The last thing the Chicago commodity markets need is a stink in the bean pit. With congressional hearings on futures reforms starting today in the House and a federal grand jury still looking over their shoulders in Chicago, the Chicago Board of Trade and Chicago Mercantile Exchange are already under the microscope. Never before has there been so much doubt about whether self-regulation works in the billion-dollar-a-year business of buying and selling bushels of soybeans that haven't been harvested yet and baskets of stocks that don't really exist. Then last week, the word got out that somebody was trying to corner the market in beans at the CBOT. Traders were holding futures contracts for almost 35 million bushels of beans to be delivered by this Thursday, when the July contracts expire. As best anybody could determine, there were no more than 13 million bushels of beans to be had in Chicago warehouses. Now you can't fill a 35 million bushel order with 13 million bushels of beans, but you can spend a lot of money trying. You can pay to haul in beans from other sources -- if you can find them and get them delivered -- or you can pay to get out of your obligation. You can pay through the nose if you made the mistake of selling beans you didn't own. People who sell beans they don't own are known in the trade as "shorts." They make their living by betting that prices will go down. The way it's supposed to work is that you sign a futures contract to sell beans on July 20 for $7.50 a bushel and then sometime before the beans have to be delivered you buy them for less than that and you make money. Sometimes, however, the shorts guess wrong and the price of beans goes up instead of down. That's what was happening in Chicago, with a vengeance. With the 20th of the month fast approaching -- and with it the time to settle up on the July futures contract -- bean prices jumped from $7.25 to $7.75 a bushel in just a couple of days. The people who bet that bean prices would go down started to scream that the market was rigged against them. Bean prices weren't going up on their own, the bean shorts complained, but because of a classic effort to corner the market by Ferruzzi Finanziaria S.p.A., an Italian company that owns Central Soya, one of the biggest bean buyers in the Midwest. Ferruzzi was holding two-thirds of the contracts to buy beans and already owned most of the beans in storage. That put Ferruzzi in a position to push the price of beans through the ceiling and to squeeze blood out of the poor fools who promised to deliver beans they didn't own. Those particular fools, however, are not so poor, nor are they foolish. Mostly, in fact, they are rich, powerful and ruthless. They include some of the biggest grain dealers in the country, some of the richest speculators in Chicago, perhaps even some members of the board of directors of the Board of Trade. Determined not to let Ferruzzi squeeze the shorts, corner the market and walk away with millions in illegal profits, the Board of Trade declared a soybean emergency last Tuesday and ordered big players to begin liquidating their positions. CBOT decreed that by contract expiration on Thursday, no one could hold futures for more than 1 million bushels. Ferruzzi was forced to sell, suffering massive losses as bean prices plunged last week. Preventing illegal market manipulation is exactly what futures market self-regulation is supposed to do, but the reaction to the CBOT's decision has been overwhelmingly critical. That backlash gets to the heart of the question of whether self-regulation works. Ferruzzi says the Board of Trade action was not self-regulation, but self-interest. We weren't doing anything wrong, Ferruzzi insists, we were just buying all the beans we could get our hands on because exports are booming and we had lots of orders from abroad. The Board of Trade order was an improper interference in the market, say Ferruzzi and its friends. It was a deliberate decision to drive down the price of beans and bail out the shorts who bet wrong about prices. The Minnesota attorney general said he will investigate complaints by soybean farmers that the Board of Trade drove down prices so big grain companies and CBOT soybean speculators could make millions. Ferruzzi said it will sue the Board of Trade for changing the rules in the midst of the game. This is not a new complaint. Nelson Bunker Hunt said the same thing a decade ago after the collapse of the silver futures market on the Comex in New York. The Comex accused Hunt and his brother William Herbert of trying to corner the market; the Hunts said Comex changed the rules to benefit the shorts. Nobody listened much to the Hunts, but they're listening to Ferruzzi. There seems to be as much concern in futures and financial markets about whether the CBOT acted improperly as there is about Ferruzzi trying to corner the market. The burden of proof is going to be on the Board of Trade, not only to prove that Ferruzzi was acting illegally but also that its own action was not biased in favor of insiders.
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