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Raymond J. Learsy Headshot

The Cost of Nearly Everything Is Rigged, Enriching the Bank Fixers

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That banks are able to manipulate became clear as a bell with the findings of the Libor interest rate fixing scandal ("Everything is Rigged: The Biggest Price Fixing Scandal Ever" Rolling Stone 04.25.13) whereby some sixteen too big to fail banks were accused of colluding to manipulate interest rates tied to the $300 trillion (yes, trillion) Libor benchmark market determining interest rates for an overwhelmingly wide range of financial instruments from mortgages, car loans, student loans and on to the very gritty of everyman and woman's daily lives. Clearly much is amiss and only now, slowly, the piper is coming home to roost in terms of forceful government action.

Just this week government authorities from the U.S. Attorney's office in Manhattan and the F.B.I. issued warrants for the arrest of two J.P. Morgan traders suspected of purposely issuing misleading information masking the dimensions of the multi-billion dollar trading (gambling) loss associated to what has now become legend as the "London Whale." ("U.S. Said To Arrest Pair in Big Bank Loss" New York Times 08.09.13)

This is not the first instance this past month for a bank the likes of JPMorgan Chase (who, by the way is one of the 'sixteen' banks embroiled in the Libor fix) to appear on the front pages of the news media.

Earlier this past month the U.S. Federal Energy Regulatory Commission charged that JPMorgan had manipulated electricity prices in California and the Mid-West and received at least $73 million in improper payments. That a fine of some $400 million on the bank was being discussed together with a slap on the wrist for those in charge. (please see "JP Morgan Accused of Rigging Energy Markets. A Feather Duster Anyone? 07.18.13)

We also learned this past week that the criminal and civil divisions of the Department of Justice have very recently opened an investigation of JPMorgan's issuance of mortgage-backed securities in 2007/2008.

Further, that JPMorgan together with Goldman Sachs and the London Metals Exchange were being sued for the manipulation of aluminum prices that entailed vast holdings and outrageously gamed storage releases of physical aluminum artificially inflating prices, actions that spurred the convening of a subcommittee of the Senate Banking, Housing and Urban Affairs Committee ("U.S. Scrutiny For Commodities Market" NYTimes 07.23.13) under the forthright Chairmanship of Senator Sherrod Brown (D-Ohio). It also elicited an announcement by the Federal Reserve that they would "review their 2003 determination that certain commodity activities are complimentary to financial activities and thus permissible for bank holding companies."

Battered and bruised, JPMorgan again hit the news cycle by their recent announcement that they would be exiting the physical commodities trading business. That they will be looking for a buyer for their commodities trading division. Can they, will they?

Perhaps, but not so easily done given the fact that on March 31 of this year JPMorgan alone held $14.3 billion in physical commodities (not to speak of the billions more in paper derivatives). Not deposits, not bank loans, not commercial credit facilities but physical commodities held mostly for speculation much at our cost both in and out. IN, through the credit facilities made available to these banks in measure by having virtually limitless access to funding at the Fed discount window at minimal interest, as well as access to their depositor's money insured by us through the Federal Deposit Insurance Corporation. OUT given the price we then pay for the goods and materials impacted by the commodities being stored, be it oil, (often held in huge 200,000 tons plus capacity fully loaded tankers at anchor, at sea for months at a time), oil products such as gasoline and heating oil, aluminum, electricity (through their interest in power plants) and on, ranging through the full gamut of commodities. One need not be Einstein to understand one doesn't stock up physical commodities nor inventory of any shape or form, hoping that prices go down. And you can bet JPMorgan et al did all they could through trading and shading the commodity derivatives on the exchanges to enhance the value of their physical commodity holdings while we, the consumer paid in higher prices for the goods impacted.

Of course JPMorgan is not alone -- Goldman's physical commodity holdings on March 31 were $7.7 billion and Morgan Stanley's $6.7 billion. Clearly something is deeply amiss and quoting Bart Chilton, CFTC Commissioner and perhaps the one person in government together with a too few handful of Senators, (Brown, Levin, Sanders,Warren et al) who seem to have the welfare of their fellow citizens as their priority, and who have not become beholden to the legion of moneyed bank, industry, commodity exchange lobbyists and their lawyers descending on Washington, was quoted earlier this year: "Given the clubby manipulation efforts we saw in Libor benchmarks, I assume -- other benchmarks -- many other benchmarks -- are legit areas of inquiry." And then being even more succinct:

"The Federal Reserve should reverse a decade-old ruling that lets banks trade physical commodities. I don't want a bank owning electric service, or cotton, corn or feedlots. I don't want banks owning warehouses, whether they own aluminum, gold, silver or anything else in them." The Fed "can and should reverse" the policy.

Hello Congress, Federal Reserve, Commodities Futures Trading Commission, Federal Trade Commission, Department of Justice, 1600 Pennsylvania Avenue, is anybody listening? Or do the Big Boys just get to play while we pay and pay!?