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Banks, the Oil Market, and the Next Financial Meltdown
Yesterday the Wall Street Journal reported that Citigroup Inc. is seeking the Treasury's approval to pay special bonuses to key employees. According to the Journal, the focus of the request is the highly profitable Phibro trading division whose energy trading unit is at the point of losing key employees because of federal pay restrictions. Citigroup, aside from receiving $45 billion in TARP funds, is now 30% owned by the government.
With the current focus on whether to pay bonuses or not, a much larger and more ominous issue is being overlooked. It highlights the massive distortions in our financial system and the grave potential to repeating the massive risk and leverage blunders taken on by the behemoths of the banking world that has come frighteningly close to destroying the financial system.
Once upon a time banks played a significant role in aiding the flow of trade both domestically and internationally. A bank would open letters of credit permitting trade to flow between buyers and sellers in different parts of the world. They would finance the inventory or storage of goods and commodities, thereby assisting the smooth functioning of markets. They would provide loans for the expansion of production capacity. In other words, they would function as banks did once upon a time.
But now, be it Citigroup or Morgan Stanley and myriad others such stolid unglamorous, sedate contributions to the world's economy have become too mundane. No, better they risk their depositors' monies and their capital (30% government-owned in the case of Citi as noted above), their TARP infusions ($10 billion for Morgan Stanley), by having opened oil trading casinos, forgoing their traditional function as lenders and facilitators of trade. 'Shazam,' they have transformed themselves into oil traders, or simply put, principals, taking title to the physical product by taking delivery, and storing it (according to Bloomberg, "Morgan Stanley Hires Super Tanker to Store Oil," January 19, 2009 -- Morgan chartered the supertanker "Argenta" to store 2 million/bbls at anchor at sea), and thereby foisting on their fiduciary depositor base and shareholders the enormous risks attendant to trading oil -- not simply oil futures on the exchanges, but an important part of the billions of barrels of crude oil being shipped all over the world.
The risks are enormous and the rewards can be as well, as they have been for the last few years. But the same could have been said, if anyone had been paying attention to the risk side, to the reckless compounding of credit instruments, the morphing of home finance loans into bank bonds, and the plunge into and packaging of CDSwaps. Banks had ceased to function basically as banks but had become traders and gamblers using Other People's Money, which provided enormous individual payouts while the going was good.
Where we probably do not need any more CDS instruments for which there is no insurable interest at hand, thereby becoming a pure speculative product, we probably do need oil traders for the smooth functioning of markets. But traders who trade at their own risk and capital. Leaving it to the banks portends another financial disaster by tying their viability to the highly volatile world of commodity trading, most especially crude oil.
It is long past time that the bankers got back to banking the old fashioned way. We would all be the better for it, and it is time our government did the needful to assure that bankers kept to their knitting.
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These rules need to be changed. What the heck are they gambling in the oil markets when they should be lending in order to rebuild America's future and Green manufacturing industries. They received government taxpayer handouts, but they feel no obligation to pay back to the nation that rescued their asses. This is disgusting.
DrFitz is correct---these bankstas, and their hedgies were trading in oil and storing oil in tankers they leased and owned during the run-up in gas prices a year ago. This is not speculative information but fact!
Goldman Sachs was the only banksta present during the Paulson-Bernanke TARP planning meeting. Goldman CEO says that he was only an observer of the meeting and did not comment. HAHAHA! So why was he there in the first place. TJCole-you are correct!!!!
http://eye-on-washington.blogspot.com
In the mean time just buy PBT.
If the Fed didn't set the Federal Funds Rate so low, and the Federal Government didn't guaranty that banks can't fail, there wouldn't be as much investment in the credit default swaps. http://video.google.com/videoplay?docid=4759275362410693117
By the way, oil is going up again this year for several reasons. One, the infrastructure projects started last year to improve oil production were abandoned when oil went from $147 to $30 a barrel. And two, this year single hull supertankers are going out of service because of an international treaty, which will drastically reduce the ability of oil to be shipped around the world.
Crime will expand to insane proportions ... and to ruinous folly ... until it is interdicted by the force of Law.
Crime has no difficulty finding 51 fools in the United States Senate, because crime gives the appearance of having unlimited Cash. "The love of money really IS the root of all evil."
It was the oil speculators that forced gas above $4 a gallon and pushed the auto industry towards bankruptcy. Their car/truck sales fell of a cliff as deep as during the worst of the Great Depression. Then Wall street's fraudulant shell game to hide the risk of sub prime loans and sell them caused the current credit freeze. This freeze is why Chrysler, GM AND Ford will all go bankrupt. The auto industry sales are down 30 to 50% because buyers can not get loans, manufacturers can not get enough credit to offer leases like before. The credit freeze has pushed the whole economy into a severe recession. Auto manufacturers are always inordanately impacted by recessions.
To make matters worse, Wall Street Sycophants running the government insist trade is fair and other countries are not deliberately under valuing their currencies. The reality is no American manufacturers can survive the unfair international competition where the deck has been stacked. Foreign countries support their manufacturers in many major ways whereas our government is working against our manufacturers.
GM was actually profitable during the great depression. It has had negative equity for several years, and today sits at negative $86 billion. The American automotive industry was hurt by the oil price hike last year, but it was really more the last nail in the coffin than it was a death blow. Ford is in the best position of the Big Three, but they could tank too.
THIS is one of the reason that I and other people http://www.federaltimes.com/index.php?S=4034396 think that the Post Office should get into the banking business!
Imagine Geithner, Obama, and Congress are allowing the credit card companies to run amok for another year whilst a growing amount of people use Visa as not only their HMO, but also to pay the groceries!
Where's the CHANGE???
ClarcKing. Your accurate appraisal of the situation should be spread throughout our country. And our leaders must respond with laws that protect and benefit the American people.
Thank you for your powerful ideas versus the poisonous and ignominous ideas being bantered about on the mass media. You believe in our country and its basis. You warn against the the formation of a financial oligarchy, who's greed and avarice can bring down our civilization.
When financial crimes--namely fraud, swindle-- are committed and the result is rewarding the criminal CEOs and their dishonest subordinates, they become convinced of their own invisibility to their criminal behavior. And their crimes are emulated. And the entire system sinks into a cesspool of criminality.
The view that banks are the oil rather than the substance of business and commerce is absolutely correct. In their swindling ways our banking institution has imposed themselves as the substance of economic wealth and national salvation while they steal everything of value within their grasp. Our Presidnt must awaken to this reality before all is lost.
Ah, I missed that about Morgan Stanley hiring a tanker...Rick Santelli on CNBC screamed that there can be no manipulation in the oil market because they have to take delivery...and they did, pumped into an oil tanker! Did they not also try to corner the market for heating oil last winter? Morgan Stanley...and they will get through the stress test just like Goldman Saks.
http://seekingalpha.com/article/134482-why-this-rally-is-unsustainable
a young kid, but what insight!
Good Job!
The implications of this article are far-reaching to the population's survival. Oil is necessary for the economic engine; however speculating in food production, supply and distribution is heinous. We/our political leadership must get the banks and the rest of the speculators out of Food, Water, Energy and Housing markets. Nations should be preparing to double the world's food supply, instead of submitting to the market demands. Tariff regulations have interfered with domestic food production in all countries. The reorganization of the U.S.banking system is necessary; the whole world is depending on the U.S. to reverse the collapse. We can not allow a "blow-out" of the U.S. dollar. our political leadership do not appear cognizant of the horrific consequences.
Yawn and triple yawn.
The next financial meltdown with likely be the health insurance industry
Just like the credit/mortgage industry they are run based on debt. It is not sustainable
When the music stops and someone has to pay the bill it will all collapse. Because the money isn't there, it's all been spent
The real solution to end speculation on commodities is to tax them for the full market price of the raw commodity. In other words, whoever drills the oil should pay a 100% tax for it back to the community where it is drilled. After that, and after paying land taxes and pollution costs, any profits are the company's to keep. This would A) encourage conservation of resources, and B) discourage speculation, since the "fuel" for it would be taxed away up front. Under such a Geonomic system, if oil prices go up, the tax rises commensurately, if oil prices go down, it drops. The market decides the raw cost of oil (this is well known), so government doesn't have to speculate either. The windfall profits oil companies and traders make come from increases in the raw costs of oil, not from improvements to the final product. They should not profit from a resource that they didn't create and that rightfully belongs to all of us under natural law.
And the megabanks - aka Monetized Derivative Exchanges - should decide to be either commercial banks, backed by the FDIC and the taxpayer, or investment banks, on their own, but not allowed to leverage beyond the old 10:1 ratios.
Why shouldn't an investor be able to make a profit on producing raw materials? It's not as if every well drilled is a sure thing. It's also silly to think that there are no efficiencies to be gained during the production process through competition.
We also don't have integrated oil and gas companies domestically for the most part. Refiners buy feedstock independently. We also have many companies that do nothing more than explore and produce.
Why continue the never ending complication of the tax system. If you want to control commodity pricing,. stop the specualtive trading practices. You can do that very easily, whomever purchases the commodity must take delivery before they can resell it.
No what ifs or Buts. Its pretty simple. No futures no shorts no nothing, just purchase at market price and you are stuck with it. If you want to make it really safe, have all interested participants agree to a price for an extended period which allows everyone to make a profit that is sutainable. I know, its not the free market but it may be the "intelligent ' market.
Citi hasn't foregone any of their traditional function as lenders and facilitators of trade. Where did that idea come from? Citi is an enormous global financial institution. They are involved in nearly everything. Energy trading desks have existed for decades. Citi just wants to continuing having a share in that space. Goldman by the way had made huge profits in their commodities division this decade. And it's the Goldman trading desk which is reaping in a lot of their profits now when their other core businesses are down. It's a good way to diversify.
Rarely do I agree with Learsy but this time he is correct as hell.
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