Question for the Fed and G-20: Why Are Our Banks Running Commodity Casinos?

In an article in Wednesday's Financial Times, "Banks Braced For Fed's Commodities Decision," an issue was raised that has been pointedly swept under the rug by the banking community and, I'm sad to say, our government.

A plethora of banks and bank holding companies such as Goldman Sachs, Morgan Stanley, JP Morgan Chase, and Citigroup (please see "Citigroup's Oil Traders $100,000,000 Payday: A Wakeup Call For the Nation") have been actively trading physical commodities and paper commodity derivatives (i.e. oil, natural gas, an array of agricultural commodities, metals, and on).

According to the FT article, several banks have entered the commodity business in recent years guided by "an increasingly permissive Fed."

What a time to be permissive! The likes of Goldman, Morgan Stanley, and JP Morgan slunk their way onto a commodity trading platform some years ago by acquiring interests in power plants and oil tankers, giving them the rationale to deal in physical commodities.

Divestment was envisaged as companies became financial holding companies. But a knowing banking community, aided by moneyed lobbyists, created an accommodating loophole in the Gramm-Leach-Bliley banking reforms of 1999.

One needs raise the question again and again: What is a bank or bank holding company doing using FDIC insured deposits, access to loans at the Fed window, access to myriad Fed Reserve and governmental loan and support programs, and the implied government guarantee of 'too big to fail" playing casino, gambling with commodity positions, with both physical product and paper derivatives? They are buying and selling commodity derivatives far beyond their in-house needs and, in most cases, based on pure speculation. And this is continuing even after the disastrous, egregious speculation of the all too recent past.

In the title I have used the word "our," because these banks could very well not be in existence were it not for the government's massive intervention, ranging from TARP funds (please see "Your Tarp Money Is Being Used To Prop Up The Price of Oil"), guaranteeing dubious asset holdings, and -- as with Goldman Sachs -- providing third parties (AIG) with counter-party liquidity to cover billions of what otherwise would have been massive losses on speculative derivatives. In a sense, a strong case can be made that they have become morally beholden as "our banks."

It is one thing for banks to finance the trade in commodities, by establishing letters of credit and providing third party financing for inventories and production. But it is sheer madness, after recent history, to permit banks to become commodity traders, especially with our money.

In playing the commodity markets with federally guaranteed deposits and implied guarantees, the banks make the public pay twice. First, the public pays by providing much of the financing at give-away levels. Second, we have to pay more in day-to-day prices for staples, such as gasoline, because of speculatively driven higher prices for core commodities, like oil.

In the old days, commodity traders put their own money on the line. It's well past time we return to that discipline. It will go a long way in reducing the speculative excesses of many of the commodities being traded on the exchanges.

 

Comments

[getsmart85]

If there is not a sustainable strategy that will generate real revenue and income, people will use creative ways to satisfy their basic wants. Not having the will or vision to transform society, the Fed facilitates speculation. Instead of tearing down the casinos, the Fed is the owner, manager and their champion.

[Libarchist]

Excellent article; Americans.­.. need to get proactive, and throw a money wrench into it by having a majority of people withdraw all their money form banks, and brokerage accounts, and put it into a personal safe at home.

The banks would then fall....as is their just fate for being failures -- and the politicians -- fail because they will not get money from them to run in elections.

It is a win-win deal for ordinary Americans, that want a true liberal democratic country.

[DoctorH]

If we want to do something about this, we have to elect a different Congress for ourselves.

There is only ONE political party in the U.S. It is the Special Interests Legally Bribing Congress and the President through Campaign Contributions party. Our government is perfectly efficient, according to the Golden Rule of Politics: He who supplies the gold (through campaign contributions) makes the rules. Do you ever hear big companies saying "Government is ineffiicient. I'm going to stop contributing to political campaigns "? No you do not. You hear them expecting de-regulation of their industry, and then you hear them expecting a bailout if they screw up everything in their company and go bankrupt as a result. Since government is totally efficient according to the Golden Rule, these companies always get everything they pay for.

If we voters want a government that represents US, we need to search the country for honest people who are willing to run for Congress, on the platform that they will accept NO Special Interest Group campaign money and will work for campaign finance reform, such that the taxpayers will pay for political campaigns. Then the voters will supply the gold, and, if we are eternally vigilant enough, we can begin to make the rules. The chosen candidates should also be willing to work to enact laws that are in the best interests of the American people as a whole, rather than to grease the palms of their friends.

[sposton]

Because there is no rule against it! Why don't we have the necessary rules? Because these guys own our government.

They are brewing another bubble in the equity markets while our economic gurus are using the rise in equity as a proof that the economy is getting back to normal. What is going to happen after an inevitable "correction"? These are not ordinary times and any correction will have inordinate effect on the economy at large. This may be the trigger effect of another implosion and how are we going to deal with the ramifications of that? By creating another bubble? With what? More debt? I don't think our system can withstand even the smallest of shocks at this moment.

Obama's administration has acted highly irresponsibly in more way than one by cuddling these gambling banksters.

[dadw5boys]

Why? Because they can !

When you control the worlds money supply you control the World,

So set back and let the Central Bankers work.

You will enjoy being Indentured Servants we promise.

[DAWK]

RJ DOES IT AGAIN ! THANK YOU MR LEARSY FOR AGAIN POINTING OUT THE ACTUAL WALL STREET THEFT OF TARP FUNDS THAT ARE CAUSING CONSUMERS BILLIONS-LOST IN INFLATED 'CASINO' LOANS TO SILENTJUNIOR THIEVES,WHO USE THEIR BANKS/TRADER COMPANIES TO 'BET' ON COMMODITIES.
SO, THIS IS 'THE ECONOMY IS RECOVERING' STATMENT BY POLITICIANS WHO CONTINUE TO TURN A BLIND EYE,AS AVERAGE-STRUGGLING CONSUMERS NOW REALIZE THAT EACH TIME ONE FILLS UP THEIR GAS TANKS,THERE IS AN INVISABLE PICK-POCKET THIEF,EXTRACTING STOLEN MONEY VIA TARP,FROM CONSUMER POCKETS! YES,THAT-BE THIEVES USING BORROWED TARP MONEY FROM GREEDY CROOKS-BANKERS BETTING ON OIL,AS YOU PUMP ANOTHER 'EXTRA' WALL STREET 'MAFIA' TAX VIA COMMODITIES!! AND-IF...T­HESE BETTING FOOLS LOSE,MORE TARP FUNDS WILL COVER THEIR BETS?!!! OUTRAGIOUS!!
RAYMOND; IF THIS ISN'T COVERED VIA THE CURRENT 'ORGANISED CRIME' LAWS,THEN POLITICIANS AND OUR ATTORNEY GENERAL ARE NOT DOING THEIR JOBS!!
IT'S TIME TO ARRSET,WITH NO BAIL AND BEGIN TO PROSECUTE ALL THE CROOKS STEALING-BETTING COMMODITIES VIA TARP FUNDS!! PERIOD!

[zell]

Thanks, Mr. Learsy, for this article. The news has said that the G-20 will put some controls on the banks and on CEO pay. If so, will this put the brakes on those institutions that are decreasing the standard of living for We, the People? When we see financial institutions giving a huge bonus to their CEOs, I am reminded of "Nero fiddling while Rome burned."..­....We know what happened to Rome......­. My prayer is that the leaders of the G-20 will tell the president that something MUST be done. It is imperative that SOMEONE stops the financial madness that is going on in our country. It is apparent that nothing is being done......­......

[02bmw76]

Great post as always, Mr Learsy. The collusive corruption continues unabated.