Amaranth distorted US natgas prices in 2006-US panel
WASHINGTON, June 24 (Reuters) - U.S. regulators were powerless to stop "excessive speculation" by Amaranth Advisors LLC because the giant hedge fund exploited an unregulated electronic exchange to "dominate" and "distort" natural gas markets in 2006, a U.S. Senate panel said in a report issued on Sunday.
Before it folded in September after sustaining $6.4 billion in losses on bad bets on natural gas contracts, Greenwich, Connecticut-based Amaranth commanded a massive trading book that at one point included about 40 percent of natural gas futures contracts for delivery in the winter months of 2006-07, the Senate Permanent Subcommittee on Investigations said in a report that details its nine-month probe.
"Amaranth accumulated such large positions and traded such large volumes of natural gas futures that it distorted market prices, widened price spreads and increased price volatility," the panel wrote in its 130-page report.
Investigators drew their conclusions from over 2 million trading records they subpoenaed from the New York Mercantile Exchange (NYM.N) and IntercontinentalExchange Inc. (ICE.N), known to traders as the ICE.
The report, to be discussed at a subcommittee hearing on Monday, gives new ammunition to panel chairman Carl Levin, the Michigan Democrat who wants to give U.S. regulators at the Commodity Futures Trading Commission (CFTC) authority over electronic exchanges like the ICE, which is currently exempt from CFTC oversight.
Levin said Congress should close the "Enron loophole" inserted in the Commodity Futures Modernization Act of 2000 at the behest of lobbying efforts by now-defunct energy trader Enron Corp., which exempts electronic exchanges like the ICE from CFTC oversight.
"We need to put the cop back on the beat in all U.S. energy markets with stronger tools to stop price manipulation, excessive speculation and trading abuses," Levin said.
Amaranth's representatives said the fund did not dominate or distort natural gas prices, and pointed to a finding at the end of the report by Republican staff that "at least at times, Amaranth was responding to the market, rather than driving it."
"Amaranth did not manipulate the market and nothing in the (report) concludes otherwise," said Dan Webb, chairman of Winston and Strawn LLP and counsel to Amaranth.
"If Amaranth really dominated the market, wouldn't they still be in business?" asked Geoffrey Aronow, a lawyer at Heller Ehrman LLP and counsel to Amaranth founder Nick Maounis, in a written statement, calling the report's findings "a novel theory of causation that is not supported by economic logic."
Levin said Amaranth's actions, though not illegal, distorted prices for utilities and other natural gas market participants who rely on exchanges like the NYMEX and ICE to hedge their bets and lock in supply for the winter, when natural gas prices are usually the highest.
"It's one thing when speculators gamble their own money," Levin said. "It's another when they turn U.S. energy markets into a lottery where everybody else is forced to gamble with them."
The report did not attempt to estimate the actual price impact of the hedge fund's actions on consumers or the market.
ONE-MAN INDUSTRY
Monday's hearing will feature testimony by former Amaranth trader Shane Lee as well as big municipal natural gas buyers and academics. At a companion July 9 hearing the panel will hear from he CFTC, NYMEX and ICE.
After Amaranth, Lee joined a team of commodities traders that founded Calgary-based Solengo Capital, which is headed by Brian Hunter, whose team made the bets that caused the formerly $9.3 billion Amaranth fund group to implode.
One unnamed trader cited in the report said Hunter traded so much natural gas at Amaranth that "he was a one-man industry." Hunter is not expected to testify, though staff said he cooperated in their investigation.
An unprecedented side-by-side comparison of Amaranth's trades on the ICE and NYMEX allowed panel staff to paint a vivid picture of how Amaranth shifted its troubled natural gas position to unregulated ICE contracts when NYMEX officials became wary of their massive positions.
In August 2006, with NYMEX enforcement staff bearing down on them for repeatedly violating exchange position limits, Amaranth took its massive natural gas position to the ICE, where no such limits or oversight exist.
Sen. Norm Coleman of Minnesota warned of unintended consequences if more federal oversight drives traders toward "far less transparent and unregulated markets," like bilateral, voice-brokered markets.
