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From Platts Oilgram News Billion-dollar bets on the spread between March, 2007, and April, 2007, gas futures prices blew up in the face of Greenwich (Conn.)-based Amaranth Advisors, leading to $5 billion in losing positions the fund is now trying to liquidate, officials and analysts familiar with the situation told Platts Sept. 19.
"They were long March and short April," former commodities regulator Michael Greenberger said, citing his own sources on futures trading desks within the industry. Greenberger, who headed the Commodity Futures Trading Commission's division of trading and markets in the late 1990s through the Enron collapse, said it appeared Amaranth was hoping to capitalize on the spread between prices at the end of the heating season and the start of the cooling season—a premium of $2.14 per million British thermal units (MMBtu) that collapsed in two weeks to 75 cents by Sept. 18, when Amaranth threw in the towel.
LIQUIDITY PROBLEM. On Sept. 18, Amaranth Managing Partner Nicholas Maounis told investors in his fund that "a dramatic move in natural gas prices" had forced Amaranth to get out of the gas market and would prompt Amaranth to post its first-ever yearly losses. The 64% drop in the spread between the March and April contracts began slowly in late August and early September, but came crashing down by more than $1 per MMBtu in the past three trading days.
Amaranth's contracts were not on the New York Mercantile Exchange (NYMEX), Greenberger explained, but were over-the-counter trades with big investment banks like Goldman Sachs (GS) acting as market-makers and counterparties. That complicates Amaranth's attempt to unwind itself, because an OTC contract nine months out is decidedly less liquid than its counterpart on the NYMEX, sources said.
A Goldman Sachs spokesman would not say how big the bank's exposure to Amaranth might be.
SECTOR NOT PANICKING. Goldman Sachs is not the only bank acting as a broker or lender to Amaranth; both JP Morgan (JPM) and Merrill Lynch (MER) have been handling gas trades for the hedge fund, according to sources familiar with the fund. Representatives of those two investment banks did not return calls for comment.
Randall Dodd, president of the Washington-based Financial Policy Forum, said Amaranth's collapse highlights cracks in the nation's capital structure and, because of the unregulated nature of both energy derivatives and hedge funds, policymakers have no idea how deep those cracks are.
"We don't know how many more Amaranths are out there," Dodd said. "Several falling is a problem for the whole financial system."
In a Sept. 19 report, Merrill Lynch hedge fund analyst Mary Ann Bartels said whatever sickness Amaranth caught did not seem to be spreading across the sector. "Despite the carnage in the energy markets, large speculators did not panic and liquidate, which is contrarian bearish and could indicate further downside for energy," Bartels said.
"BORDERS ON SINFUL." According to Greenberger, "the positions Amaranth took were too large to have any relationship with the underlying fundamentals"— trades that if made on a regulated exchange such as NYMEX would have likely earned disapproval.
The Commodity Futures Trading Commission (CFTC) "would have either talked them down or threatened them down," Greenberger surmised. He said Amaranth's woes highlight the need for the CFTC or Congress to start tightening the presently nonexistent reins on OTC energy derivatives.
"It borders on being sinful," Greenberger asserted. "The CFTC has turned a blind eye to these markets, making them unreliable as a hedging vehicle."
FEINSTEIN'S PUSH. "We are aware of the situation," a CFTC spokesman said, declining to confirm or deny whether the commission was looking into market misbehavior on the part of Amaranth.
The political fallout from Amaranth's troubles had reached Capitol Hill by the afternoon of Sept. 19. Sen. Dianne Feinstein (D-Calif.), who has a bill before the Senate to require OTC energy traders to report their positions daily, reiterated her call for more regulation.
"This is a graphic and very expensive example of the need for legislation that would increase transparency and accountability in the energy markets so the federal government could determine if speculation or manipulation is occurring," Feinstein told Platts.
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