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CFTC's energy industry gadfly gets his way
By Kara Scannell
The Wall Street Journal
Saturday, June 12, 2010
http://online.wsj.com/article/SB1000142405274870446350457530110036624596...
WASHINGTON -- Three years ago, Bart Chilton was the energy industry's guitar-playing gadfly, advocating for what seemed a quixotic change to the way the roughly $350 billion energy commodities markets are traded.
Now the views of the Democrat, who sits on the influential Commodity Futures Trading Commission, could become law by July 4, when the Obama administration hopes to get a sweeping financial-overhaul bill through Congress.
The 50-year-old always looked out of place in the capital. Partial to cowboy boots and a shoulder-length blond mane, he clears his mind between meetings by strumming on a Kay acoustic guitar in his stately office at the CFTC in Washington.
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His views on the oil markets seemed especially out of step not long after his appointment to the commission in 2007. He argued that the influx of pension and institutional investors into the markets, which he has dubbed "massive passives," contributed to the wild swings in commodity prices.
He added that it concerns him when a "massive passive" might come to own 20% of one market. A 20% stake "gets to be where you might not be able to control prices, but you have the possibility of moving them."
The volatile summer of 2008, when $145-a-barrel oil led to $4-a-gallon prices at the pump, was the pivotal moment for the Midwesterner. Mr. Chilton says he largely ignores prices, but the surging cost of oil changed his mind. "I've seen nobody who can justify $147 [a barrel for crude oil]. It doesn't mean the massive passives are the sole culprit. I think they're having an impact. As regulators, it's our job to be asking these questions," he says. Mr. Chilton pushed the CFTC to propose position limits that would prevent traders from having a large concentration in energy contracts for four of the most highly traded commodities at the center of the global energy market.
"Position limits that are reasonable," Mr. Chilton says, "would end the possibility of large concentrations in individual markets that could inordinately influence price."
Under CFTC chief Gary Gensler, the commission proposed such limits in January. But they drew hostile opposition from three of the five commissioners and the energy-trading industry. In an interview, Mr. Chilton conceded there probably aren't enough votes today to make the limits final.
That is why the financial-regulation bill has taken on outsize importance. The Senate version passed last month would require the CFTC to impose limits. While the details would still be up to the agency, Mr. Chilton believes the congressional mandate would pave the way for action.
Position limits in energy contracts are just one part of Mr. Chilton's wish list. He also wants the CFTC to have criminal authority to prosecute wrongdoers and a consumer division to respond to investors who think they got ripped off. And he has pushed for position limits on metals trading, an idea that even Mr. Gensler is slow to embrace.
Opponents -- who include some academics, fund investors, and futures exchanges -- say they would eventually choke off market forces that ultimately help consumers.
Philip Verleger, an economist who runs energy consulting firm PKVerleger LLC, says commodity demand by pension funds has encouraged banks and others to stock up on inventories, helping tamp volatility. He credits the passive investors for keeping energy prices stable last winter during a cold spell. "Chilton is very bright," Mr. Verleger says, but "position limits could consign us back to a world where, when it gets cold, people have to use more natural gas and electricity and they'll see prices double simultaneously."
Mr. Chilton's views were shaped, he says, by a year he spent working at an Inland Steel steel mill before heading to Purdue University. He was skimming waste off water before it was released from the mill, and his clothes stank so badly he had to change multiple times, he recalls.
"Folks weren't getting what they deserved," he recalls, and he felt someone had to look out for "the little guy."
He grew up in Ogden Dunes, Ind., about 45 miles southeast of Chicago, in an engineering family. Grandfather Thomas Chilton was a chemical engineer at DuPont, which named a laboratory in Wilmington, Del., after him. His father was a mechanical engineer who patented a way to create a self-standing artificial Christmas tree.
Mr. Chilton left Purdue one semester shy of graduation and worked on Democratic campaigns, including Walter Mondale's failed 1984 presidential run. Later, he became a Democratic staffer on Capitol Hill and worked for then-Senate Majority Leader Tom Daschle of South Dakota, helping the senator push through a big farm bill in 2002.
For 18 years, he has lived on the water's edge of the Chesapeake Bay, miles from Washington, and he sometimes motors his boat to restaurants.
After a stint at the National Farmers Union, which represents farmers and ranchers, Mr. Chilton was named a CFTC commissioner in 2007 by President George W. Bush, and he quickly ruffled feathers. In early 2008, he raised concerns with the CFTC staff, including then-chief economist Jeffrey Harris, about the effect of "massive passives" on energy prices.
"The staff says, 'You don't understand, you're too new,'" recalls Mr. Chilton. "It was the quintessential bureaucratic answer. We haven't found a problem, so none exist."
In July 2008 the CFTC staff issued a report saying that financial traders weren't driving oil prices higher. Mr. Chilton was infuriated and publicly called the report "deeply flawed." Today, he charges the report was "political" and done to appease Republicans.
Mr. Harris says, "There was no political pressure from any party. We looked but we couldn't find any smoking gun. There were a lot of people working hard to find out what was going on. We had dedicated economists and their reputation was more important than political pressure."
Scott O'Malia, a Republican who became a CFTC commissioner last year, says he has had many friendly discussions with Mr. Chilton about the energy position-limits proposal, and the talk often turns to how the retail consumer fares. Mr. O'Malia praises his colleague as a good listener with an "easy style about him" but says he isn't convinced. "We have a different opinion with regard to energy and what impact that will have on higher prices," he says.
Mr. Chilton has had better luck with Democrats in Congress. His former counsel last year became staff director for Sen. Blanche Lincoln (D., Ark.), chairman of the Agriculture Committee, and a member of Mr. Chilton's staff was on loan to Ms. Lincoln's committee to help with portions of the financial-regulation bill. Ms. Lincoln introduced a bill with language that was much tougher than what the administration was seeking. That bill made it through the Senate.
The Senate bill reflects several of Mr. Chilton's priorities, including the requirement for the CFTC to set position limits. It also broadens the CFTC's authority to sue traders for disruptive trading. Last week, he says he met with Ms. Lincoln to congratulate her on the bill and encouraged her to "hang tough" on the issues as Congress combines it with the House bill.
Michael Masters, a hedge-fund manager who supports position limits, says of Mr. Chilton: "Sometimes you need a gadfly to make things happen. He has really served that role."
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