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Raymond J. Learsy

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After Costing Americans Billions, Federal Reserve Reexamines Banks' Commodity Speculation

Posted: 07/24/2013 7:14 am

"The Fed regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complimentary to financial activities and thus permissible to bank holding companies" comments from Fed spokeswoman and reported by Bloomberg ("Fed Reviews Rule On Big Banks' Commodity Trading after Complaints" 07.20.13).

Banks neither produce nor consume, they only trade and physically store commodities at our enormous cost reflected in significantly higher prices for everyday goods from gasoline (trading oil and gasoline derivatives) to beverage cans (trading aluminum derivatives), and in many cases, with our money amply supplied by the Federal Reserve Discount Window or with funds accessed from federally insured customer deposits which they leverage to their massive profit, contributing nothing of economic value other than higher prices.

It is one of the grossest miscarriages of Wall Street power and government obeisance resulting in billions of consumer dollars going into the pockets of banks, hedge funds and traders producing and adding nothing to the economic well-being of the nation, other than lining their own pockets.

On Sunday, July 21, the NY Times regaled us with a first page cryptically blazoned headline article "A Shuffle of Aluminum, But to Banks Pure Gold." The article went on for eleven lengthy columns, introducing us into the malevolence of 'merchant banking' showing how the likes of Goldman Sachs through market hanky-panky adds fractions more to the price of aluminum by controlling the storage warehouses, and massive amounts of aluminum inventory, impacting in turn the price of beverage cans bought and paid for by consumers the length and breadth of the country. It is a system so complex it escapes public perception except by those aluminum consumers and beverage companies dealing with the gamed system and paying the hyped price of aluminum. Yet the gambit is so intricate in skirting free market pricing discipline and ultimately costing consumers billions given the 90 billion beverage cans used by consumers annually in the U.S., without a whisker of benefit, other than fattening Goldman Sachs' bottom line.

As the article clearly points out,

The inflated aluminum pricing is just one way that Wall Street is flexing its financial muscle and capitalizing on loosened federal regulations to sway a variety of commodities markets... The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone.


But it is not only the New York Times that has now, finally, at long last, focused on this issue, which is costing the public billions upon billions each year without the most cursory government oversight until yesterday's Senate Financial Institutions and Consumer Protection subcommittee hearings on bank commodity trading, a response in measure to the NY Times article but without the participation of Goldman Sachs -- good luck! Despairingly one need only refer to past government initiatives such as the "Oil and Gas Fraud Price Working Group" loudly proclaimed by the administration amidst much fanfare in April 2011, for which the Department of Justice was meant to take the necessary initiatives and from whom, now more than two years down the road, we have heard nary a word.

The level of frustration by the government's lack of action or toadied acquiescence is perhaps best exemplified by the efforts of Mr. Bart Chilton, the one commissioner on the Commodities Futures Trading Commission (CFTC) who is not programmed by their affinity to Wall Street or the commodity exchanges. On October 23, 2012, in a scolding letter to the Wall Street Journal he points out that Congress decidedly mandated the imposition of trading limits on commodity derivatives to be held by banks and other traders, that it stands explicitly as part of the Dodd-Frank reform law, clearly calling for position limits that "were even required to be promulgated in a specific shorter time frame than other rules." To date, no such limits have been promulgated no doubt in large measure to heavy-handed and moneyed lobbying by the interested Wall Street banks thereby freeing Goldman Sachs to encumber tens of thousands of tons of aluminum as is presently the case for this one commodity alone.

The issue of hoarding, speculation and manipulation is clearly not limited to aluminum. Referring to oil, the world's largest traded futures market, Chilton went on to site a Goldman Sachs report (March 2011) noting: "We estimate that each million barrels of net speculative length tends to add 8-10 cents to the price of a barrel of oil. Chilton further cites other studies supporting the "speculative-price nexus" including that of the Federal Reserve Bank of St.Louis (February 2012) and that of Massachusetts Institute of Technology (June 2008) as well as Rice University (August 2009). As an aside, note that on February 12, 2012 the Chicago Mercantile Exchange Group through their subsidiary the New York Mercantile Exchange, traded a then one day record of 3,098,129 energy futures and options. Each individual futures contract/option represents 1,000 barrels of crude oil. Staggering!

Chilton continued, "This is a significant problem that continues today for the millions of American households that can be paying a "speculative premium" at times for virtually everything they purchase... This is a critically important issues for consumers." Comments made near a year ago, and nothing, nothing has changed.

This is but the tip of the iceberg of what has become a grotesque government perversion paid for by all Americans through near limitless financing made available to the 'Bank' Holding companies from the Federal Reserve's Discount window, as well as the Fed's and the Federal Deposit Insurance Corporation's (FDIC) tolerance in permitting the use of depositors monies guaranteed by the FDIC as gambling chips, thereby placing all of us at risk twice -- once to the risk of 'too big to fail' becoming guarantors of last resort, and then punishing us for our government's largesse to these banks, by allowing them to leverage these funds, playing the markets and in turn shamelessly ratcheting up the cost of traded commodities from gasoline, energy, food and on, 'household items' (to us, as opposed to "commodities" to the banks) that are basic to our daily lives.

Saule T. Omarova, law professor at the University of North Carolina who has studied the issue, told the subcommittee that there was one other company that was an early leader in combining the practice of moving physical commodities with the financing of market activity -- Enron. The comparison was seized upon by Senator Elizabeth Warren, a Massachusetts Democrat. "The notion that two of largest financial companies are adopting a business method pioneered by Enron," she said, "suggests that this movie will not end well."

 

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