The Mystery of the Hillary Clinton Cattle Futures Controversy

cowThe year was 1978.

First lady of Arkansas Hillary Rodham Clinton said, in later interviews, she'd wanted to pad her husband's modest salary with some investments.

She did just that - with highly speculative commodities trading. In fact, Clinton turned $1,000 into $100,000.

But her actions would spark a scandal, known as the "Hillary Clinton cattle futures controversy."

Here's why...

The History Behind the Hillary Clinton Cattle Futures Controversy

Commodities trading is risky. Analysts estimate more than three-quarters of commodities investors lose money.

But skilled traders - or ones with special knowledge - can cash in.

Hillary Clinton had no commodities trading experience when she entered the market. Nor did she have any specialized knowledge of the cattle business.

Yet she cashed in, miraculously turning $1,000 into $99,537 in 11 months, by investing in live cattle futures - contracts linked to the anticipated future value of 40,000 pounds of slaughter-ready beef cattle.

That's why eyebrows raised when computerized records of Clinton's trades, which the White House obtained from the Chicago Mercantile Exchange (CME), showed how she was able to turn her initial investment of $1,000 into $6,300 overnight (and nearly $100,000 over the next 10 months).

Clinton said her trades were guided by her own research in The Wall Street Journal, and by James Blair - her friend and a top in-house lawyer for Tyson Foods Inc. (NYSE: TSN), one of Arkansas' most lucrative companies.

But analysts nationwide gauged the odds of her success and were left with serious doubts that Clinton's cattle futures trades had been totally legal...

Hillary Clinton Cattle Futures Controversy: Shadows of Doubt

The Washington Post noted in a report on May 27, 1994, that "while Clinton's account was wildly successful to an outsider, it was small compared to what others were making in the cattle futures market in the 1978-79 period."

The Post's conclusion was much more favorable than the rest. Critically, it also compared absolute profits instead of percentage rate of return.

"This is like buying ice skates one day and entering the Olympics a day later. She took some extraordinary risks," stated Journal of Future Markets in April 1994.

In a 1994 study published in the Journal of Economics and Finance, economists from the University of North Florida and Auburn University investigated the odds of gaining a hundred-fold return in the cattle futures market during the period in question. Using a model that was stated to give the hypothetical investor the benefit of the doubt, they concluded that the odds of such a return happening were - at best - 1 in 31 trillion.

A 1995 analysis from National Review, conducted by hedge fund manager Victor Niederhoffer and Bloomberg News columnist Caroline Baum, concluded that Clinton's explanations for her results were highly implausible.
The Marshall School of Business said the following in a 1998 article in Marshall Magazine:

These results are quite remarkable. Two-thirds of [Clinton's] trades showed a profit by the end of the day she made them and 80 percent were ultimately profitable. Many of her trades took place at or near the best prices of the day.

Only four explanations can account for these remarkable results. Blair may have been an exceptionally good trader. Hillary Clinton may have been exceptionally lucky. Blair may have been front-running other orders. Or Blair may have arranged to have a broker fraudulently assign trades to benefit Clinton's account.

And, going back to The Washington Post article, even it noted curious discrepancies. It reported Clinton "was allowed to order 10 cattle futures contracts, normally a $12,000 investment, in her first commodity trade in 1978 although she had only $1,000 in her account at the time, according to trade records the White House released [that day]."

It continued: "The [CME] records also raise the possibility that some of her profits - as much as $40,000 - came from larger trades ordered by someone else and then shifted to her account, Leo Melamed, a former chairman of the Merc who reviewed the records for the White House, said in an interview. He said the discrepancies in Clinton's records also could have been caused by human error."

And finally, here's an excellent recap. An anonymous commenter on ask-and-answer site Quora posted a quick analysis that breaks down the chronology of the Hillary Clinton cattle futures scandal. It's based on Barbara Olson's expose on Clinton, "Hell to Pay":

Here are the explanations that we got in 1994 - either from the Clinton camp or from investigative reporters - when the whole matter burst into public sight. I'm drawing on a recap by the late Barbara Olsen in her book "Hell to Pay."

1. Clinton's spokespeople initially explain that there's no story here - she consulted with numerous people and did her own research.
2. As questions persist, Clinton's aides say she got a little advice, but not on any specific dates or trades.
3.  Then again, if journalists won't stop asking questions, it's worth adding that Clinton's main source of advice was Arkansas lawyer and sometimes commodity trader Jim Blair, a Clinton family friend.
4. It turns out that Blair was close to Tyson Foods at the time, a big Arkansas company that would be understandably eager to have good relations with the Clinton family.
5. As questions persist, it emerges that Hillary Clinton's trades were placed by Robert L. "Red" Bone, a commodities trader and high-stakes poker player.
6. Poke around a bit  more, and it turns out Red Bone in the late 1970s was censured by the  Chicago Mercantile Exchange for allocating trades to investors after the  fact - a mechanism that makes it possible to steer a lot of winners  into one particular portfolio.
7. Funny twist: while Clinton was making one winning trade after another, her "adviser," Mr. Blair, kept losing money on his trades.
8.  Various folks try to calculate the odds of being able to turn $1,000 into nearly $100,000, without any special edge. Their assessment: for a neophyte trader, it's about 1 in a zillion.
9. The Chicago Merc. does some looking into the situation, and decides that Clinton did nothing wrong.

Nothing wrong, indeed. There were never any official investigations into the Hillary Clinton cattle futures controversy, nor was the current 2016 Democratic front-runner officially charged with wrongdoing.

Stay tuned to Money Morning for more on the 2016 presidential election. You can follow us on Twitter @moneymorning or like us on Facebook.

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