It hit the front page of the New York Times and Wall Street Journal and papers all around the country: Paul Krugman, Nobel Laureate and New York Times columnist permitted himself to be "outraged." Here was another example of Wall Street and Banks going off the deep end after very nearly taking all of us over a cliff.
And yet I would suggest that Mr. Andrew J. Hall the head of Citigroup's oil and energy trading unit, Phibro LLC, and focus of the $100,000,000 pay controversy, has rendered a great service to the nation. His payday though munificent in the extreme, is but a drop to what his odyssey may well save us all in the years ahead. That, especially given the lessons learned over the past months and the billions -- no, trillions --placed a great risk through guarantees and at public cost to grossly mismanaged financial institutions freighted with speculative excess.
The questions raised over Mr. Hall's compensation has given us the opportunity to focus on the primordial underlying issue of this whole drama. The Citicorp/Hall episode puts into clear focus the question that should have been posited from the very outset:
WHAT IN THE WORLD IS A BANK DOING IN THE OIL TRADING BUSINESS?!
It is one thing for a bank to finance oil or commodity trading with letters of credit or transaction financing, but to be a principal, that is, taking title on speculative positions in say oil, or other commodities, as owners and risk takers? What does that have to do with banking??
When hundreds of millions -- no, billions -- of dollars are being used by banks to play the oil contango game that is filling up supertankers with millions of barrels of oil, paid for by cheap money made available by the Fed, keeping the oil laden supertankers at sea months at a time in order to sell the oil at higher prices at a later date, thereby:
What commodity speculation has to do with banking is a question that should be asked by our press and our lawmakers of the banking authorities. That Citigroup's Phibro oil trading operations are successful is well and good. However, it exposes Citigroup to enormous risk and the same degree of downside as the failings they were unable to manage in the recent crisis. One need only recall that in 1985 Phibro-Salomon (before its merger into Travellers and in turn into Citigroup) reported a 1984 writeoff of $307 from its oil investments in the Beaufort Sea (" Phibro-Salomon in Red: Huge Oil Wrte-Off Cited," L.A.Times 02.20.85) underlining that oil profits are not a one way street- being a sum that had a vastly different connotation then, than it would have today.
Of particular note, a Federal Reserve/Treasury Department "Report to Congress on Financial Holding Companies" commented that the 1999 Gramm-Leach-Bliley Act significantly altered the legal framework that governed the permissible affiliations and activities of banking organizations, repealing the provisions of the Glass-Steagall Act and the Bank Holding Companies Act of 1956. It removed the barriers that previously inhibited the ability of banking organizations, securities firms and insurance companies to affiliate with each other. In other words the Act now allows existing bank holding companies to acquire full service securities firms and insurance companies and it allows securities firms and insurance companies to acquire banks (and thereby become a bank holding company).
The report contained an especially telling paragraph:
"Commercial Activities of Financial Holding Companies: Virtually all domestic FHC's engage only in financial activities. One domestic FHC-Citigroup- currently is engaged in trading activities involving non financial commodities (for example oil and gas).These commercial activities, however, represent a de minimis portion of Citigroup's total consolidated assets and are conducted pursuant to conditions imposed by the Board that are designed to ensure the activities are conducted in a safe and sound manner. Accordingly, the existing commercial activities of FHC's pose little risk to the safety and soundness of the depository institution subsidiaries"
Financial Holding Companies or Bank Holding Companies have become the time bombs of our financial system. Citigroup's Phibro trading division was the camel's nose under the tent of the American Banking System. The leniency extended toward Citigroup permitting it to engage in commodity trading was subsequently extended to FHC's including Morgan Stanley, JPMorgan Chase, all of whom are playing the oil/commodities game and not to be outdone, also have fully loaded vessels at sea (JP Morgan having recently chartered the VLCC Supertanker Front Queen, loaded with 2 million barrels of heating oil for a duration of nine months to sit at anchor off the coast of Malta. The commodity speculation doesn't stop with oil, but these bank's traders along with the likes of Goldman Sachs (now a Bank Holding Company) take huge trading positions on all manner of commodities for which they are clearly neither producer nor consumer, but only speculators. Given recent experience and its enormous cost can the Fed and the Treasury truly say that these rote speculative activities -- "pose little risk to the safety and soundness of the depository institution."
Under current conditions one would think that the Fed and the Treasury would be moving heaven and earth to get Citigroup to divest itself from its Phibro Division, and would call a halt to all commodity speculation by all Bank Holding Companies protected by the Fed and Treasury through their myriad programs, having access to minimal funding costs at the Fed window, to FDIC guaranteed deposits, to TARP monies, to government funded counterparty bailouts (e.g., AIG /Goldman), and being cushioned in their belief that they are too big to fail and will be bailed out by the rest of us if their trades go wrong.
Given the financial storm clouds gathering once again, given that Mr. Hall's imbroglio has brought this all to a head and helped us clearly define what is at risk, one can only say that Andrew Hall, directly or indirectly, has done the nation a great service!
The way Mr. Hall makes his money is to create false scarcities in commodities markets, such as crude oil, then profiting from temporarily inflated prices.
Stealing from the many to enrich the few can hardly be considered rendering a great service to the nation.
No magic here. Use less gas and oil and you will drive prices down. Use more and prices will go up.
might I suggest googling PEAK OIL
or getting the book "Hubbert's Peak -- Impending World Oil Shortage" fromKenneth Deffeyes
or
Googling Colin Campbell
or ASPO
or the Oil Drum
Have a little curiosity dude -- do some research
learn about how the modern industrial world really works
Since the TARP is covering their loses,
The bankster use the old "double down" system, which works great till the inevitable string of loses results in catastrophic loses.
Then they go to TARP for more money.
Now the reason for the big payouts is greed, of course, but more specifically
If the TARP folks saw a bunch of money in the accounts of the banks, they would naturally want the bank to use that first.
So payout and bonuses are the way to hide that money.
All bow to the Banksters.
:-)
kinda harsh aren't ya?
%)
seriously, I do know what you mean, and I think we are already in that slow motion spin just before we hit- i don't think we even have to accelerate- just BAU, or trying to go back to BAU will do it.
cheers!
What just happened?
:-)
:-)
But this guy should not get anything close to 100 million dollars since his company was bailed out with taxpayer money. He must have taken great risks to make big money and the risk profile at Citigroup was seriously wrong.
He should get paid what he would get if Citigroup went bankrupt which is not much.
The USGS gives odds on Peak Oil. They say there is a 95% chance for Peak Oil to hit sooner then later and a 5% chance that Peak Oil will hit by 2037. Some people like to pretend the 2037 prediction is set in concrete. It isn’t. It’s only given a 5% chance!
Countries and regions in “Terminal decline” (long past their Peak in oil production):
Peaked in oil production in: 1971
Decline Rate: about 4.2%
Peaked at: 11.6 million barrels per day
MEXICO (CANTARELL)
Peak Oil Production: 2004
Decline Rate: 15%
Peaked at about 3.59 million barrels per day
NORTH SEA
Peak oil production: 1999
Decline rate in 2005: 12.8%
Peaked at about 6.4 million barrels of oil per day
• 80% of worlds oil supply comes from fields discovered before 1970
• World Oil Discoveries Peaked in 1960s
• The world now consumes four-six barrels of oil for every barrel we
• world Peak Per Capita Oil Production occurred in the 1979
It hit papers around the world except for this country. Faith Birol, Chief economist for the International Energy Agency, fears an energy crunch by 2010. And yet I’d suggest, both Colin Campbell and Kenneth Deffeyes through their studies on Peak Oil, have rendered a great service to the nation.
Learn the truth
Read the book: “Hubbert’s Peak, The Impending World Oil Shortage”
By Kenneth Deffeyes
B. Banks should have been maintained by the employees who run them and the top 10 executives FIRED outright WITHOUT A DIME in bonus or walking money. Let the next in line run the business. Or split the damn thing in half and rename it under a different corporate entity. But FIRE the execs.
C. This political gamble isn't working as expected or discussed. Rahm is still trying to use the benefits of these connections to sell an idea that doesn't exist. That Obama is saving the economy. He's not. He's paying off his contributors.
I voted for the man I still have some naive hope we're not all in Rome and it's burning like all hell.
:-)