Hence, in the course of buying low, selling high and leaving blood on trading floor, the administrators of these aggressively managed investment portfolios often rip through the industries with all of the finesse of a starving shark, and consumers pay the price in more ways than one-Can we say Enron?
And, before some of you get your drawers in a wad, yes, Enron was a singularity of unique proportions, but the tools which it allegedly used to manipulate the energy market were not created out of thin air by some arcane investment trick meister. Those tools, including so-called "Aggressive Accounting" practices.
In the "energy universe", Enron was a giant black hole, whose every action yielded often-deadly reactions in Consumer World-collapse of the company, destruction of retirement plans and the scrambling of the California energy markets. All of these results impacted consumers at the wallet level, with some after effects still wafting through the economy.
Congress has taken steps to slap some hands; courts have sent a few behinds to prison, but the power of large-scale investors and brokerage houses remains a terrifying thing to behold. This is particularly so if you are a consumer whose utility bills and fuel prices are out of your control and consume an ever-increasing amount of your paycheck.
As background, according to a Senate Committee hearing on the Enron collapse:
While the stock markets provide a means of capital formation, a way for new and existing businesses to raise funds, the futures markets provide producers, distributors, and users of commodities with a means to manage their exposure to commodity price risk. Historically, commodity futures and options were traded on agricultural products. And while contracts based on agricultural products are traded as actively today as ever, a great many futures contracts are now based on non-agricultural physical commodities like precious metals or energy products and on financial commodities like interest rates, foreign currencies, or stock market indices. (my emphasis) Because they serve the risk management needs of businesses in virtually every sector of the economy, the volume of trading in these financials and non-agricultural physicals is now nine times that in agricultural contracts. While farmers and ranchers continue to use futures contracts to effectively lock in the prices for their crops and herds months before they come to market, manufacturers now can also use futures contracts to plan their raw material costs and to reduce uncertainty over the prices they receive for finished products sold overseas. (January, 2002)
Managing risk has devolved into price manipulation for a select group of traders, who, according to reports, have too much power and influence over the energy commodity market. As a case in point, while institutional traders such as Enron have allegedly had their wings clipped, many small traders continue to ply their trade on the trading floor, often influencing the market on a level at variance with their position as a single trader.
These "small traders" hold sway over huge amounts of capital in investment funds, particularly so-called "hedge funds." And while the futures markets are regulated and supervised, because hedge funds require so much capital, it is reportedly assumed that those investors are sophisticated enough not to require "supervision." Hence, according to Investopedia:
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