Sam Siegel and Vincent Kosuga were an unlikely duo. Siegel owned cold-storage facilities on the outskirts of Chicago, which held and distributed, among other things, onions delivered by farmers from around the country. Kosuga was a boisterous, larger-than-life farmer and amateur chef from the Catskills who grew onions that would find their way to Siegel’s warehouses. The man could cook just about anything as long as the recipe called for onions. Perhaps his greatest concoction, however, was the scheme he cooked up while trading onions on the floor of the Chicago Mercantile Exchange (the “Merc”) with his storage partner-turned accomplice, Sam Siegel.
Both men made good money hedging their onion farming and gathering operations by trading onion futures in the 1950s at the Merc. Like most of the men they traded alongside, Siegel and Kosuga possessed iron constitutions for risk. To outsiders theirs was a bizarre world filled with a ragtag bunch of gamblers who spoke furiously with their hands, called one another by their trading nicknames and kept mostly to themselves. It was an insular existence. Then one day Siegel and Kosuga’s actvities drew an unwelcome light on the clandestine world of commodities trading and prompted Congress to blacklist onions from trading on the exchanges.
Here’s how it went down. Because Kosuga controlled a large portion of onion growth and both men had the capacity to store excess supply along with the financial wherewithal to purchase contracts for delivery from other onion growers, they effectively controlled the price when the product came to market. It was a classic “corner.” When the harvest came in 1956, they bet against the same growers they contracted with by placing sell orders in the Merc while simultaneously dumping their excess inventory, thereby flooding the market with onions and driving prices into the ground. In an instant, Siegel and Kosuga made millions while many farmers went broke, buyers were left bewildered and onions were rendered worthless.
Their plan worked so well that President Dwight D. Eisenhower signed the Onions Futures Act in 1958 to prevent the trading of onions forever. Onions, it seemed, were too important to allow unscrupulous speculators to monkey with.
By and large the commodities markets were extraordinary examples of self-regulation. Instances of malfeasance such as the corner perpetrated by Siegel and Kosuga were typically rooted out quickly. Volatility might have been a trader’s best friend, but fraud was never tolerated. It was somewhat of a code of honor, the trader’s ethos. The self-policing activities at the Merc or their crosstown rivals at the Chicago Board of Trade caught the eye of free market ideologues like the economist Milton Friedman who would argue in the latter half of the 20th century that free markets were pure and without boundaries; that any outside influence, particularly governmental, would dilute and corrupt the process.
Friedman’s work would not only earn him a Nobel Prize in Economics, it would inspire a generation of free-market enthusiasts such as Alan Greenspan, Federal Reserve chairman, and Robert Rubin, Secretary of the Treasury. But it was Friedman’s friend and protégé, Leo Melamed, the egotistical and charismatic head of the Merc, who would change the nature of trading more than any other person in modern history.
In 1972 Melamed established the International Monetary Market (IMM) within the Merc to facilitate the trading of currencies afer President Richard Nixon repealed Bretton-Woods, which removed the United States from the gold standard and allowed world currencies to float. In short order Chicago would no longer be known as the “second city” when it came to trading. The IMM caught fire and opened the possibility of trading futures on just about anything. Everything, that is, except onions.
Without historical context, it would be impossible to comprehend why President Barack Obama isn’t doing more to contain the ravenous behavior of market traders. There are really two overarching reasons why this is the case. First, to understand these markets is to appreciate how institutionalized and endemic trading is to Chicago culture. Then-Illinois Sen. Obama, for example, was one of the first to congratulate the aging Melamed on the historic merger of the Merc and the Board of Trade to create the behemoth CME Group. The political and financial elite in Chicago would sooner give up the Cubs rather than commodities trading.
The second, more obvious reason is that financial markets today dwarf the federal government. Trading futures on commodities such as wheat, flax, onions and potatoes are quaint reminders of a bygone era. Images of bleary-eyed traders crammed into pits, throwing paper on the ground and making quizzical gestures in the air belong on the walls of a museum.
The marriage of deregulation and technology over the past several decades has birthed franken-markets that influence nearly every aspect of our daily lives. From controlling pensions and mortgages to home-heating oil and bread, traders are pagan gods and we are their minions. Although markets today are bigger and faster, the underlying truth to the trading game is simple, proven and unwavering:
For every winner, there is a loser.
In today’s world Siegel and Kosuga are Goldman Sachs and Morgan Stanley. Except these guys won’t be caught because they changed the rules. They control the markets, the exchanges, the products that are traded and the currencies we use. They have the ability to name their price then bet against their own recommendations. It’s the perfect modern corner. And it has the markets behaving badly and acting counter-intuitively.
It is why exchanges no longer react to normal market forces like supply and demand, weather patterns and monetary policy. It is why oil prices remain high during a recessionary period and weak demand, why the dollar has retained relative strength despite “quantitative easing,” and why food prices remain out of reach for people in developing nations. It is why deregulation failed the public and enriched companies like Goldman and Morgan.
These companies do more than move the markets. They move economies. Nixon may have started the ball rolling and Obama might be powerless to control it today, but every Congress and president in between have been complicit in the world’s greatest shell game that moves money from around the globe into the accounts of just a handful of firms.
Deregulation fanatics can scream about the government all they want but they’re ignoring the fact that the government lost control of the country long ago. All the proof you need is in Chi-Town. Fifty years ago onions were considered too crucial to the public good for traders to bet on. Today, everything from crude oil to the almighty dollar is on the craps table and traders are using loaded dice.