A hot new trend among traders is betting on packages of energy and agricultural futures. Kind of like the bankers bet on subprime mortgages, traders recently invented Collateralized Commodity Obligations (or CCO's). They are like their subprime cousins, CDO's (collateralized debt obligations), only their performance is linked to rising commodity prices; the higher the prices, the more profit to the CCO.
These Collateralised Commodity Obligations or "CCO's" give investors, bankers and corporations the opportunity to access the commodities market. It is part of a recent trend, exploited in the subprime market by AIG, Lehman, Merrill, Goldman and the banking industry, to use innovative structures to eke out returns in an increasingly tight market, offering these investors high-yielding, rated paper for betting that commodity prices will not fall dramatically.
Not surprisingly, "major hedge-fund stars like George Soros and Michael Masters have recently been screaming moral foul on commodity speculation -- a clear signal there's more fire than smoke on the horizon."
So who are the players in this unregulated commodities market?
No shock here. Goldman, AIG and the agrichemical commodity giants.
Does this have anything to do with why AIG's counterparties are getting paid back in full, to the tune of tens of billions of taxpayer dollars given that just like the unforeseen drop in home prices, commodity prices have fallen dramatically?
Interesting you should ask.
According to Eliot Spitzer, "for the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? Again, no shock here, "the alpha male of Wall Street": Goldman Sachs."
Goldman Sachs, acting as the book running lead manager, brought Monsanto to life in 2000. Monsanto Company, based in Creve Coeur, Missouri raised $723 million through an initial public offering. After a century-long metamorphosis, Goldman was able to IPO a total of 35 million shares with an option to sell an additional 5.25 million shares.
You have to wonder what impact the volatility in the commodity markets and these "CCO" derivatives might be having on Goldman's, AIG's and Monsanto's balance sheets, profitability and perhaps their ability to secure financing. Or bailout funds.
But that's all we'll be able to do...wonder...since commodity speculators are able to bypass all Commodity Futures Trading Commission regulations by trading on foreign exchanges as highlighted by Senator Carl Levin (D-Mich.) who introduced the Close the London Loophole Act, which would curtail these situations.
Has any of this played a role in the jaw dropping bailout of AIG by taxpayers and the funds that they are channeling to their counterparties like Goldman? And what about Spitzer's issue with the closed door discussions between Goldman and the Fed? And did CCOs have anything to do with Monsanto's recent announcement of the resignation of its treasurer, Robert Paley in the midst of the corporation's "record profitability"?
Has the debt burden for these corporations become too heavy amid a decline in commodity prices and sales due to unforeseen market collapse and global recession?
And what about agrichemical giants? Is it harder for a chemical corporation like Monsanto to borrow because their credit is based in part on the value of their inventory, commodities, which has also declined?
And does any of this have to do with Goldman Sachs recent downgrade of Monsanto (MON) on December 22, 2008:
The dramatic rise and fall of commodity prices, credit concerns and fertilizer costs have partially paralyzed fall buying activity," analyst Robert Koort wrote in a note in which he cut the companies to "neutral" from "buy."
In a typical year, 40 percent of annual fertilizer application occurs in the fall, but this year the rate could be half that level, he said.
With the decline in crop prices and the financial crisis, farmers are reducing their fertilizer usage, shifting their focus to cost savings rather than profit or yield maximization, Koort said.
Or was the downgrade a result of Goldman's concern over Monsanto's ability to continue to secure financing for their customers, the farmers, amidst financial Armageddon and the credit crisis' impact on the Farm Credit System, a government sponsored enterprise of government backed lending earmarked for agriculture (a role not unlike Freddie Mac and Fannie Mae played in the financial sector)?
Wouldn't it be great if Kristof at the Times, Kilman at the Journal or the gang in the Bloomberg Tower turned their attention to the following?
Additional Food for Thought: The commoditization and patenting of our food supply, introduced by agrichemical corporations like Monsanto in the 1990s (and recommended by Jim Cramer of TheStreet.com) enable corporate ownership of underlying assets (in this case, corn and soy) that can then be bundled and traded as derivatives known as "collateralized commodity obligations".
• Collateralized Commodity Obligations: the hidden cousin of collateralized debt obligation and how the patenting of our food supply over the last ten years has created one of the world's largest, unregulated markets.
• George Soros and Michael Masters: What do these guys know that you don't?
• Farm Credit System: The Freddie Mac and Fannie Mae of agriculture. It is a government sponsored enterprise of government backed lending earmarked for agriculture. One third of farmers get financing at the Farm Credit System.
• Barnyard Bailout? Goldman, AIG and the unregulated (AIG insured?) investment vehicles you've never heard of.
• Costly Corn: amidst declining sales in the global depression, is the debt burden of agrichemical corporations becoming too much to bear?
• Mergers, Acquisitions and Bankruptcies, oh my: From Lyondell Basell to Dow to Rohm and Haas, the agrichemical corporations are being hammered. Why are a few favorites still standing?
• Funding Farmers: from government sponsored enterprises similar to Freddie and Fannie to the corporations selling the products to the subsidies found in the farm bill, how much is this costing taxpayers?
• Round Tripping Revenue?: from telecom technology to agriculture technology, follow the money
• Red Flags: An increase in earnings and a decrease in cash flows: what are the financial statements of the agrichemical giants actually telling us?
• Shriveling Borrowing Capacity: analyzing the impact of declining borrowing capacity that is based in part on the value of inventory, which has seen a sharp decrease in the midst of the global recession.
Or is that too much to ask?
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