The White House has portrayed the commodities market trading that netted First Lady Hillary Rodham Clinton almost $100,000 in a two-year period as a case of an ordinary small investor who took her chances and came up a winner with shrewd judgment and a little guidance from an experienced friend.
But experts and officials in the volatile futures trading industry said Wednesday that what she did would be highly unusual for the average small investor to pull off successfully. And many commodities trading firms would never have allowed such an investor to try it.
For one thing, the experts said, her activities involved exposure to possible losses in the unpredictable market for farm commodities futures that substantially exceeded the available capital--losses that potentially could have been greater than her family’s net worth if the market had turned sharply against her.
Normally, commodities specialists said, an inexperienced investor with such limited assets would not be allowed to run the risks Mrs. Clinton did unless she had the backing of--and perhaps financial guarantees from--a wealthy backer.
At the time she made her huge profits, starting with an initial capital investment of just $1,000, Bill Clinton was a rising political star in Arkansas but he and his wife had only modest assets. They did not even own their own home.
Yet Mrs. Clinton took surprisingly large positions in cattle futures, earning one-day profits as high as $30,000. Had the market moved the other way, she could have lost huge amounts virtually overnight, according to market specialists.
The White House has insisted that Mrs. Clinton risked her own money, made all decisions herself about when to buy and sell and bore full responsibility for any losses. They have said that she got advice from prominent Arkansas lawyer James B. Blair, but also consulted other advisers and studied the market through the Wall Street Journal.
Futures market analysts and officials who have examined the records of her activities, however, question whether a responsible broker would have allowed her to trade the way she did without some kind of financial protection.
One commodity trader with 30 years’ experience who reviewed the records of Mrs. Clinton’s market activity said that her account is highly unusual, both in the frequency and size of trades and in the small amount of capital behind them.
“There’s no way in the world that Hillary Clinton should have been trading 50 (cattle futures) contracts. That’s 2 million pounds of beef. The risk posture is just not consistent with (the Clintons’) income and net worth,” said this trader, who works for one of the nation’s biggest brokerage houses.
“We would not let either one of them (the Clintons) trade commodities. In the late 1970s, we required a couple hundred thousand dollars in liquid net worth before we let them in the door to trade commodities. This is not for the faint of heart,” the broker said.
Another commodities trader, Phil Tiger of Smith Barney Shearson, described the First Lady’s successful trading as “unusual and fortuitous, and her timing was perfect.”
He said that she entered the market just at a point of rocketing growth and rode it until she had made a small fortune.
“It surprised me she stuck it out as long as she did. Most novices just take their profits and get out,” Tiger said.
But other market experts noted that shortly after Mrs. Clinton ceased trading, her broker, Robert L. (Red) Bone, and the brokerage company, Ray E. Friedman & Co., were disciplined by the Chicago Mercantile Exchange for “serious and repeated” violations of exchange rules on margin requirements and record-keeping functions at their Springdale, Ark., office.
Margin is the amount of cash a trader must put up versus the amount of borrowed money used to make the investment.
Bone was suspended from trading for three years. The brokerage was fined $250,000.
White House officials have said that Mrs. Clinton was unaware of allegations that her brokerage was allocating successful trades to clients or that Bone had previously been suspended for trading violations.
Elliot Bercovitz, vice president for strategic planning at Lind-Waldock Inc., of Chicago, one of the nation’s leading commodities trading firms, said that it was possible at the time to turn a small stake into $100,000 with savvy trading in the booming market in cattle futures.
But one transaction caught his and a number of other brokers’ attention: the very first trade in October, 1978, when her account balance went from her initial $1,000 investment to $6,300 in one day.
There is no documentation for what was traded at what price, but some brokers said that she could not possibly have had enough in her account to cover the large position in cattle futures that she would have had to take to make that much profit that quickly.
“There are holes in these records,” said John Damgard, president of the Futures Industry Assn. and a former official in the Richard Nixon Administration who examined the Clinton trading records. “They show the original $1,000 and next day $6,000. How does that compute?
“Her $1,000 wouldn’t margin the cattle position on that day, necessary to create the profit on the next day. Maybe there was more than $1,000 up front, maybe there were some guarantees.”
“Most firms weren’t taking small individual investors like Hillary Clinton. This is a professional’s business. But somehow, Hillary Clinton made $100,000 very quickly, and I would be remiss as president of the FIA to allow the general public to believe this is commonplace,” Damgard said.
Neither Blair nor Bone was authorized to trade on Mrs. Clinton’s behalf, White House officials said. Blair offered “advice but no guarantees,” said a senior White House official familiar with Mrs. Clinton’s trading who asked not to be named. “He wasn’t backing her trades and he wasn’t custodian of her account,” the official said.
On Wednesday, Blair and Bone did not respond to telephone calls from The Times.
The White House official familiar with Mrs. Clinton’s trading said that the initial $6,300 profit was based on a single futures trade but that the First Lady could not locate the documentation for it.
From that first trade, Mrs. Clinton traded aggressively, staking out ever-larger positions and booking profits of more than 3 to 1 over losses. When the market began to go sour in May and June, Mrs. Clinton switched from betting on rising cattle prices--taking a “long” position--to betting that the market would fall, or selling “short.”
In June, she took a very large short position in cattle futures, selling them three weeks later in mid-July for a quick profit of almost $25,000.
Her boldness astounded market observers who have reviewed her record.
“That was a very large and aggressive position. . . . This is heavy-duty trading by someone who was not averse to taking risk,” said Bercovitz.
After that series of trades, Mrs. Clinton stopped trading, took a check for $60,000 from Friedman & Co. and never re-entered the market in any substantial way.
“She got the money and walked away,” Bercovitz said. “You’ve got to give her credit.”
Other brokers question how she could have taken such risks without the means to cover potential losses.
“It would take a person of enormous wealth to take on 50 contracts of cattle, as she did,” said a trader involved in similar transactions at the time. “If they lost, where would the Clintons come up with $100,000 to pay for it? They didn’t have it.”
Futures markets allow investors to buy or sell a specific amount of a commodity (such as gold and pork bellies) or financial instrument (Treasury bills or a stock-market index) at a particular price in a stipulated future month. Here’s how it works:
1) By buying a futures contract, the investor controls a fairly large investment with a fairly small amount of money.
$1,000 = $20,000
Through “leverage,” a $1,000 investment, for example, might buy an investor a contract for $20,000 worth of beef. Leverage is just a fancy term for making a purchase with a very low down payment.
2) If the market . . .
. . . price for beef rises by just 5%--a gain of $1,000 on the contract--the investor has just doubled his money.
. . . price drops by the same amount, the $1,000 investment is lost. Worst still, if the price drops more than 5%, the investor is liable for the difference of his contract and the actual market value of his contract.
* FACT: Roughly 80% of the traders lose money in the commodities markets after trading costs are taken into account.