WASHINGTON (Dow Jones)--Major Wall Street banks are feeling increased congressional scrutiny as lawmakers seek a convenient villain for skyrocketing oil prices.
A top House Democrat, Rep. Bart Stupak, D-Mich., on Thursday complained oil and products markets were being "manipulated" by the biggest trading houses in the futures markets, though he said a probe hasn't uncovered illegal activity.
In response to a reporter's question, Stupak identified Goldman Sachs (GS) and Morgan Stanley (MS) as firms whose oil trading activities warranted closer review. The two firms quickly defended their conduct and Stupak later went on CNBC television to say no specific firms were under investigation.
The development comes as lawmakers have sought to show voters in an election year they are trying to act to identify and punish whoever is responsible for rising oil prices. Crude oil futures posted the biggest single-day gain in dollar terms in New York on Thursday, erasing a week of losses in one stroke, settling up $5.49 at $127.79 a barrel.
Though many analysts see considerable fundamental support for high oil prices, regulators and legislators alike are increasingly placing the blame for crude's scorching run above $100 a barrel on what they perceive may be excessive financial speculation - a charge that's hard to prove.
Stupak said initial results of his committee's investigation into oil and product prices had found loopholes in current laws were allowing the biggest traders in the futures market to artificially inflate oil prices. He said the committee would hold a hearing to announce full results of the investigation on June 23.
"As our investigation goes further, we are really starting to unravel quite a web of - I am trying to say collusion, but I wouldn't quite go that far - but you can certainly see manipulation of the price in places we've never seen before," he said.
Stupak said the biggest traders were the "financial houses." The congressman said large traders had "learned to game the system and maximize the profits."
"I find it amazing that even Goldman Sachs said (oil prices) would be $200 a barrel," said Stupak. "No one's looking at them, they can drive it up to $200 a barrel."
In a statement, Morgan Stanley said: "We fundamentally disagree with Congressman Stupak's allegations that Morgan Stanley is manipulating the oil and products market. We are happy to meet with members of the House Energy and Commerce Committee regarding Morgan Stanley's commodities business."
Goldman Sachs spokesman Ed Canaday said the bank conducts its commodities sales and trading businesses "to the highest standards including all applicable regulations and exchange rules. We have rigorous policies and procedures including regular training designed to ensure that our activities comply with the rules that prohibit market manipulation."
Stupak said he and other congressmen plan to file legislation next week that will target speculation through swap - or privately negotiated - deals, foreign exchanges and over-the-counter trades.
Eye On Swaps
Under scrutiny from lawmakers now are two rules that allow institutional investors to funnel billions of dollars into the crude futures market, far beyond the speculation limits imposed on trading on the New York Mercantile Exchange, owned by Nymex Holdings Inc. (NMX).
Maria Cantwell, D-Wa., Byron Dorgan, D-N.D., and Joseph Lieberman, I-Conn., are authoring legislation very similar to Stupak's Prevent Unfair Manipulation of Prices, or PUMP, Act. Among the proposals, one would subject Nymex's main competitor ICE Futures Europe, a unit of IntercontinentalExchange (ICE), to the same oversight as its New York counterpart. ICE offers contracts to trade crude in the U.S. but has been granted exemptions from the same rules governing the Nymex because it's considered a foreign operator.
The U.S. Commodity Futures Trading Commission, which last week unveiled plans to beef up its own oversight of the markets and disclosed a broad crude-oil investigation, already plans to require more information from dealers of swaps, and obtain details on investment funds using them to track the returns of commodity indexes.
Because swap transactions are lightly regulated, little is known about the size of the market. On the Nymex, traders face position limits on futures contracts equal to three million barrels of crude oil in the last three days before the contract expires. But the Nymex rulebook allows traders who need to hedge their commodity swap exposure to apply for exemptions.
Some say this, coupled with the ICE exemption, creates an opening for investment funds to skirt position limits by placing swaps bets though Wall Street banks that have exemptions.
Stupak said current laws allowed excessive speculation that created artificial prices in energy futures markets.
"It's not that they are doing anything criminally illegal...they are taking advantage where no one has ever looked before and when someone does take a look, there may be something illegal," said Stupak.
Unlike stock markets, where trading on information unavailable to the broader market is illegal, commodities markets often turn on proprietary information known to a limited number people. An oil company can take advantage of inside information about its own production outlook when it makes trades. However, if traders intentionally create an artificial price and use it to make money, market manipulation charges may arise.
Goldman Sachs and Morgan Stanley are major players in the world of commodities, which range from trading to hedging and even owning electricity plants and oil barges. In the first quarter, Morgan Stanley calculated that it took more risks in commodities on a daily basis than in stocks.
Source: Ian Talley, Dow Jones Newswires; 202 862-9285; ian.talley@dowjones.com