commodities

IN THE SUMMER of 2008, Priscilla Carillo, a twenty-four-year-old living near San Bernardino, had some rough luck. She had been working as a temp at a warehouse and also going to school at Chaffey Community College, about forty minutes away from where she was living at the time. She was humping it back and forth in a beat-up Nissan Altima, making a go of it. She says her mom, thinking she was being helpful, had booted her out of the house when she turned eighteen, told her to make her own way. You know, the American way.
“I always thought Latinos lived with their parents until they were forty,” she says now. “I guess I was different.”
Then, at the beginning of 2008, Priscilla started to notice a problem. Gas prices were going up—way up. They were steaming past four dollars a gallon. Since the trip to her community college was a long one, it soon became unaffordable. She dumped school and went to work full-time. But then her temp agency went under and she lost her job. Now Priscilla was broke and unable to pay rent. In June and July 2008, she was living in her car.
“I’d park at a library or in a park or something,” she says now. “I didn’t know I couldn’t sleep in residential neighborhoods at night. I got picked up by the cops a bunch of times. They thought I was a prostitute. I told them, man, I’m just sleeping.”
Halfway across the country, at almost exactly the same time, a businessman named Robert Lukens was starting to feel a squeeze. He ran a contracting firm called Lukens Construction in Reading, Pennsylvania. Lukens had seven employees and his business had been in his family for three generations, founded by his father close to forty years back.
He hadn’t wanted to get into the family business, but circumstances made that decision for him. Way back in 1981 he’d moved to Richmond, Virginia, and in the space of a week had gotten married and then was laid off by Ryan Homes, one of the biggest contracting companies in America.
Now, with a new wife and no job, he reluctantly went back to work for his father, who had taken over Lukens Construction from his own father and with whom he had a difficult relationship. But father and son smoothed it out, stuck it out, and made it work. Some fourteen years later, in 1995, Robert Lukens took over the business himself, and in describing the firm he sounded like a man deeply proud of his family’s business. “We do high-end contracting, really nice work,” he says. Not cookie-cutter houses, he says, but custom additions and “lots of word-of-mouth referrals.” Heading into 2008, Lukens says, he was doing fine.
“But then all of a sudden I started having high energy costs,” he says. “Used to be I’d pay five hundred, six hundred dollars a week for gas. Now, in July of 2008, I’m suddenly paying twelve hundred dollars a week for gas. And not only that—all my vendors are suddenly hitting me with fuel costs. Used to be if I got a delivery of lumber, the delivery would be figured into the price. Now they’d hit me with a surcharge—a hundred and twenty-five bucks for the delivery or whatever. Lumber. Concrete. Stuff like that.”
About the same time that Lukens was seeing those price hikes, a biology student with dreams of becoming a doctor named Sam Sereda was heading home for the summer. Sereda was doing his undergrad at Gordon College on the North Shore of Massachusetts, but his home was in Sunnyvale, in the Bay Area out in California. Sereda was doing everything right in his young life. His grades were good, he was making money in his spare time by tutoring kids from Hamilton Wenham High in AP Bio. For the summer he had an internship set up with a Bay Area company called Genentech in San Francisco, and was planning on taking an advanced calc class at West Valley College in Saratoga, to pick up a few extra credits for his upcoming senior year.
“But then gas prices, they went from like three bucks to over four bucks a gallon,” he says now. “My family was going through some financial problems at the time, too. I ended up having to cancel the internship. The forty-minute drive was too long, it cost me too much money.”
The calc class went out the window, too. “Couldn’t afford that drive either,” he says now. “I ended up having to do twenty credits in one semester when I got back to Massachusetts. I know how this sounds, but with gas prices the way they were … my only real option for that summer was to sit in the house and do nothing. My brother was ill at the time—my family and I made the decision, the best thing for me was just to stay home.”
And while all of this was going on, a woman named Diane Zollinger was gainfully employed, no serious economic worries on the horizon. Her problem was that she lived in Montana. In Montana, everything is far from everything else. She had a good job in Bozeman, but Bozeman was thirty-five miles from her home in Livingston. She was driving seventy miles a day to work when the price of gas shot up to $4.85 a gallon. Her car got twenty-five miles a gallon. She was paying nearly seventy bucks a week for gas at the height of the oil spike that summer. “When the world crashed and I got laid off in November,” she says now, “we had more money in our pockets at the end of the day with me on unemployment.”
It didn’t matter where you lived or what you did for a living—in the summer of 2008, the cost of energy almost certainly hit you hard. There was no serious attempt by either the national media or the national political establishment to explain the cause of the problem. Most people assumed it had to do with some combination of shortages and/or increased demand from the Chinese industrial machine, and most TV reports were more than willing to encourage that perception, despite the fact that there were no long lines at the gas stations, no seventies-style rage-fests while waiting for gas, no obvious evidence of scarcity. We were told about a crisis of supply that existed somewhere other than where we could see it—someplace in the abstract.
“I remember watching CNN, and they were trying to tell us about shortages,” says Sereda. “They were showing lines in Canada, or somewhere else, someplace.”
I mostly spent that summer covering the McCain-Obama presidential campaign for Rolling Stone, during which time I heard varying explanations for why this gas price spike was happening, why people like Priscilla were suddenly living out of cars.
McCain, amazingly, spent all summer telling us reporters that the reason for the spike in gas prices was that socialists like Barack Obama were refusing to permit immediate drilling for oil off the coast of Florida.
Like all reporters that summer, I found my attention dominated not by interjections into the commodities market but by a seemingly endless series of made-up controversies involving either warring tribes within the Democratic Party (the Clintonicons versus the Obamaniacs) or blue/red hot-button issues like the Reverend Wright business.
But I do remember that gas was an issue, sort of, and it sort of got talked about by both candidates. I remember being in Kenner, Louisiana, on the night McCain de facto won the nomination and he gave a speech against a hideous puke-green background saying that “no problem is more urgent today than America’s dependence on foreign oil.” I remember the somber ads McCain started airing that summer talking about how “some in Washington are still saying no to drilling in America.”
I remember after that night, the press pool rolled out of its caged-in area after the speech and all us hacks were snickering in the bus about McCain’s latest whopper.
“What a bunch of bullshit,” one of them, a TV guy I’d known and disliked for years, said. “As if gas prices were going up because of an offshore drilling ban.”
“Yeah, nobody’s gonna buy that,” added another.
This went on for a few minutes. Campaign reporters love to rip the candidates they cover, it’s their favorite sport—until the candidate actually walks back into their section of the plane, at which point they go weak in the knees like high school girls and start kissing his skirts like he’s the pope. Anyway, at one point of this latest rip session about McCain’s drilling gambit, I piped in. “Hey,” I said. “Does anyone here actually know why gas prices are going up? I sure as hell don’t.”
There was a brief discussion at this, and theories were offered, but in the end it became clear that none of us in the pool had a fucking clue what was causing the gas spike. I later whispered to another print reporter: “Doesn’t that make all of us frauds? I mean, if we’re covering this stuff anyway.”
His answer: “You’re just figuring that out now?”
Later on, I was in Minnesota for the Republican convention in September of that summer and listening—squeezed up against a wall of other suckers with jobs as lousy as mine and with backgrounds in economics as shaky as mine—as McCain explained the problem in explicit terms:
Senator Obama thinks we can achieve energy independence without more drilling and without more nuclear power. But Americans know better than that. We must use all resources and develop all technologies necessary to rescue our economy from the damage caused by rising oil prices.
How about Barack Obama? He offered a lot of explanations, too. In many ways the McCain-Obama split on the gas prices issue was a perfect illustration of how left-right politics works in this country.
McCain blamed the problem, both directly and indirectly, on a combination of government, environmentalists, and foreigners.
Obama knew his audience and aimed elsewhere. He blamed the problem on greedy oil companies and also blamed ordinary Americans for their wastefulness, for driving SUVs and other gas-guzzlers. I remember him in the pivotal Pennsylvania primary, when Hillary had him running scared for a while, and he was honing a strategy of chalking up the high gas prices to greedy oil companies that, one supposed, were simply bumping up prices to pay for bigger bonuses.
“They have been in fat city for a long time,” Obama said in Wilkes-Barre during that campaign, referring to Exxon and other gas companies. “They are not necessarily putting that money into refinery capacity, which could potentially relieve some of the bottlenecks in our gasoline supply. And so that is something we have to go after. I think we can go after the windfall profits of some of these companies.”
Both candidates presented the solution as just sitting there waiting to be unleashed, if only one or the other would get the political go-ahead. McCain said the lower gas prices were sitting somewhere under the Gulf of Mexico. Obama said they were sitting in the bank accounts of companies like Exxon in the form of windfall profits to be taxed.
The formula was the same formula we see in every election: Republicans demonize government, sixties-style activism, and foreigners. Democrats demonize corporations, greed, and the right-wing rabble.
Both candidates were selling the public a storyline that had nothing to do with the truth. Gas prices were going up for reasons completely unconnected to the causes these candidates were talking about. What really happened was that Wall Street had opened a new table in its casino. The new gaming table was called commodity index investing. And when it became the hottest new game in town, America suddenly got a very painful lesson in the glorious possibilities of taxation without representation. Wall Street turned gas prices into a gaming table, and when they hit a hot streak we ended up making exorbitant involuntary payments for a commodity that one simply cannot live without. Wall Street gambled, you paid the big number, and what they ended up doing with some of that money you lost is the most amazing thing of all. They got America—you, me, Priscilla Carillo, Robert Lukens—to pawn itself to pay for the gas they forced us to buy in the first place. Pawn its bridges, highways, and airports. Literally sell our sovereign territory. It was a scam of almost breathtaking beauty, if you’re inclined to appreciate that sort of thing.
The scam was a two-part squeeze. Part one was the commodities bubble, a completely avoidable speculative mania that drove oil prices through the roof. It is perhaps the first bubble in history that badly wounded a mighty industrial empire without anyone even realizing it happened. Most Americans do not even know that it took place. That was part of the beauty of the grift—the oil supply crisis that never was.
This was never supposed to happen. All the way back in 1936, after gamblers disguised as Wall Street brokers destroyed the American economy, the government of Franklin D. Roosevelt passed a law called the Commodity Exchange Act that was specifically designed to prevent speculators from screwing around with the prices of day-to-day life necessities like wheat and corn and soybeans and oil and gas. The markets for these necessary, day-to-day consumer items—called commodities—had suffered serious manipulations in the twenties and thirties, mostly downward.
The most famous of these cases involved a major Wall Street power broker named Arthur Cutten, who was known as the “Wheat King.” The government accused Cutten of concealing his positions in the wheat market to manipulate prices. His case eventually went to the Supreme Court as Wallace v. Cutten and provided the backdrop for passage of the new 1936 commodity markets law, which gave the government strict watchdog powers to oversee the functioning of this unique kind of trading.
The commodities markets are unlike any other markets in the world, because they have two distinctly different kinds of participants. The first kind of participants are the people who either produce the commodities in question or purchase them—actual wheat farmers, say, or cereal companies that routinely buy large quantities of grain. These participants are called physical hedgers. The market primarily functions as a place where the wheat farmers meet up with the cereal companies and do business, but it also allows these physical hedgers to buy themselves a little protection against market uncertainty through the use of futures contracts.
Let’s say you’re that cereal company and your business plan for the next year depends on your being able to buy corn at a maximum of $3.00 a bushel. And maybe corn right now is selling at $2.90 a bushel, but you want to insulate yourself against the risk that prices might skyrocket in the next year. So you buy a bunch of futures contracts for corn that give you the right—say, six months from now, or a year from now—to buy corn at $3.00 a bushel.
Now, if corn prices go up, if there’s a terrible drought and corn becomes scarce and ridiculously expensive, you could give a damn, because you can buy at $3.00 no matter what. That’s the proper use of the commodities futures market.
It works in reverse, too—maybe you grow corn, and maybe you’re worried about a glut the following year that might, say, drive the price of corn down to $2.50 or below. So you sell futures for a year from now at $2.90 or $3.00, locking in your sale price for the next year. If that drought happens and the price of corn skyrockets, you might lose out, but at least you can plan for the future based on a reasonable price.
These buyers and sellers of real stuff are the physical hedgers. The FDR administration recognized, however, that in order for the market to properly function, there needed to exist another kind of player—the speculator. The entire purpose of the speculator, as originally envisioned by the people who designed this market, was to guarantee that the physical hedgers, the real players, could always have a place to buy and/or sell their products.
Again, imagine you’re that corn grower but you bring your crop to market at a moment when the cereal company isn’t buying. That’s where the speculator comes in. He buys up your corn and hangs on to it. Maybe a little later, that cereal company comes to the market looking for corn—but there are no corn growers selling anything at that moment. Without the speculator there, both grower and cereal company would be fucked in the instance of a temporary disruption.
With the speculator, however, everything runs smoothly. The corn grower goes to the market with his corn, maybe there are no cereal companies buying, but the speculator takes his crop at $2.80 a bushel. Ten weeks later, the cereal guy needs corn, but no growers are there—so he buys from the speculator, at $3.00 a bushel. The speculator makes money, the grower unloads his crop, the cereal company gets its commodities at a decent price, everyone’s happy.
This system functioned more or less perfectly for about fifty years. It was tightly regulated by the government, which recognized that the influence of speculators had to be watched carefully. If speculators were allowed to buy up the whole corn crop, or even a big percentage of it, for instance, they could easily manipulate the price. So the government set up position limits, which guaranteed that at any given moment, the trading on the commodities markets would be dominated by the physical hedgers, with the speculators playing a purely functional role in the margins to keep things running smoothly.
With that design, the commodities markets became a highly useful method of determining what is called the spot price of commodities. Commodities by their nature are produced all over the world in highly varying circumstances, which makes pricing them very trying and complicated. But the modern commodities markets simplified all that.
Corn, wheat, soybean, and oil producers could simply look at the futures prices at centralized commodities markets like the NYMEX (the New York Mercantile Exchange) to get a sense of what to charge for their products. If supply and demand were the ruling factors in determining those futures prices, the system worked fairly and sensibly. If something other than supply and demand was at work, though, then the whole system got fucked—which is exactly what happened in the summer of 2008.
The bubble that hit us that summer was a long time in coming. It began in the early eighties when a bunch of Wall Street financial companies started buying up stakes in trading firms that held seats on the various commodities exchanges. One of the first examples came in 1981, when Goldman Sachs bought up a commodities trading company called J. Aron.
Not long after that, in the early nineties, these companies quietly began to ask the government to lighten the hell up about this whole position limits business. Specifically, in 1991, J. Aron—the Goldman subsidiary—wrote to the Commodity Futures Trading Commission (the government agency overseeing this market) and asked for one measly exception to the rules.
The whole definition of physical hedgers was needlessly restrictive, J. Aron argued. Sure, a corn farmer who bought futures contracts to hedge the risk of a glut in corn prices had a legitimate reason to be hedging his bets. After all, being a farmer was risky! Anything could happen to a farmer, what with nature being involved and all!
Everyone who grew any kind of crop was taking a risk, and it was only right and natural that the government should allow these good people to buy futures contracts to offset that risk.
But what about people on Wall Street? Were not they, too, like farmers, in the sense that they were taking a risk, exposing themselves to the whims of economic nature? After all, a speculator who bought up corn also had risk—investment risk. So, Goldman’s subsidiary argued, why not allow the poor speculator to escape those cruel position limits and be allowed to make transactions in unlimited amounts? Why even call him a speculator at all? Couldn’t J. Aron call itself a physical hedger too? After all, it was taking real risk—just like a farmer!
On October 18, 1991, the CFTC—in the person of Laurie Ferber, an appointee of the first President Bush—agreed with J. Aron’s letter. Ferber wrote that she understood that Aron was asking that its speculative activity be recognized as “bona fide hedging”—and, after a lot of jargon and legalese, she accepted that argument. This was the beginning of the end for position limits and for the proper balance between physical hedgers and speculators in the energy markets.
In the years that followed, the CFTC would quietly issue sixteen similar letters to other companies. Now speculators were free to take over the commodities market. By 2008, fully 80 percent of the activity on the commodity exchanges was speculative, according to one congressional staffer who studied the numbers—“and that’s being conservative,” he said.
What was even more amazing is that these exemptions were handed out more or less in secret. “I was the head of the Division of Trading and Markets, and Brooksley Born was the chair [of the CFTC in the late nineties],” says Michael Greenberger, now a professor at the University of Maryland, “and neither of us knew this letter existed.”
And these letters might never have seen the light of day, either, but for an accident. It’s a story that reveals just how total the speculators’ hold over government is.
One congressional staffer, a former aide to the Energy and Commerce Committee, just happened to be there when certain CFTC officials mentioned the letters offhand in a hearing. “I had been invited by the Agriculture Committee to a hearing the CFTC was holding on energy,” the aide recounts. “And suddenly in the middle of it they start saying, ‘Yeah, we’ve been issuing these letters for years now.’ And I raised my hand and said, ‘Really? You issued a letter? Can I see it?’ And they were like, ‘Uh-oh.’
“So we had a lot of phone conversations with them, and we went back and forth,” he continues. “And finally they said, ‘We have to clear it with Goldman Sachs.’ And I’m like, ‘What do you mean, you have to clear it with Goldman Sachs?’ ”
The aide showed me an e-mail exchange with a then-CFTC official who was telling him he needed to clear the release of the letters with Goldman. The aide wrote first:
We are concerned there is a reluctance to release this 1991 letter involving hedge exemptions for swaps dealers that we requested.
Please let me know the name and date of this letter.
Please advise on the cftc posture on this letter. We cannot fathom the need for secrecy.
The CFTC official wrote back:
Can you give people a couple of days to agree with you?
“People,” in this case, referred to the recipients of the letters, specifically Goldman Sachs. To which the congressional staffer wrote back:
what is the sensitivity of a 17 year old letter which shaped agency policy? I am baffled.
Adding to the problem were a series of other little-known exceptions, including the so-called swaps loophole (which allowed speculators to get around position limits if they traded through a swaps dealer), the Enron loophole (which eliminated disclosure and trading limits for trades conducted on electronic exchanges—like Goldman’s ICE), and the London loophole (loosening regulation of trades on foreign exchanges—like the one Goldman owned part of in London). The loopholes were political/regulatory absurdities, not at all unlike the fictional old British laws lampooned in the classic British TV satire Brass Eye, in which the sale of dangerous narcotics was strictly prohibited, unless it was done “through a mandrill.”
“The concepts here were ridiculous,” says another congressional aide. “You’ve got something that’s illegal if you do it one way, but perfectly okay if you do it through a swap. How does that make sense?”
All of these loopholes created—out of thin air, almost in a literal sense—a massive government subsidy for those few companies like Goldman’s J. Aron that got those semisecret letters from the CFTC. Because at the same time these companies were getting those letters, they were creating a new kind of investment vehicle, a new table at the casino as it were, and the way that vehicle was structured forced everyone who wanted to play to give them a cut.
The new investment vehicle was called index speculation. There were two main indices that investors could bet on. One was called the GSCI, or the Goldman Sachs Commodity Index. The other was the Dow Jones–AIG Commodity Index. The S&P GSCI traditionally held about two-thirds of the index speculation market, while the Dow-AIG Index had the other third, roughly.
It’s a pretty simple concept on the surface. The S&P GSCI tracks the prices of twenty-four commodities—some agricultural (cocoa, coffee, cotton, sugar, etc.), some involving livestock (hogs, cattle), some involving energy (crude oil, gasoline), and some involving metals, precious and otherwise (copper, zinc, gold, silver).
The percentages of each are different—the S&P GSCI, for instance, is heavily weighted toward the price of West Texas Intermediate Crude (the price of oil sold in the United States), which makes up 36.8 percent of the S&P GSCI. Wheat, on the other hand, only makes up 3.1 percent of the S&P GSCI. So if you invest money in the S&P GSCI and oil prices rise and wheat prices fall, and the net movement of all the other commodities on the list is flat, you’re going to make money.
What you’re doing when you invest in the S&P GSCI is buying monthly futures contracts for each of these commodities. If you decide to simply put a thousand dollars into the S&P GSCI and leave it there, the same way you might with a mutual fund, this is a little more complicated—what you’re really doing is buying twenty-four different monthly futures contracts, and then at the end of each month you’re selling the expiring contracts and buying a new set of twenty-four contracts. After all, if you didn’t sell those futures contracts, someone would actually be delivering barrels of oil to your doorstep. Since you don’t really need oil, and you’re just investing to make money, you have to continually sell your futures contracts and buy new ones in what amounts to a ridiculously overcomplex way of betting on the prices of oil and gas and cocoa and coffee.
This process of selling this month’s futures and buying the next month’s futures is called rolling. Unlike shares of stock, which you can simply buy and hold, investing in commodities involves gazillions of these little transactions made over time. So you can’t really do it by yourself: you usually have to outsource all of this activity, typically to an investment bank, which makes fees handling this process every month. This is usually achieved through yet another kind of diabolical derivative transaction called a rate swap. Roughly speaking, this infuriatingly complex scheme works like this:
You the customer take a concrete amount of money—let’s say a thousand dollars—and “invest” it in your commodity index. That thousand dollars does not go directly to the index, however. Instead, you’re buying, say, a thousand dollars’ worth of U.S. Treasury notes. The money you make from those T-bills goes, every month, to your investment bank, along with a management fee.
Your friendly investment bank, which might very well be Goldman Sachs, then takes that money and buys an equivalent amount of futures on the S&P GSCI, following the price changes.
When you cash out, the bank pays you back whatever you invested, plus whatever increases there have been in commodity prices over that period of time.
If you really want to get into the weeds of how all this works, there’s plenty of complexity there to delve into, if you’re bored as hell. The monthly roll of the S&P GSCI has achieved an almost mythical status—it is called the Goldman roll, and there are lots of folks who believe that knowing when and how it works gives investors an unfair advantage (particularly Goldman)—but in the interest of not having the reader’s head explode, we’ll skip that topic for now.
Minus all of that, the concept of index commodity speculation is pretty simple. When you invest in commodities indices, you are not actually buying cocoa, gas, or oil. You’re simply betting that prices in these products will rise over time. It might be a short period of time or a long period of time. But that’s all you’re doing, gambling on price.
To look at this another way—just to make it easy—let’s create something we call the McDonaldland Menu Index (MMI). The MMI is based upon the price of eleven McDonald’s products, including the Big Mac, the Quarter Pounder, the shake, fries, and hash browns. Let’s say the total price of those eleven products on November 1, 2010, is $37.90. Now let’s say you bet $1,000 on the McDonaldland Menu Index on that date, November 1. A month later, the total price of those eleven products is now $39.72.
Well, gosh, that’s a 4.8 percent price increase. Since you put $1,000 into the MMI on November 1, on December 1 you’ve now got $1,048. A smart investment!
Just to be clear—you didn’t actually buy $1,000 worth of Big Macs and fries and shakes. All you did is bet $1,000 on the prices of Big Macs and fries and shakes.
But here’s the thing: if you were just some schmuck on the street and you wanted to gamble on this nonsense, you couldn’t do it, because your behavior would be speculative and restricted under that old 1936 Commodity Exchange Act, which supposedly maintained that delicate balance between speculator and physical hedger (i.e., the real producers/consumers). Same goes for a giant pension fund or a trust that didn’t have one of those magic letters. Even if you wanted into this craziness, you couldn’t get in, because it was barred to the Common Speculator.
The only way for you to get to the gaming table was, in essence, to rent the speculator-hedger exemption that the government had quietly given to companies like Goldman Sachs via those sixteen letters.
If you wanted to speculate on commodity prices, you had to do so through a government-licensed speculator like Goldman Sachs. It was the ultimate scam: not only did Goldman and the other banks undermine the 1936 law and upset the delicate balance that had prevented bubbles for decades, unleashing a flood of speculative money into a market that was not designed to handle it, these banks managed to secure themselves exclusive middleman status for the oncoming flood.
Now, once upon a time, this kind of “investing” was barred to institutional investors like trusts and pension funds, which by law and custom are supposed to be extremely conservative in outlook. If you’re the manager of a pension fund for Ford autoworkers, it kind of makes sense that when you invest the retirement money of a bunch of guys who spent their whole lives slaving away at hellish back-breaking factory work, that money should actually be buying something. It should go into blue-chip stocks, or Treasury bills, or some other safe-as-hell thing you can actually hold. You shouldn’t be able to put that money on red on the roulette wheel.
In fact, for most of the history of the modern American economy, there had been laws specifically barring trusts and pension funds and other such entities from investing in risky/speculative ventures. For trusts, the standard began to be set with an influential Massachusetts Supreme Court case way back in 1830 called Harvard College v. Amory, which later became the basis for something called the prudent man rule.
What the Harvard case and the ensuing prudent man rule established was that if you’re managing a trust, if you’re managing someone else’s money, you had to follow a general industry standard of prudence. You couldn’t decide, say, that your particular client had a higher appetite for risk than the norm and go off and invest your whole trust portfolio in a Mexican gold mine. There were numerous types of investments that one simply could not go near under the prudent man rule, commodity oil futures being a good example of one.
The system seemed to work well enough for a long period of time, but by the early nineties there was a new class of economists who had come to believe that the prudent man rule was needlessly restrictive. When I spoke with John Langbein, a Yale professor who helped draft the law that would eventually turn the prudent man rule on its head, he was dismissive, almost to the point of sneering, of the prudent man standard.
“It tended to use a sort of … widows and orphans standard,” he said in an irritated voice.
I paused. “What do you mean by widows and orphans?” I asked.
“Well, what that means is that there was an extreme aversion to loss,” he said. “Everyone had to do a lot of bonds and real estate, you understand.”
While I was sitting there trying to figure out what was so bad about that, Langbein proceeded to tell me about how he helped draft something called the Uniform Prudent Investor Act of 1994, some form of which would eventually be adopted by every state in the union. The Prudent Investor Act was something of a financial version of the Clear Skies Act or the Healthy Forests Restoration Act, a sweeping deregulatory action with a cheerily Orwellian name that actually meant close to the opposite of what it sounded like.
The rule now said that there was no one-size-fits-all industry standard of prudence and that trusts were not only not barred from investing in certain asset classes, they were actually duty bound to diversify as much as possible.
“It made diversification a presumptive responsibility” of the trust manager, Langbein said proudly, adding, “It abolished all categoric prohibitions on investment types.”
This revolution in institutional investment laws on the state level coincided with similar actions on the federal level—including yet another series of very quiet changes to the rules in 2003 by the CFTC, which for the first time allowed pension funds (which are regulated not by the states but by the federal government) to invest in, among other things, commodity futures. At that same time, the CFTC also loosened the rules about who could buy and sell commodity futures. Whereas once upon a time you had to be accredited to trade commodities, there were now all sorts of ways that outsiders could get into the market.
Coupled with the new interpretation of prudence—this notion that institutional investors not only could diversify into other types of investments, but should or had to—there was suddenly a huge inpouring of money into the commodity futures market.
“Once upon a time, you had to be an accredited investor, and commodities weren’t considered an asset class,” says Pat McHugh, a trader in natural gas futures who has spent upwards of twenty years watching changes in the market. “Now all of a sudden commodities, it was like it was something you had to have.”
Now, with all these changes, the massive pools of money sitting around in funds like CalPERS (the California state employees pension funds) and other state-run pension plans were fair game for the salesmen of banks like Goldman Sachs looking to pitch this exciting new class of investment as a way of complying with what Langbein, the Yalie professor, called the “powerful duty to diversify broadly.” These plans tended to be guarded by midlevel state employees with substandard salaries and profound cases of financial penis envy who were exquisitely vulnerable to the bullshit sales pitches of the Wall Street whiz kids many of them secretly wanted to be.
When I told Langbein that I was interested in how it came to be that so many institutional investors ended up putting gobs of money into the commodity futures market in the late part of the last decade, he immediately interjected that such investing was not a good idea for everyone. “Just because it is not prohibited does not mean it’s prudent for everyone to invest in oil futures,” he said. “Because they are very volatile.”
Well, I said, given that they are volatile, what would be an example of a situation in which it would be prudent for a trust—something, again, that is supposed to be supersafe—to invest in oil futures?
“Well, um…,” he began. “Say … Well, let’s say the trust portfolio owns real estate that contains oil, real estate whose value fluctuates with oil prices. Then you might want to buy oil futures as a hedge.”
Sounds like the kind of extremely common eventuality that is worth completely revamping the regulatory environment for.
Anyway, commodity index investing had one more thing going for it. It was about to be the last thing left on the institutional investment menu that Wall Street did not completely fuck up. By the mid-to-late 2000s the stock market, the consumer credit market, and the housing market had all either imploded spectacularly or were about to implode spectacularly. Those big pools of money had to go somewhere, and the key word that everyone was interested in hearing, after all these disasters, was “safety.” And “quality,” that was another word. And hell, what seemed more solid than oil? Or sugar? Or wheat?
That was the pitch, anyway. And the banks started hitting that theme really hard in the middle part of the decade.
“Going long on index investing has long been popular in the securities markets,” wrote a cheerful Will Acworth in the May 2005 issue of Futures Industry magazine. “Now it is coming into fashion in the futures world, and bringing a new source of liquidity to commodity futures contracts.”
That probably doesn’t make much sense to you now, and wouldn’t have made much sense to you in 2005. It did, however, make sense, back then, to the people who managed the great pools of money in this world—the pension funds, the funds belonging to trade unions, and the sovereign wealth funds, those utterly gigantic quasi-private pools of money run by foreign potentates, usually Middle Eastern states looking to do something with their oil profits. It meant someone was offering them a new place to put their money. A safe place. A profitable place.
Why not bet on something that people can’t do without—like food or gas or oil? What could be safer than that? As if people will ever stop buying gasoline! Or wheat! Hell, this is America. Motherfuckers be eating pasta and cran muffins by the metric ton for the next ten centuries! Look at the asses on people in this country. Just let them try to cut back on wheat, and sugar, and corn!
At least that’s what Goldman Sachs told its institutional investors back in 2005, in a pamphlet entitled Investing and Trading in the Goldman Sachs Commodities Index, given out mainly to pension funds and the like. Commodities like oil and gas, Goldman argued, would provide investors with “equity-like returns” while diversifying portfolios and therefore reducing risk. These investors were encouraged to make a “broadly-diversified, long-only, passive investment” in commodity indices.
But there were several major problems with this kind of thinking—i.e., the notion that the prices of oil and gas and wheat and soybeans were something worth investing in for the long term, the same way one might invest in stock.
For one thing, the whole concept of taking money from pension funds and dumping it long-term into the commodities market went completely against the spirit of the delicate physical hedger/speculator balance as envisioned by the 1936 law. The speculator was there, remember, to serve traders on both sides. He was supposed to buy corn from the grower when the cereal company wasn’t buying that day and sell corn to the cereal company when the farmer lost his crop to bugs or drought or whatever. In market language, he was supposed to “provide liquidity.”
The one thing he was not supposed to do was buy buttloads of corn and sit on it for twenty years at a time. This is not “providing liquidity.” This is actually the opposite of that. It’s hoarding.
When an investment banker coaxes a pension fund into the commodities markets, he’s usually not bringing it in for the short term. “Pension funds and other institutional investors have extremely long time horizons,” says Mike Masters of Masters Capital Management, who has been agitating against commodity speculation for years. He notes, for example, that the average duration of a pension fund’s portfolio is designed to match the average employee’s years until retirement. “Which could be twenty years, or more,” says Masters.
The other problem with index investing is that it’s “long only.” In the stock market, there are people betting both for and against stocks. But in commodities, nobody invests in prices going down. “Index speculators lean only in one direction—long—and they lean with all their might,” says Masters. Meaning they push prices only in one direction: up.
The other problem with index investing is that it brings tons of money into a market where people traditionally are extremely sensitive to the prices of individual goods. When you have ten cocoa growers and ten chocolate companies buying and selling back and forth a total of half a million dollars on the commodities markets, you’re going to get a pretty accurate price for cocoa. But if you add to the money put in by those twenty real traders $10 million from index speculators, it queers the whole deal. Because the speculators don’t really give a shit what the price is. They just want to buy $10 million worth of cocoa contracts and wait to see if the price goes up.
To use an example frequently offered by Masters, imagine if someone continually showed up at car dealerships and asked to buy $500,000 worth of cars. This mystery person doesn’t care how many cars, mind you, he just wants a half million bucks’ worth. Eventually, someone is going to sell that guy one car for $500,000. Put enough of those people out there visiting car dealerships, your car market is going to get very weird very quickly. Soon enough, the people who are coming into the dealership looking to buy cars they actually plan on driving are going to find that they’ve been priced out of the market.
An interesting side note to all of this: if you think about it logically, there are few reasons why anyone would want to invest in a rise in commodity prices over time. With better technology, the cost of harvesting and transporting commodities like wheat and corn is probably going to go down over time, or at the very least is going to hover near inflation, or below it. There are not many good reasons why prices in valued commodities would rise—and certainly very few reasons to expect that the prices of twenty-four different commodities would all rise over and above the rate of inflation over a certain period of time.
What all this means is that when money from index speculators pours into the commodities markets, it makes prices go up. In the stock markets, where again there is betting both for and against stocks (long and short betting), this would probably be a good thing. But in commodities, where almost all speculative money is betting long, betting on prices to go up, this is not a good thing—unless you’re one of the speculators. But chances are that’s not who you are in this drama. You are far more likely to be Priscilla Carillo or Robert Lukens, dealing with a sudden price hike for reasons you know nothing about.
“It’s one thing if you’re getting people to invest in IBM or something,” says McHugh, the natural gas futures trader. “But wheat and corn and soybeans … this stuff actually affects people’s lives.”
Anyway, from 2003 to July 2008, that moment when Priscilla started living in her car, the amount of money invested in commodity indices rose from $13 billion to $317 billion—a factor of twenty-five in a space of a little less than five years.
By an amazing coincidence, the prices of all twenty-five commodities listed on the S&P GSCI and the Dow-AIG indices rose sharply during that time. Not some of them, not all of them on the aggregate, but all of them individually and in total as well. The average price increase was 200 percent. Not one of these commodities saw a price decrease. What an extraordinarily lucky time for investors!
In and around Wall Street, there was no doubt what was going on. Everyone knew that the reason the price of commodities was rising had to do with all the new investor flows into the market. Citigroup in April 2008 called it a “Tidal Wave of Fund Flow.” Greenwich Associates a month later wrote: “The entry of new financial or speculative investors into global commodities markets is fueling the dramatic run-up in prices.”
And the top oil analyst at Goldman Sachs quietly conceded, in May 2008, that “without question the increased fund flow into commodities has boosted prices.”
One thing we know for sure is that the price increases had nothing to do with supply or demand. In fact, oil supply was at an all-time high, and demand was actually falling. In April 2008 the secretary-general of OPEC, a Libyan named Abdalla El-Badri, said flatly that “oil supply to the market is enough and high oil prices are not due to a shortage of crude.” The U.S. Energy Information Administration (EIA) agreed: its data showed that worldwide oil supply rose from 85.3 million barrels a day to 85.6 million from the first quarter to the second that year, and that world oil demand dropped from 86.4 million barrels a day to 85.2 million.
Not only that, but people in the business who understood these things knew that the supply of oil worldwide was about to increase. Two new oil fields in Saudi Arabia and another in Brazil were about to start dumping hundreds of thousands more barrels of oil per day into the market. Fadel Gheit, an analyst for Oppenheimer who has testified before Congress on the issue, says that he spoke personally with the secretary-general of OPEC back in 2005, who insisted that oil prices had to be higher for a very simple reason—increased security costs.
“He said to me, if you think that all these disruptions in Iraq and in the region … look, we haven’t had a single tanker attacked, and there are hundreds of them sailing out every day. That costs money, he said. A lot of money.”
So therefore, Gheit says, OPEC felt justified in raising the price of oil. To 45 dollars a barrel! At the height of the commodities boom, oil was trading for three times that amount.
“I mean, oil shouldn’t have been at sixty dollars, let alone a hundred and forty-nine,” Gheit says.
This was why there were no lines at the gas stations, no visible evidence of shortages. Despite what we were being told by both Barack Obama and John McCain, there was no actual lack of gasoline. There was nothing wrong with the oil supply.
But despite what Wall Street players were saying amongst themselves, the message to potential investors was very different. In fact, it still is. Banks like Goldman Sachs continually coaxed new investors into the commodities market by arguing that there would be major disruptions to the world oil supply that would cause oil prices to spike. In the beginning of 2008, Goldman’s chief oil analyst, Arjun Murti, called an “oracle of oil” by the New York Times, predicted a “super spike” in oil prices, forecasting a rise in price to two hundred dollars a barrel.
Despite the fact that there was absolutely no evidence that demand was rising or supply falling, Murti continually warned of disruptions to the world oil supply, even going so far as to broadcast the fact that he owned two hybrid cars, adding with a straight face: “One of the biggest challenges our country faces is its addiction to oil.”
This was a continuation of a theme Goldman had shamelessly pimped for years, that high prices were the fault of the piggish American consumer; in 2005 a Goldman analyst even wrote that we wouldn’t know when oil prices would fall until we knew “when American consumers will stop buying gas guzzling sport utility vehicles and instead seek fuel efficient alternatives.”
“Everything that Goldman cooked up or predicted, by hook or by crook, it happened,” Gheit says. “[Goldman and Morgan Stanley] pushed these prices up.”
All of these factors contributed to what would become a historic spike in gas prices in the summer of 2008. The press, when it bothered to cover the story at all, invariably attributed it to a smorgasbord of normal economic factors. The two most common culprits cited were the shaky dollar (investors nervous about keeping their holdings in U.S. dollars were, according to some, more likely to want to shift their holdings into commodities) and the increased worldwide demand for oil caused by the booming Chinese economy.
Both of these factors were real. But neither was any more significant than the massive inflow of speculative cash into the market.
The U.S. Department of Energy’s own statistics prove this to be the case. It was true, yes, that China was consuming more and more oil every year. The statistics show the Chinese appetite for oil did in fact increase over time:
YEAR    CONSUMPTION
(barrels per year) 
2002 1,883,660,777
2003 2,036,010,338
2004 2,349,681,577
2005 2,452,800,000
2006 2,654,750,989
2007 2,803,010,200
2008 2,948,835,000
If you add up the total increase between each of those years, i.e., the total increase in Chinese oil consumption over the five and a half years between the start of 2003 and the middle of 2008, it turns out to be just under a billion barrels—992,261,824, to be exact.
During the same time period, however, the increase in index speculator cash pouring into the commodities markets for petroleum products was almost exactly the same—speculators bought 918,966,932 barrels, according to the CFTC.
But it was almost impossible to find mention of this as a cause for the spike in gas prices anywhere in the American media, which at the time was focused on more important things, like the geographical proximity of Bill Ayers to Barack Obama, or whether Geraldine Ferraro was being racist or just stupid when she said that Obama would not be winning the nomination “if he were a white man.”
I was out there, covering the campaign, and what I remember was a lot of ginned-up anger between working-class Democrats (who supported Hillary) and yuppie Democrats (who supported Obama), a lot of anger emanating from female Hillary supporters (at a Hillary rally in Washington, DC, I saw two women tear an Obama sign away from a young girl and call her a “traitor”), and in general a lot of noise about things that, in retrospect, had nothing to do with anything at all.
While most of the country was talking about Reverend Wright and superdelegates, media coverage of the soaring gas prices was curiously nonspecific and unconvincing. The New York Times ran one of the first stories on high gas prices and specifically blamed the rise on “global oil demand,” which it called “the relentless driver behind higher prices.” That was at the end of February 2008, when oil hit what was then a record high of $100.88 a barrel.
A CNN story back in March 2008 called “Gasoline Price Spike Has Only Just Begun” told us that the reason for the surge was, well, because this is what always happens in between winter and summer:
The price of gasoline usually increases this time of year. Several factors contribute to the runup: Low refinery output due to maintenance, a switch from winter to pricier summer blends, and the looming high-demand summer driving season.
Politicians blamed the high prices on a variety of factors—the most ridiculous perhaps being Kentucky senator Mitch McConnell blaming high prices on an automatic gas tax instituted by his electoral opponent, Bruce Lunsford, in the Kentucky state legislature thirty years before.
By late spring and early summer the stories about the gas spike were more common, but quite often they seldom even mentioned a cause for the price disruptions. In most cases it was simply assumed that the high prices were caused by too much consumption, that Americans were going to have to change their habits if they wanted to survive the high costs.
When gas soared to over four dollars a gallon in May, USA Today ran a story called “Gas Prices Rattle Americans” that talked about the sobering—perhaps even positive—effect the high prices had had on the national psyche:
The $4 mark, compounded by a sagging economy, could be a tipping point that spurs people to make permanent lifestyle changes to reduce dependence on foreign oil and help the environment, says Steve Reich, a program director at the Center for Urban Transportation Research at the University of South Florida.
“This is a more significant shift in behavior than I’ve seen through other fluctuations in gasoline prices,” he says. “People are starting to understand that this resource … is not something to be taken for granted or wasted.”
There is nothing new about the political press in America getting a story wrong, especially a financial story. But what was unique about the gas spike story was that it was an issue that profoundly affected the lives of virtually everyone in the country, was talked about heatedly by both parties and by pundits in the midst of a presidential election year, and yet as far and as wide as you search, you simply will not find much of a mention anywhere about the influx of new commodity index money as a potential cause of this crisis.
And you barely heard it on the Hill. Several different congressional committees decided to hold hearings on the high gas prices, including Joe Lieberman’s Homeland Security and Governmental Affairs Committee and the House Agriculture Subcommittee on General Farm Commodities and Risk Management. At these hearings there were some voices, like those of Mike Masters and Fadel Gheit, who tried to talk about the real causes of the crisis, but the headlines generally followed the pronouncements of the CFTC’s chief economist, Jeffrey Harris, who said that the whole problem stemmed from normal supply and demand issues.
In written testimony before both committees in May 2008, Harris convincingly dismissed the notion that speculators played any role in the high prices.
“All the data modeling and analysis we have done to date indicates there is little evidence to suggest that prices are being systematically driven by speculators in these markets,” he said. “Simply put, the economic data shows that overall commodity price levels … are being driven by powerful fundamental economic forces and the laws of supply and demand.” He cited, as evidence of “fundamentals,” the increased demand from emerging markets, decreased supply due to “weather or geopolitical events,” and a weakened dollar.
The government’s chief economist on the matter blamed the oil spike on the weather!
Even weirder was the fact that Harris was apparently so determined to keep any suggestion that speculation played a role in the problem out of the hearings, he even called up at least one witness to try to get him to change his mind.
“This guy tried to shake me down!” says Gheit, still incredulous at the story. He recounts a bizarre phone call in which Harris called up the Oppenheimer analyst, put him on speakerphone so that another colleague could listen in, and proceeded to tell Gheit that he had no evidence that speculation played a role in the crisis and that maybe he should consider this before he testified.
Gheit, who actually thought the call was coming from a staffer in Senator Carl Levin’s office at first, found himself wondering what the hell was going on. “I said, ‘Whose side are you on?’ ” As the phone call progressed, Gheit began to consider other possibilities. “I was sure it was someone from Goldman Sachs or Morgan Stanley. That’s how weird it was.”
It would be a full year before the CFTC under the Obama administration would admit that Harris’s analysis was based on “deeply flawed data” and that speculators played a major role in the crisis.
But by then it was too late to stop what happened in 2008. Oil shot up like a rocket, hitting an incredible high of $149 a barrel in July 2008, taking with it prices of all the other commodities on the various indices. Food prices soared along with energy prices. According to some estimates by international relief agencies—estimates that did not blame commodity speculation for the problem, incidentally—some 100 million people joined the ranks of the hungry that summer worldwide, because of rising food prices.
Then it all went bust, as it had to, eventually. The bubble burst and oil prices plummeted along with the prices of other commodities. By December, oil was trading at $33.
And then the process started all over again.
The oil bubble, taking place as it did smack-dab in the middle of a feverish presidential campaign, was really a textbook example of how our national electoral politics and our media watchdogs are inadequate to address even the most glaring emergencies.
When you have a system with an electorate divided up into two fiercely warring tribes, each determined to blame the country’s problems on the other, it will often be next to impossible to get anyone to even pay attention to a problem that is not the fault of one or the other group. Moreover it is incredibly easy to shift blame for the problem to one of those groups, or to both of them, if you know how to play things right—which happened over and over again in this case.
Throughout the spike, America accepted almost without question the notion that our problems were self-inflicted, caused by our obscene consumption of oil. It was a storyline that appealed in different ways to the prejudices of both of the two main political demographics.
It naturally appealed to the left, which for entirely logical reasons saw an evil in America’s piggish dependence upon petroleum and had just spent five long years protesting an invasion of Iraq seemingly driven by our political elite’s insatiable thirst for oil.
Oil consumption for progressives was, in fact, at the heart of two of their core protest issues: America’s rapacious militarism and its environmental irresponsibility. America had bowed out of Kyoto. We had supported dictatorships in Saudi Arabia and Kuwait and (once upon a time) Iran in our hunger for oil and had toppled or tried to topple regimes in oil-rich countries like Iraq and Venezuela for seemingly the same reason.
More to the point, America was the birthplace of the SUV—the evil symbol of American oil gluttony that in one conveniently boxy package tied together all of the symbolic frustrations of the American progressive. It had a vaguely militaristic symbolism (the domestic Hummer was a modified military vehicle). It was driven unashamedly by big-assed conservatives and their teeming white-trash families who openly thumbed their noses at environmental concerns—witness the bumper stickers often seen plastered to the hugest SUV brands, with messages like “I’ll Give Up My SUV When Al Gore Gives Up His Limo” and “Hybrids Are for Pussies” and “My SUV Can Beat Up Your Prius.”
The last sticker had a particular sting, given that just as driving a big gas-guzzling SUV was a mode of political expression for conservatives, driving hybrids was one of the easiest ways for progressives to “have an impact” on the causes they cared about. The San Francisco political activist Robert Lind in the early part of the decade had encouraged opponents of SUVs and people who drove energy-efficient vehicles to download bumper stickers that read, “I’m Changing the Climate! Ask Me How!” He was followed by the Evangelical Environmental Network, which started its “What Would Jesus Drive?” bumper sticker campaign in 2002, which prompted a 60 Minutes story about the anti-SUV backlash.
In short, the idea that Americans consumed too much oil had enormous traction with American progressives, among other things because it happened to be true.
So it wasn’t at all hard to sell Democratic voters on the notion that the oil spike was related to overconsumption. In fact, the whole consumption issue had enormous symbolic import for Democratic voters, and it wasn’t a surprise when presidential candidates started working vague references to overconsumption—divorced, of course, from specific policy proposals—into speeches that were supposedly addressing the gas price issue. When Obama went to Oregon in May 2008, right in the middle of the oil bubble, he specifically referenced SUVs, as I would hear him do over and over again that summer. “We can’t drive our SUVs and eat as much as we want and keep our homes on seventy-two degrees at all times” was one of his favorite lines.
He consistently got cheers with that line, and to me it seemed obvious that these were angry cheers, cheers directed at the “other side,” who consumed as much as they wanted and thought the Prius was for fags.
Meanwhile conservatives bought the supply-disruption storyline because it fit in seamlessly with the story of capitalist efficiency thwarted by regulators, tree-huggers, and OPEC. An oil spike caused by shortages justified the Iraq invasion and put the blame on environmentalists who blocked drilling in the Alaska National Wildlife Refuge and the outer continental shelf and those other dickwads who were always sacrificing American jobs on the altar of the spotted owl.
Those same SUVs that had once been bedecked with bumper stickers justifying the vehicle itself were, in the summer of 2008, starting to be plastered with new stickers that saw their owners’ right to consume as a protest cause. “Drill Here, Drill Now!” was one sticker we saw a lot that summer.
What made this important was the fact that the new Obama administration really changed very little when it came to the problem of index speculation. The public was never focused on it, not really. When Obama nominated the new CFTC chief, Gary Gensler, a former Goldman executive and lieutenant to Bob Rubin who had been partially responsible for deregulating the derivatives market in 2000, few people even blinked.
This was news for specialists and experts in the industry, of course (Gheit compared putting Gensler in charge of the CFTC to “making a former legalization advocate the drug czar”), but America is no longer a country that cares about experts. In fact, it hates experts. If you can’t fit a story into the culture-war storyline in ten seconds or less, it dies.
That’s what happened to the oil speculation problem. Although the CFTC would finally, in August 2008, admit that speculation was a serious issue, and Gensler himself would demonstrate what appears to be a real conversion on the core problems, the root causes remained basically unchanged—so much so that at this writing, oil prices are once again soaring, once again thanks to prodding from the same old cast of villains.
In a weekly newsletter distributed to its own investors only, given to me by a source in the industry, Goldman Sachs in October 2009 repeated its classic “oil is going up because of the fundamentals” act.
“We believe oil prices are poised to move higher, with the catalyst likely to be evidence of rebounding diesel demand,” the company wrote. “The normal Christmas retail seasonal effect suggests we should see a rebound in diesel demand in mid to late October to restock shelves.” The newsletter continued later: “Crude oil prices have been both volatile and range bound, but poised to break out.”
That particular analysis memo was released on a Monday (October 19), just after oil had crept back above $70 a barrel for the first time in more than a year. By that Wednesday the price of crude had gone up seven whole dollars. By Friday, October 23, it was closing at $81.19 a barrel.
What is interesting about this Goldman memo is not how obviously full of shit it is, but the disclaimer that is hidden in the very back of it.
On the very last page of the newsletter, in tiny print, Goldman wrote, under the heading “General Disclosures,” the following:
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions reflected in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy and sell, the securities or derivatives, if any, referred to in this research.
Translated into English, Goldman can take your investment order and do anything they want with it, no matter how conflicted they might be. They might be recommending that you buy oil futures for “fundamental reasons,” like the holiday shopping season or some such bullshit, but in the fine print they admit that, “from time to time,” they might have long positions themselves as they make that recommendation.
Here, in this one document, is laid bare the whole basic stratagem behind the oil bubble. The big investment banks convince the ordinary investor that oil prices are going up because of “fundamentals,” then they get all that money coming in, at which point their predictions about prices going up actually come true. Then they ride in with their own bets and make a fortune, front-running the massive flows of capital pouring into the market. Meanwhile, we all end up paying $4.50 a gallon for gas, just so these assholes can make a few bucks trading on what amounts to inside information.
“The reality is that if Goldman is successful enough marketing commodity index swaps to institutional clients they can make their research self-fulfilling,” says one commodities trader. “Because those money flows that Goldman’s marketing efforts create can move prices by themselves.”
This story is the ultimate example of America’s biggest political problem. We no longer have the attention span to deal with any twenty-first-century crisis. We live in an economy that is immensely complex and we are completely at the mercy of the small group of people who understand it—who incidentally often happen to be the same people who built these wildly complex economic systems. We have to trust these people to do the right thing, but we can’t, because, well, they’re scum. Which is kind of a big problem, when you think about it.
And here’s the punch line: bubbles like the one we saw in 2008 are only one-half of the oil-price scam. Because taking your money through the indirect taxation of high energy and food prices, and reducing you to beggary as you struggle to pay for them, is only half of the job. What these clowns did with all that cash they siphoned from you and what they did to take advantage of your newfound desperation is the other end of the story.