hedge that exposure. The ACE political contracts enable any commercial companies to hedge their financial exposure to things like increased tax rates, enactment of harmful legislation, and adverse regulatory decisions. Speculators are also welcome, of course.

The seven initial contracts are:

  1. Increase capital gains/dividend income tax rates-
  2. Elimination of the manufacturers&#8217- tax deduction for oil companies-
  3. Enactment of &#8220-card check&#8221–
  4. Enactment of &#8220-cap and trade&#8221–
  5. The EPA granting California&#8217-s Clean Air Act waiver-
  6. Increase in the minimum wage-
  7. Taxation of carried interest as regular income.

The future prediction markets might feature these topics:

  1. Various new financial services regulations-
  2. Additional industry bailouts-
  3. Major healthcare reform-
  4. FDA drug approvals-
  5. Windfall profits tax on oil companies-
  6. Renegotiation/dissolution of existing trade agreements-
  7. Resolution of major class action lawsuits.

The Delaware-incorporated American Civics Exchange will be operating as an &#8220-exempt board of trade&#8221- pursuant to CFTC regulations, the Commodity Exchange Act, and the Commodity Futures Modernization Act. Last week&#8217-s launch consists solely of the play-money prediction exchange, with free accounts available to the general public. In the coming weeks, the real-money prediction exchange will open shop. Eligible contract participants [see 1(a)12] will then fund their accounts and begin live trading.

UPDATE: On February 10, 2009, the American Civics Exchange received an official acknowledgment from David Stawick, Secretary of the CFTC. The CFTC website, however, does not yet list ACE in their directory of eBOTs. It will, ultimately.

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What ACE says (in their media kit) about hedging:

To offset a hypothetical $100,000 negative exposure to a proposed increase in the capital gains tax rate, a market participant would place a bid on 1,000 contracts. If that order were filled at $30, the position would cost $30,000 (excluding transaction costs). Matching such a bid does not require a coincident order to sell 10,000 contracts. As with established exchanges, the liquidity of a robust marketplace of buyers and sellers will enable even large orders to be automatically matched to batched bids submitted by an unlimited number of participants, including both speculators and natural hedgers.

If the tax increase is enacted before 12/31/10, the contract holder would receive $100,000, offsetting the impact of the tax increase. The contract holder can also sell the contract back into the marketplace at the prevailing price at any time before the expiration date, provided another party is willing to purchase the contracts at that price.

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Press release:

Online Futures Market Enables Participants To Hedge Exposure To Political Events

NEW YORK, March 20 /PRNewswire-USNewswire/ &#8212- American Civics Exchangecorp, Inc. announced today that it has launched The American Civics Exchange, the first US-based commercial market for political futures. The Exchange enables traders to hedge and speculate on political risk through derivative contracts based on the outcomes of underlying events, including increases in tax rates, enactment of &#8220-card check&#8221- legislation, increases in minimum wage rates, enactment of &#8220-cap and trade&#8221- legislation, and other legislative, regulatory, and legal outcomes.

The ability to offset exposure to such events using contracts traded on the Exchange will enable risk managers and investors to reduce unwanted risk and protect themselves from adverse political outcomes. All contracts that trade on the Exchange are binary in nature, meaning they settle at $0 or $100, and are fully cash-collateralized, eliminating any counterparty, credit, or clearing risk.

The Exchange&#8217-s initial launch consists of a &#8220-play money&#8221- market for prospective participants and interested members of the general public. This launch will be followed by the roll-out of the &#8220-real money&#8221- market, which will be open only to eligible contract participants (as defined in the Commodity Exchange Act). The play money market will continue to operate parallel to the real money market and will remain available to individuals not eligible to trade in the live market, members of the press, academic and policy researchers, and other interested parties. In coming weeks, the Exchange will phase in additional collaborative and community-based tools for trading and research.

Philip &#8220-Flip&#8221- Pidot, one of the founders and the CEO of the Exchange, said, &#8220-The inauguration of a new Presidential administration and the unprecedented legislative and regulatory changes being considered in response to the financial crisis have only magnified the bottom-line impact of public policy decisions. For the first time, businesses and individuals have a market-based solution to hedge against these uncertain political risks.&#8221-

The American Civics Exchange operates as an Exempt Board of Trade pursuant to federal law and CFTC regulations. Users can register accounts and trade through the secure online trading platform located at http://amciv.com.

Requests for additional information can be directed to [email protected] or (646) 257-2426.

For media inquiries, please contact Audrey Mullen at [email protected] or (703) 548-1160.

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American Civics Exchange

UPDATE: The Hill on ACE&#8230-

Dealing with public perception and general anti-market sentiment

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I posted the following to the Cantor Exchange forum a couple of weeks ago. That same weekend, this piece by Zach Karabell appeared. We make some of the same points that are relevant in a generally hostile environment towards derivatives and markets.

&#8212-

Rich Jaycobs&#8217- expertise and realism on issues such as insider trading and manipulation are invaluable to the Cantor Exchange project, especially given the backdrop of the failure of the financial system. A letter from Max Keiser to the FT and related comments underline the challenge of knee-jerk public reaction to innovative contracts.

This is a typical reaction: &#8220-I can&#8217-t believe this. The financial mess we&#8217-re in right now is, in a very large way, due to this kind of crap &#8230- it&#8217-s simply gambling.&#8221- These sorts of claims need to be dealt with.

First, the contracts that are being proposed are traded on exchanges. As many, including myself and the CFTC have argued, lack of transparency in pricing was one of the main culprits of the financial meltdown. The surest way to deliver a shock, a high standard deviation move, to markets is to just not mark or otherwise mis-mark prices for a while. Without active trading, risk build-ups. Explosion and collapse follows.

Leverage also played a significant role in the crises. After all, without leverage, the bogeyman of derivatives is largely defused. Of course no CFTC-regulated contract, most of which allow for substantial leverage, has yet defaulted.

Nor would the proposed contracts suffer from the specific agency problems that infected credit markets and investment houses, so I&#8217-m not sure what &#8220-kind of crap&#8221- the commenter had in mind precisely. It is meaningless that the box-office contracts happen to be &#8220-derivatives&#8221-.

Max Keiser does propose a specific problem. What if a studio blows-up in the box-office market, forcing it into bankruptcy? This line of thinking quickly becomes absurd. If society were strictly bound to &#8220-do no harm&#8221-, nothing would ever get done. Even doctors do harm in the form of side-effects. They evaluate courses of action in terms of the expected net result and so should we in these cases.

Over time, the net benefit of well-regulated markets will be positive, but realism is needed to stand up to these essentially prudent concerns. It does seem to be the case, for example, that commodity futures exhibit structural influences on prices that are independent of usage-based supply and demand, and that may increase volatility. Whether that is more attributable to the existence of the contract or ultimately fiat money is debatable, but in any case, this should be much less of an issue in markets like the box-office contracts, which are settled objectively in a relatively short period of time. In contrast, the exact &#8220-meaning&#8221- of a perpetuity or commodity future is not clear.

We can imagine self-fulfilling prophesies and other possible side-effects, and of course there are some issues we aren&#8217-t thinking of, but the supporters of innovative contracts have to be on top of the foreseeable pathologies and engage critics in terms of specifics. Generic anti-market, anti-derivative carping is not an argument.

And remember that the eve of the French Revolution, no-one would have predicted Emperor Napoleon.

&#8212-

Yes, Napoleon later &#8220-blew up&#8221-!

Gary Gensler will head the Commodity Futures Trading Commission in 2009.

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Barack Obama has named Gary Gensler, a former Treasury official under President Bill Clinton, to take over the Commodity Futures Trading Commission (CFTC).

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New York Times:

Mr. Obama has vowed to reverse the deregulatory stance of the Bush administration and overhaul the entire system of financial supervision. Though Mr. Obama’s team has not mapped a specific plan, advisers on his transition team said reining in derivatives would be one of the biggest and most complicated parts of that effort.

gary-gensler

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Wall Street Journal:

team

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Is deregulation to blame? – by Reason Magazine

2) The Commodity Futures Modernization Act of 2000 guaranteed that high-risk tools such as credit default swaps remained unregulated, opting instead to encourage a “self-regulation” that neverhappened.

In late September, Securities and Exchange Commission (SEC) Chairman Christopher Cox estimated the worldwide market in credit default swaps —pieces of paper insuring against the default of various financial instruments, especially mortgage securities— at $58 trillion, compared with $600 billion in the first half of 2001. This is a notional value- only a small fraction of that amount has actually changed hands in the market. But the astounding growth of these instruments contributed to the over-leveraging of nearly all financial institutions.

In the late 1990s, the fight over these and other exotic new derivatives pitted a committed regulator named Brooksley E. Born, head of the Commodity Futures Trading Commission, against the powerhouse triumvirate of Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin, and Securities and Exchange Commission Chairman Arthur Levitt Jr. Unsurprisingly, Greenspan, Rubin, and Levitt won. The result was the Commodity Futures Modernization Act of 2000, which gave the SEC only limited anti-fraud oversight of swaps and otherwise relied on industry self-regulation. The Washington Post has closely chronicled the clash, concluding that “derivatives did not trigger what has erupted into the biggest economic crisis since the Great Depression. But their proliferation, and the uncertainty about their real values, accelerated the recent collapses of the nation’s venerable investment houses and magnified the panic that has since crippled the global financial system.” In other words: The absence of a regulation didn’t cause the crisis, but it may have exacerbated it.

Part of the problem was a technicality. Instruments such as credit default swaps aren’t quite the same thing as futures, and therefore do not fall under the Commodity Commission’s purview. But the real issue was that Greenspan, Rubin, and Levitt were concerned that the sight of important figures in the financial world publicly warring over the legality and appropriate uses of the derivatives could itself create dangerous instability. The 2000 law left clearing-house and insurance roles to self-regulation. Without a clearinghouse, the market for credit default swaps was opaque, and no one ever really knew how extensive or how worthless the derivatives were.

In congressional testimony on October 23, Greenspan seems to have admitted error: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform. But Greenspan still wasn’t convinced that regulation is the solution: “Whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets,” he said at the same event. “Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”

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Previously: New SEC Chief

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BACKGROUND INFO:

– CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts&#8230- notably how they define &#8220-event markets&#8221-, how they are going to extend their &#8220-exemption&#8221- to other IEM-like prediction exchanges, and how they framed their questions to the public.

– American Enterprise Institute’s proposals to legalize the real-money prediction markets in the United States of America

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