NEW FOX, SAME HENHOUSE

Considering who is about to be in charge of administering LIBOR, the Obama Administration and U.S. regulators might want to pay close attention to how the process unfolds.

How Wall Street Cornered the Market
by Taking Control of the World’s
Most Important Financial Benchmark

Twitter: @jedmorey

There is a scene in the Godfather II when the Hyman Roth character, played by Lee Strasberg, admonishes Al Pacino’s Michael Corleone over the death of the character credited with building Las Vegas out of a “desert stopover for GIs.”

Roth fixes his steely gaze angrily on Corleone and says, “That kid’s name was Moe Greene and the city he invented was Las Vegas. And there isn’t even a plaque or a signpost or a statue of him in that town.”

The same could be said of Thomas Jasper, the architect of the biggest gambling venture ever invented: the swaps market.

In her book The Futures, Forbes writer Emily Lambert describes how in 1981 Salomon Brothers “pulled an investment banker named Thomas Jasper out of a cloistered office and set him up on Salomon’s trading floor with its loud, swearing, cigar-smoking men.” Jasper’s job was to figure out how to turn a new type of banking agreement called an interest rate “swap” into a contract that could be traded on an exchange much like a commodity. By 1987 Salomon’s new product was ready for market, and as Lambert notes, “by that spring, there were $35 billion worth of bond futures contracts open at the Chicago Board of Trade, and there were $1 trillion worth of outstanding swaps transactions.”

For Wall Street this was like graduating instantly from slots to craps.

Twenty years later, unregulated swaps would be at the heart of the global financial meltdown and the very banks responsible for creating them would be considered “too big to fail.” A lethal mixture of deregulation, manipulation and greed would transform swaps—a type of investment known as a “derivative” in which two parties exchange risk with one another in a negotiated agreement—into opaque mega investments that many traded but few understood.

Today, the global derivatives market is estimated to be somewhere around $1.2 quadrillion—more than 14 times larger than the world economy.

After the crash in 2008, the whole world became acquainted with these investments and some of the toxic assets they were based on. Yet since the crash, and despite the best attempts on the part of regulators to get their arms around the world of derivatives, surprisingly little has changed in the way they are packaged, sold and regulated.

By staying one step ahead of regulators, banks have continued to rake in historic profits. Bart Chilton, a commissioner at the Commodity Futures and Trading Commission (CFTC), is one of the U.S. regulators charged with implementing rules that would curb risky speculative behavior on the part of banks and protect American consumers. He expressed his irritation in an interview with the Press, saying, “The financial sector has made more profits every single quarter since the last quarter of 2008 than any sector of the economy by like a hundred billion dollars. So they crash the economy and still make more than anyone else.”

Chilton points to the aggressive bank lobby against regulators as one major impediment to reform. “They have fuel-injected litigation against regulators,” he laments. “There are ten financial sector lobbyists for every single member of the House and Senate.”

Despite this frustration, Chilton believes in the importance of speculators “in determining what the prices of things are, whether it’s a home mortgage or a gallon of milk.” Instead of squarely blaming the banks, he believes the question “is whether or not government has allowed too much leeway so that the markets have simply become a playground for speculators to roam and romp.”

One of the most important determinants in pricing everything from mortgages to the multi-trillion-dollar derivatives market is the London inter-bank offered rate, better known as LIBOR. Barclays, the British banking giant, thrust LIBOR into the headlines last year when it was discovered that it was among a handful of banks found to be manipulating daily rates for its own benefit. The scandal rocked the banking sector and sent European regulators searching for a replacement to LIBOR or, at the very least, a new third-party administrator.

Charting LIBOR’s new path was left to Martin Wheatley, who was head of the Financial Services Authority in the U.K. when the scandal broke. The recommendations, known as the Wheatley Review, included the formation of a panel charged with finding a new host for LIBOR that would restore confidence to the market and ensure transparency in the rate-setting process.

In a twist even Michael Corleone would appreciate, the panel chose Wall Street.

LIBOR: “A huge, hairy, honking deal.”
Beginning in 2008, rumors began to circulate in the financial world that several of the London banks were involved in influencing the daily posted LIBOR rates. During a 2012 House Financial Services Committee investigation into the matter, Treasury Secretary Timothy Geithner admitted to hearing the rumors while he served as head of the Federal Reserve Bank of New York. In his testimony, Geithner said he attempted to warn U.K. and U.S. regulators but assumed they would “take responsibility for fixing this.”

What the British and American governments knew and when they knew it unfortunately matters little at this juncture, as both have since levied financial penalties on the banks involved that amount to a slap on the wrist. What matters now is how rates are set going forward to ensure some degree of integrity. To understand how the Wheatley Review panel merely chose a new fox to guard the world’s financial henhouse, it’s important to understand how LIBOR is calculated and how much is riding on it.

LIBOR rates are determined on a daily basis. According to an Economist article that details the scandal, “The dollar rate is fixed each day by taking estimates from a panel, currently comprising 18 banks, of what they think they would have to pay to borrow if they needed money. The top four and bottom four estimates are then discarded, and LIBOR is the average of those left.”

Rates were submitted to the British Bankers Association (BBA), a nonprofit third-party administrator responsible for gathering and posting the data. In theory, the arms-length distance of a disinterested third party provided enough oversight and assurances to the market that rates were being determined fairly. Only the rates weren’t based upon actual market rates. Rather, they were estimates supplied by traders from Europe’s largest banks and therefore surprisingly susceptible to manipulation and, as it turns out, collusion.

Traders were caught periodically manipulating these estimates in order to gain a trading advantage in the market and maximize profit on recent transactions. Moreover, because LIBOR is an indication of the perceived health of a financial institution, bankers had an added incentive to suppress rates to artificially illustrate confidence among their colleagues. In short, everyone was in on it. Because of the global credit crunch, few banks were actually lending large sums to other banks since both sides had cheap and easy access to government dollars to provide market liquidity. This reality made LIBOR even less realistic.

Former Barclays president Bob Diamond initially responded to the scandal by admitting that while manipulation occurred, it didn’t happen “on the majority of days.” The Economist said Diamond’s response was “rather like an adulterer saying that he was faithful on most days.” Diamond subsequently resigned and so far three U.K. traders, Tom Hayes, Terry Farr and James Gilmour, were swept up in the LIBOR price-fixing scandal. According to the Financial Times, “Mr. Hayes, Mr. Farr and Mr. Gilmour are the only individuals to face U.K. criminal action to date in a global scandal that has seen three banks pay a combined $2.6bn in fines for attempting to manipulate interbank lending rates.”

Many bankers have distanced themselves from the importance of the scandal by calling it a victimless crime. Bart Chilton had a choice expletive for this attitude, and then added, “If it’s a home loan mortgage, or a small business loan or a credit card bill, if you buy an automobile or if you have a student loan, about everything you purchase on credit is impacted by LIBOR. It’s a huge, hairy, honking deal. If somebody says it’s a victimless crime, I bet you it’s a banker.”

Michael Greenberger, a professor at the University of Maryland, has been an outspoken critic of the way derivatives have been regulated for several years. (The Press first spoke with Greenberger for a 2008 cover story on the price manipulation of crude oil.) He weighed in on the Obama Administration’s reaction to the LIBOR price-fixing scandal saying, “This Justice Department is settling these LIBOR cases for what you and I would consider to be traffic tickets.”

Considering who is about to be in charge of administering LIBOR, the Obama Administration and U.S. regulators might want to pay close attention to how the process unfolds.

The Wheatley Review panel chose NYSE Euronext to step into the BBA’s role as administrator of LIBOR. On the surface, choosing the members of the New York Stock Exchange—one of the oldest and most trusted brand names in global finance—to oversee rate-setting seems like sound concept. Only the NYSE isn’t the clubby, self-governed body of individual members it once was. Today the exchange is a publicly traded, for-profit business whose shareholders include none other than the world’s biggest bank-holding companies.

“They’re moving from a disinterested nonprofit that couldn’t do the job,” exclaims Greenberger, “to an interested for-profit. There’ll be less transparency I bet in the way that rates are set.”

Chilton is equally apprehensive at the idea of the transition: “When there’s a profit motive, I think it’s always suspect. That’s why key benchmark rates like LIBOR in my view should be monitored or overseen by either a government entity, a quasi-government entity or a not-for-profit third party that doesn’t have a vested interest in what the rates should be.”

How LIBOR will be determined in the future is still being hashed out. A spokesperson for NYSE Euronext declined to answer the Press’ questions on the record, instead directing us to their standard press release. Most observers agree, however, that the days of aggregating estimates should be a thing of the past.

“These benchmarks need to be based upon actual trades,” says Chilton, “not a poll of what the money movers believe it should be.”
As far as the bankers’ claims that price-fixing was a victimless crime, there are several municipalities that beg to disagree. The cities of Baltimore and Philadelphia, among others, have filed suit against several banks claiming severe financial injury due to LIBOR manipulation. “That’s the hidden story of Detroit,” says Greenberger. “Detroit got clobbered in the swaps market.”

Greenberger also warns that “pensions are still in this market.” That’s a scary proposition considering the underlying risk and leverage that still exists off bank balance sheets.

Eric Sumberg, the spokesman for the New York State Common Retirement Fund—the nation’s third-largest pension—says State Comptroller Tom DiNapoli is watching the LIBOR transition closely.

“There have been some calls for moving from LIBOR’s banker’s poll to a rate-setting process that is more directly based on a broader universe of transactions and on actual market activity,” Sumberg wrote the Press in response to our inquiries. “Such a change over time could have the potential to improve transparency and integrity in rate-setting, but potential details of any such process have not yet emerged. We will continue to monitor developments in this area.”

Yet even when the proposed rules are made public and the administration of LIBOR has fully transitioned, NYSE Euronext will still only be the titular head of LIBOR. The real force behind the market is neither in London nor New York. Atlanta, home of the Intercontinental Exchange (ICE), is the new financial capital of the world.

ICE in his veins
Many of the toxic assets the public became aware of after the 2008 crash have worked their way through the system and been mostly written off by many of the largest financial institutions. Much of the credit for the industry’s stunning recovery belongs to the U.S. Federal Reserve’s low interest rate policy and aggressive liquidity practices known as quantitative easing. Much like the exuberance that preceded both the tech-bubble crash of 2000 and the mortgage-backed securities crash of 2008, a capital bubble established by the Federal Reserve is artificially propping up the market.

Hedge funds and bank holding companies fueled their own recovery by using deposits, borrowed federal funds and leverage to drive the equity market to historic highs and post speculative profits in the derivatives market. And while the financial sector was scrambling to regain its footing, regulators in Washington, D.C., attempted to keep pace by passing reforms to prevent the next global financial crisis should the Federal Reserve change course and remove liquidity from the system while simultaneously allowing interest rates to gradually climb.

In 2010, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act in an effort to curb speculation and create greater oversight in the financial sector. It was a monumental legislative task that has proven even more difficult to translate into regulatory policy. Regulators at the Securities and Exchange Commission and the Commodity Futures Trading Commission have been working against bank lobbyists and the fact that the markets are global and U.S. regulatory authority only reaches so far.

To complicate matters further, banks have been busy changing the rules of engagement by shifting markets from classic bilateral swaps between parties to futures contracts, which are more standardized agreements traded on exchanges and therefore subject to greater regulatory scrutiny. In theory, exchange-traded derivatives will provide the transparency that regulators seek. In practice, however, this capital shift might simply move risky investments from the frying pan into the fire, as futures exchanges are global, meaning U.S. regulators must rely heavily on the voluntary cooperation of foreign exchanges.

The one person set to benefit from this capital shift is Jeffrey Sprecher, founding chairman of the ICE. Though not a household name outside of investment circles, Sprecher has emerged as the unlikely king of the global trading exchange industry. In little more than a decade, he helped transform the commodities market from a $10 billion market to more than a half a trillion dollars, with the ICE being a huge beneficiary.

The growth of trading on the ICE has been so explosive Sprecher is about to close on a deal to purchase the vaunted NYSE Euronext for $8.2 billion. The deal has already been approved by European regulators and awaits final approval in the U.S. Once completed, Sprecher will not only run the world’s most famous trading exchange; he will also extend his reach into the global derivatives market as the acquisition includes NYSE Liffe, one of the world’s largest derivatives trading desks.

Nathaniel Popper’s front-page story in the business section of The New York Times on Jan. 20, 2013 pulls the veil back on Sprecher, the man, and describes how he grew a little-known Southern exchange into a juggernaut capable of purchasing NYSE. As Popper himself writes, “It sounds preposterous.” Given the inevitable capital shift sparked by U.S. regulators, Popper also notes that “Wall Street firms will have to move trading in many opaque financial products to exchanges, and ICE is in a perfect position to profit.”
Popper’s piece brings forward a story that few people know. Most have no idea that trading exchanges are even for-profit businesses.

And while he does a worthy job demystifying the business of exchanges, he overlooks the planet-sized regulatory loopholes that allowed Sprecher to convert a small energy futures trading exchange into a global exchange that is buying the most famous trading platform on Earth.

To call Sprecher an opportunist would be technically accurate but cheap and intellectually dishonest. He understood the inevitability of electronic trading and the superior potential it held. But there’s a danger in spreading the accepted mythology of Jeff Sprecher and his plucky exchange. Behind his story is the familiar invisible hand of Wall Street.

“The reason Sprecher has been so successful is he’s really representing all the major ‘too big to fail’ banks,” says Greenberger. “And they want him to succeed, and therefore he is succeeding.”

Missing from the brief history of the ICE are the loopholes that gave it life and the ability to flourish beyond imagination. It was the oft-spoken of— but rarely understood—“Enron Loophole” that gave corporations the legal right to trade energy futures on exchanges such as the ICE even if the corporation itself was in the business of energy. The second loophole was a maneuver by the Bush Administration that granted the ICE foreign status as an exchange despite its being based in Atlanta. This initiated a massive shift of trading dollars, and influx of new ones, into the ICE for one reason: This singular move placed the ICE outside the purview of U.S. regulators like Chilton at the Commodities Futures and Trading Commission (CFTC). Essentially, corporations could now trade energy futures electronically through the ICE without oversight or disclosure.

Moreover, the mere fact that the founding investors of the ICE are some of the world’s largest bank-holding companies, Morgan Stanley and Goldman Sachs in particular, speaks to how little transparency there truly is.

This in no way takes away from Sprecher’s genius as a businessman. It simply illustrates how willfully ignorant we are to the business of Wall Street and therefore how frightfully far away we are from properly regulating it. Everything Sprecher has done is legal and ethical, to the extent there is an ethos on Wall Street. Where all of this hits home for the consumer is at places like the gas pump and the supermarket.

Now it’s easier to place the LIBOR issue in its proper context. Almost every “too big to fail” bank has a significant ownership stake in both the ICE and NYSE Euronext, soon to be one entity. This combined entity will also soon control LIBOR, the world’s largest rate-setting mechanism. In trader’s parlance, this would be considered the perfect “corner.”

But wait, there’s more. In the attempt to rein in speculation and manage risk in the marketplace, Dodd-Frank might have unintentionally become the gift that keeps on giving—to Sprecher.

The Future of Futures
The sheer size and complexity of the derivatives market overwhelm even the most interested parties—including Congress, regulators and bankers themselves—leaving average citizens utterly dumbfounded and sidelined. It’s little wonder. Banks that were too big to fail in 2008 are bigger today in 2013. The vast majority of the much-ballyhooed Dodd-Frank regulations have yet to take effect, and bank leverage is back at pre-crash levels.

A former trader who worked in both New York and London recently told me, “At the end of the day, this market is running on the [Federal Reserve]. Once they pull out it’s all over. Cheap money, loads of people making loads of money, but no lessons learned.”
Derivatives themselves aren’t nearly as difficult to understand as the markets they trade in. They are essentially risk transfer agreements between two parties, a way to hedge investments. The word ‘derivative’ refers to the fact that the agreement derives value from other investments: a bet as to how the original investment would perform. It’s helpful to once again employ the casino analogy.

Ten random players approach the roulette table and lay down $100 worth of chips on various numbers. Each individual gambler is making a bet, or an investment, collectively totaling $1,000.

Now imagine that another gambler watching the action on the roulette table calls his or her bookie and places a bet on the outcome of their total wagers when the wheel stops spinning. Having sized up the situation, the gambler predicts that overall this group will win and walk away with $1,100. But in order for this bet to be placed, someone else has to take the action and bet the group will lose $100, leaving them with $900. Before the ball drops on the number, the bookie connects the two outside gamblers and creates a new bet. This bet functions as the derivative investment because even though they’re not actually playing the game, they have a stake in the outcome.

In the real world of investing, the bookie is a trader and the gambler taking the action from the outside is a speculator. Sounds nefarious, but in reality, these transactions are essential to providing market stability.

“If we didn’t have speculators,” says Chilton, the CFTC commissioner, “consumers would pay disproportionate prices.”
There are three classic types of derivatives, all of which Chilton and the CFTC have been trying to rein in well before the crash introduced the world to this type of investment. All three involve counterparties, which trade these investments either directly or through exchanges.

But the differences between the three types of derivatives are diminishing. The first type of derivative is commonly referred to as a “swap.” This is where two parties exchange risk with one another in a negotiated agreement. In the United States, these have traditionally been deals between banks that fall under the purview of the SEC. The other two types of derivatives, futures and cleared derivatives, are negotiated similarly but must be listed and cleared on exchanges.

The CFTC and other regulators have long argued that these investments are similar in nature and should therefore be consistently regulated with complete transparency. With the exception of swaps, the investment created at Salomon Brothers in the 1980s, this was historically the case. But despite the similarity between swaps and other types of cleared derivatives, regulators allowed swaps to be treated as banking instruments that were held “off balance sheet.” Over the next two decades a flurry of deregulation and the growth of global trading reduced the transparency of derivatives trading and increased the size of the market dramatically.

The Dodd-Frank regulations were designed to put an end to this practice by requiring anyone who deals in large amounts of swaps to register as a swaps dealer and clear their trades through an exchange. Yet CNBC’s John Carney believes the new swaps regulations have already created a “flight to futures” from swaps, an unintended consequence of Dodd-Frank that will end up with a “world with less collateral and less capital, less transparency, less investor protection, more concentration of risk, and a huge unanticipated market transformation.”

In other words, the ICE will likely be the greatest beneficiary of Dodd-Frank.

Nevertheless, Chilton believes that there will still be “trillions, tens of trillions if not hundreds of trillions of swaps that will be traded in the U.S. and worldwide that will be regulated and have the light of day cast upon them.”

For his part, Greenberger agrees U.S. regulators are beginning to get a handle on the markets but thinks inordinate risk is still present in the market. He calls the original Dodd-Frank a “Rube Goldberg system” that was “prospective in nature. There’s still trillions of dollars of swaps that are operating in an unregulated environment.”

The world will have to hold its breath until these unregulated swaps run their course and settle in the global marketplace. Intelligent reforms such as margin and capital requirements, position limits and cross-border coordination with respect to regulation are indeed around the corner. These reforms essentially mandate that everyone involved in trading these agreements has enough money to cover potential losses and plays by the same set of rules.

“Ultimately we will have position limits,” Chilton believes. “I would be surprised if they weren’t in place by the end of the year.”
Greenberger also believes the world will begin to recognize universal standards, saying: “The CFTC has made it clear that for futures the foreign exchanges have to comply with U.S. rules.”

Even still, he worries that “this international guidance is a roadmap for banks to avoid Dodd Frank. Just trade in foreign subsidiaries.”
Chilton takes a more sanguine view on immediate concerns such as transparency, working with his European counterparts and the future of LIBOR, but he worries more about the things he cannot see.

“I feel like we’re going to get things done on capital requirements and on cross-border stuff so that other regulators come to where we are,” says Chilton. “But there’s a bunch of new things that are around the corner that we can’t see.”

He cites high-speed trading computers that he calls “cheetah traders” as an example of the unknown. “The cheetah traders, the high-frequency traders, are proliferating. They’re 30 to 50 percent of markets on average but during feeding frenzy time, cheetahs can be up to 70 or 80 percent of the market. There’s not one single word in the Dodd Frank legislation that deals with high-frequency trading. Not one word.”

Once again, pulling the strings behind this unseen phenomenon is Sprecher, the man responsible for making high-frequency trading what it is today.

Thomas Jasper will likely never get that plaque for inventing the investment world’s biggest game of chance. On a positive note, however, he’s alive, well and wealthy, unlike Moe Greene, who infamously took a bullet through the eye. But there are better-than-even odds that a statue of Jeff Sprecher will someday be erected on Wall Street. Or, at the very least, downtown Atlanta.

Women’s Intuition

When you examine the litany of geniuses who wrought havoc in the markets in their profligate quest for unmitigated deregulation, you’re hard-pressed to find the fairer sex among them.

On the 18thday of the Occupy encampment at Zuccotti Park, I paused to photograph a curious scene. An older man with a tight gray beard was leading an unlikely group in an acoustic rendition of Bob Dylan’s “Blowin’ in the Wind.” People of every age and background, from a family with young children to a construction worker, had gathered on the steps leading to the area of the park known as “The People’s Library” to join in song. The only giveaway that I hadn’t accidentally stumbled through a wrinkle in time and landed sometime in the 1960s was that nearly everyone was recording the moment with a camera phone.Midway through the song, our musical guide abruptly stopped the music to address the ragtag bunch before him. “Why are there no women in this song?” he pondered aloud, with his guitar dangling from its strap and his arms spread wide. “Because men are responsible for screwing it up.” Before continuing with the song he proclaimed, “Let’s hope there are more women in power so we can have more humane decisions.”This scene was only one of several captivating pockets of Zuccotti Park, and my attention was soon drawn elsewhere. Weeks later when reading a piece about celebrity influence in the Occupy movement, I noticed a picture similar to the one I had captured on the steps that day. As it turns out, the gentleman serenading the group was Peter Yarrow of Peter Paul and Mary fame. Two things immediately occurred to me. The first was that Yarrow questioning Bob Dylan was beyond rhetorical, as he probably could have asked him directly.  (Dylan wrote “Blowin’ in the Wind,” but it was Peter Paul and Mary who first recorded it.)

The second thing that came to mind was that my friend and former editor-in-chief of the Press, Robbie Woliver, would be gravely disappointed in me for not recognizing Peter Yarrow and grasping the significance of the moment; a realization that was made clearer to me in researching the origins of the song. As it turns out, the first public performance of “Blowin’ in the Wind”—it would become one of the seminal anthems of the ’60s protest movement—was at Gerde’s Folk City in 1962. Robbie and his wife, Marilyn Lash, co-owned Folk City for several years in the 1980s.

Yarrow’s timely reappearance at Occupy Wall Street underscores the similarity between the anti-establishment, anti-corruption sentiment of the 1960s and today. Further, his comments regarding the negative male influence in world affairs are perfectly in context with the situation on Wall Street. When you examine the litany of geniuses who wrought havoc in the markets in their profligate quest for unmitigated deregulation, you’re hard-pressed to find the fairer sex among them. Sure, there are stand-outs such as Wendy Gramm, but even in her case it can be argued that her depravity pales next to that of her husband. As the saying goes: Behind every terrible woman is an asshole. (Or something to that effect.)

History is replete with examples of men behaving badly to the detriment of civilization. Citing women as the reason for some of our bigger peccadilloes—Helen of Troy causing the Trojan War, Eve getting us all kicked out of the Garden, yada yada—is a favorite device of the male historian. Leading up to and during the financial meltdown, omniscient wizards such as Larry Summers, Alan Greenspan and Robert Rubin eschewed the warnings of women like Brooksley Born, head of the Commodity Futures Trading Commission from 1996 to 1999, and continued their blitzkrieg of destruction. These guys keep breeding more insufferable free market ideologues like Tim Geithner, who fought Sheila Bair, head of the Federal Deposit Insurance Corp. from 2006 to 2011, who railed against the concept of “Too Big to Fail.” To the free market jerkoffs like Greenspan and Geithner, Born and Bair were considered “difficult.” That’s man-speak for “tough.” Creative wordplay like this is how we men diminish effective women; better to be a bastard than a bitch in the worlds of high finance and government.

The most notable among all of these “difficult bitches” today is the earnest and brilliant Elizabeth Warren, who is running for Ted Kennedy’s old senate seat in Massachusetts against fluke incumbent Scott Brown. The funny thing about that race is that for Warren, this seat is actually a consolation prize from President Barack Obama. After leading the fight to create and organize the Consumer Financial Protection Bureau, Warren was the presumptive nominee to head the agency upon its formation. Shockingly, however, the POTUS buckled under pressure from Senate Republicans, who threatened to block a Warren appointment, and instead he installed the even more hardcore and controversial Richard Cordray to the position under a recess appointment.

While I might not be able to spot one of the world’s most famous folk singers even when he’s performing one of his biggest hits in front of a crowd at a demonstration (it’s even worse when put that way, isn’t it?) I do have a keen sense of irony and a dark sense of humor. It’s why I can appreciate that while my gender has driven the world’s economy in the ground, they did so in pursuit of an ideology set forth by a woman. Somewhere in hell, Ayn Rand is doubled over with laughter watching obsequious and dim-witted men like Alan Greenspan trip over themselves in an attempt to become the Howard Roark of finance or John Galt incarnate. Ayn Rand is the Helen of Troy of the economy, the Eve of financial catastrophe, the…

(Did ya see what I did there?)

Chuck Pumps It Up

Obviously emboldened by the fact that either no one cares about his role in this disaster or no one understands how deep his involvement is, Schumer and his PR machine have continued to push the envelope of denial while pointing a crooked finger in the direction of everything but himself and the robber barons on Wall Street he has been protecting since taking office.

Charles Schumer Oil Shell Game
This fancy chart is another great way for me not to tell you why gas is so high at the pump

A couple of weeks ago Sen. Charles Schumer responded to a piece I had written claiming that he alone was responsible for the high price of oil. The point of the column was to illustrate the responsibility inherent in his position as the one senator who sits on the committees with oversight and authority to investigate and recommend legislation that would restore prudent checks and balances to the wildly unregulated commodity exchanges at the root of skyrocketing gasoline prices.

Because I was hoping to provoke a legitimate response from New York’s Democratic senator, I stopped short of detailing how intimately involved Schumer was in creating and subsequently covering for the irresponsible deregulation that allowed investment banks and oil companies to trade oil futures contracts without any oversight of a completely opaque and shadowy marketplace.

I was being polite.

As a result, the senator’s minions clearly viewed my rebuke as somewhat tongue-in-cheek, answering with the exact type of benign platitudinous response Americans have been conditioned to accept from our public officials. Schumer’s letter to the editor, which we published in its entirety the following week, ran sans snarky commentary from yours truly. (Those comments were left for my website.) Obviously emboldened by the fact that either no one cares about his role in this disaster or no one understands how deep his involvement is, Schumer and his PR machine have continued to push the envelope of denial while pointing a crooked finger in the direction of everything but himself and the robber barons on Wall Street he has been protecting since taking office.

His most recent diversion was to send a letter to Jon Leibowitz, chairman of the Federal Trade Commission, asking him to investigate U.S. oil refineries in connection with price fixing. Sounds logical, right? That’s our Chuck. Man of the people. But this is the perfect example of “gorilla dust” whereby two gorillas face off against one another in a spectacle of chest-thumping and screaming, throwing dirt in the air to create a commotion for the purpose of actually avoiding an altercation. The problem is that Schumer equivocates so often on this issue that his face and words have become wallpaper to Americans. He’s beating our collective will into submission by the sheer volume of deceptive statements.

To highlight the senator’s subterfuge, I have taken the liberty of explaining or translating his statements. Hopefully you will find this helpful.

Schumer: “Recent reports have indicated that U.S. refiners are cutting back on U.S. gasoline stockpiles in order to artificially keep prices high and inflate their bottom line… while gasoline use is declining, U.S. gasoline inventories remain below average and refining margins continue to rise.”
Planet Earth: The truth is that we have an over-supply of oil right now because, as Schumer admits, we are using less gasoline. The refiner doesn’t choose how much oil to refine, the market does. The market also determines how much the refinery is paid, and the oil companies such as Exxon Mobil and investment banks such as Morgan Stanley and Goldman Sachs are the market. All Chuckles is trying to do here is shoot the messenger and create a distraction from his beloved Wall Street funding sources.

Schumer: “I’ve called for the elimination of (oil) subsidies to help reduce our deficit and stop wasting taxpayer money subsidizing oil companies that don’t need any help.”
Planet Earth: Talk of eliminating oil subsidies is politically sexy and practically worthless unless we put an end to Big Oil’s ability to manipulate the market by simultaneously setting prices and driving the volume of trading. Eliminating the subsidies without fixing the fundamental market problem will bring in, or retain, more revenue for the government but the oil companies would have already taken it out of the consumer’s pocket to achieve the same bottom line margin by jacking prices at the pump.

Schumer: “I helped to protect a $100 million loan guarantee to build the Taylor Biomass Energy facility in Orange County that uses a process called gasification to convert over 95 percent of the waste received at its facility into cleaner energy.”
Planet Earth. Gasification, indeed. There’s only one thing spouting hot gas right now, and it ain’t the Taylor Biomass Energy facility. For the record, these projects are great for reducing greenhouse gas emissions. But let’s be clear about the energy potential. The energy captured from the average landfill is enough to power approximately 7,200 homes annually. That’s the equivalent of two on-shore GE wind turbines. Two, yes, two.

The well-documented back-room maneuverings done by Schumer to repeal Glass-Steagal in 1999, his assistance in creating the Enron Loophole in the Commodities Futures Modernization Act in 2000 and his silence as a member of the banking committee when the Bush administration obliterated all transparency in the commodities and derivatives market in 2006 makes him a central accomplice in the dirty dealings that precipitated the global financial meltdown and today’s spike in oil prices. His chicanery in addressing a fearful public represents the true nadir of the crisis.

So let me be absolutely clear this time in addressing our fair senator and be assured, sir, that my tongue is neither planted in my cheek nor forked as yours appears to be. Rather, it speaks a truth some part of you understands but no part of you wants to acknowledge. Save your minions the time and effort of responding as there is no more room in this paper for your spurious replies. As you are funded by the oil and bank oligarchy you helped to create, I hardly expect you to continue this conversation anyway. Regardless, for every dishonest press release you issue or diversionary press conference you hold, a growing number of informed citizens will know to offer this refrain:

Chuck Schumer is responsible for the price of gas.
Chuck Schumer is responsible for the price of gas.
Chuck Schumer is responsible for the price of gas.

Now, go forth and spread this word. If you made it all the way to the end of this column and have connected the dots that draw a picture of corruption please forward, digg, like, stumble, reddit, send it to everyone you know who is watching their savings flow from their wallets and into the coffers of Wall Street and Big Oil.

Chuck Schumer Is Responsible For The Price Of Gas

A market where only a handful of powerful people determine the price of commodities, buy and sell them at will, and reap huge rewards while starving millions of people worldwide and decimating the savings of Americans almost overnight is anything but moral.

Bubble, Bubble, Oil and Trouble

We assemble around the pumps staring at gas prices like hominids around the monolith, shrieking and beating our chests. But whereas Stanley Kubrick’s primates in 2001 were willing to touch the slab and receive the divine, other-worldly intelligence it offered, we simply tighten the cap and blithely go about our day, all the while filling the wallets of oil companies and banks that conspire to pick every last nickel, dime and piece of lint from our pockets.

The ongoing drama in the Beltway, quibbling over mere billions of a multi-trillion dollar problem, is the ultimate subterfuge blinding us from the true budgetary crisis in our nation and the world. The $39 billion compromise achieved on Capitol Hill last week is a billion shy of ExxonMobil’s profit for 2008, the last time oil prices crippled the nation and filled the corporation’s coffers. This was the largest profit ever posted by an American public company. Once again analysts are predicting record profits when the publicly traded oil companies release their first quarter earnings in the coming weeks.

I’m officially calling bullshit; calling it on the whole stinking lot of them. While oil companies reap historic profits and politicians try to out-Ayn Rand one another, espousing free market ideals they completely misinterpret, Wall Street and Big Oil are about to deliver the coup de grace on the American people and the world at large.

The Intercontinental Exchange (ICE), in partnership with NASDAQ, recently upped the ante to purchase the historic New York Stock Exchange (NYSE Eurodex). Naturally, your next questions should be: “What does this have to do with the price of gasoline at the pumps?”  “Why is this important?” “Why should I care?” and “What can I do about it?”

Glad you asked.

What does this have to do with the price of gasoline at the pumps? Everything. Here’s the short version of exactly why gas is so high right now. All you have to do is memorize the following paragraph to be able to shut anyone up at a party who claims that Middle East uprisings are responsible for driving up oil prices.

Nearly 20 years ago Wendy Gramm and her senator husband Phil Gramm created the Enron loophole when Mrs. Gramm chaired the Commodities Futures Trading Commission (CFTC) under President George H.W. Bush that cleared the way for trading energy futures on the commodities exchanges. On December 21, 2000, President Bill Clinton signed it into law. In 2001, the two largest investment banks in the nation, Goldman Sachs and Morgan Stanley, teamed up with British Petroleum (BP) to start their own exchange called the Intercontinental Exchange (ICE) to handle commodities transactions. In January of 2006, George W. Bush made it possible for anyone investing in commodities to hide their identity, turning the ICE into a powerhouse exchange overnight. When the Glass Steagall Act was repealed, deregulating the banking industry, banks and investment banks merged; further, because of the commodities deregulation under Clinton, then Bush, banks are now able to set the price of commodities by having their analysts forecast pricing and purchase large quantities of commodities through the banking end on exchanges they own and control.

There you have it. I mention all of the presidents involved in this fiasco to illustrate that this is not a partisan issue. Both parties have blood on their hands. They have created a trading exchange that, despite being only 10 years old, is so big and powerful it can partner on an $11 billion bid to acquire the New York Stock Exchange.

Why is this important? The obvious, most immediate reason is the pain at the pump that you’re experiencing personally and the pain that threatens the global economic recovery. But there’s a larger problem. The International Monetary Fund and the World Bank have been vociferously warning anyone who will listen that there is a direct correlation between sharply rising crude oil prices and starvation.

There are three reasons for this: 1) The surge in oil prices has increased demand for bio-fuel substitutes, so instead of feeding people we feed our vehicles. 2) Higher oil prices means higher production costs. At the farm level the hard production costs of fertilizer and irrigation rise in lockstep with crude oil prices. 3) Lastly, the cost of transporting goods from farm to table increases directly and dramatically.

So, the answer to the first question is: This is important because high oil prices kill people.

Why should I care? Another wonderful question. Well, apart from the obvious fact that we are all part of the human race and should care about things like forced hunger and starvation, there is a distinctly American reason to care about this issue: Fairness.

Politicians, lobbyists, policy makers, and pundits are all mixing metaphors and messing with the essential American principles of fairness. Tea Partiers, conservative radio hosts, radical free-market freshmen Republicans in Congress and kooky presidential candidates are carrying weathered copies of Atlas Shrugged and the Bible, and screaming from the mountaintops, “Set my market free!” (The Bible-toting Objectivist is my new favorite American oxymoron.)

Talking about “free-markets” is fun, but there are seriously flawed fundamentals at work here. As we have learned from every bubble burst in the era of deregulation, the markets do not self-police nor are they inherently moral. Markets, like people, must be guided by regulations and boundaries; investors must have the freedom to maneuver within these parameters, and suffer punishments for exceeding them. Free market radicals should understand better than anyone that a market without regulations is like the Bible without Commandments.

A market where only a handful of powerful people determine the price of commodities, buy and sell them at will, and reap huge rewards while starving millions of people worldwide and decimating the savings of Americans almost overnight is anything but moral. It’s exactly immoral and completely un-American.

 What can I do about it? Plenty.But we have to work together. It starts with understanding the fundamentals behind oil pricing and then figuring out who’s lying. First and foremost, Goldman Sachs and Morgan Stanley are both lying unabashedly through their teeth by blaming political unrest and upheaval for potentially hindering supply and causing speculative panic in the market. They’re ignoring that the United States and OPEC oil reserves are at an all-time high, that actual demand is still sluggish, and that we continue to build more energy-efficient vehicles and access natural gas and renewable resources. 

Now they’re playing a game of chicken and managing our expectations, sending mixed signals about “demand destruction” and how high energy prices might have a deleterious effect on the global economic recovery even though their own analysts set the price of oil futures contracts and their own bankers buy them up. What they’re doing is establishing a new low, an artificial floor. It’s genius. Get us used to the idea of $5 per gallon pricing so that $4 doesn’t seem so bad. This is a test and we’re eating up their lies.

There are four primary solutions to the global oil problem. They’re a heavy lift and you should know what they are, but don’t be overly concerned with these details; your part comes later. Briefly, the solutions are as follows: (1) Reinstate Glass-Steagall, (2) Incentivize oil companies to invest in renewable energy by levying enormous fees on non-compliant companies, (3) Strip the ICE of its foreign-based exchange status to restore transparency to the commodities and derivative market and (4) Kill all speculative conflicts of interest by crafting legislation that prohibits investment banks from owning a controlling interest in any oil-related corporation.

202-224-6542. Give him a jingle.

Sounds like a crazy, impossible pipe dream. Not to worry. Thankfully there is one man with the power to get all of this done. Who is that powerful you ask? New York’s own Sen. Charles Schumer.

Schumer sits on the Rules, Economic, Judiciary, Finance and Banking committees. When it comes to anything related to finance, Charles Schumer is the single most important man in America. Now for your part: Because his office doesn’t accept emails, please call his office at 202-224-6542 and tell whoever answers the phone that you would like Sen. Schumer to please lower the price of gas at the pump. Don’t take no for an answer.

Then we go viral. It’s on. Tweet and post a link to this article with the message: “Only Chuck Schumer can lower the price of gas. If he doesn’t, I guess he’s responsible.”

Good luck and Godspeed. Remember, there are tens of millions of starving people counting on you to tweet our demands.


Charles knows enough to cancel the subsidies (starting around 1:30).

Click on the following links to read other oil-related entries

LIBYA. MORE BLOOD FOR OIL. “Crude Behavior” March 23, 2011 – JedMorey.com

BEHIND THE BUSINESS OF EXCHANGES. $4 Per Gallon: Beating the Oil Drum. March 9, 2011 – JedMorey.com

HAPPY NEW YEAR AMERICA. OIL’S HEADING TO $4. “Why Is Oil So High?” Crude: Part II – Long Island Press

OP-ED: INITIAL REACTION TO BP OIL SPILL. “Our Addiction To Oil” June 24, 2010. – JedMorey.com

CRUDE: HOW WALL STREET SCREWED AMERICA IN THE SUMMER OF 2008 – Long Island Press

$4 Per Gallon: Beating The Oil Drum

America and oil. Perfect together.

Americans are being warned about $4 gasoline at the pumps as an impending and potentially persistent reality. In actuality we’re really being sold on this proposition by the same people who are obfuscating the facts behind what is essentially a looming consumer economic crisis. The triumvirate of the federal government, oil companies and major financial institutions are at the core of disseminating information about, and controlling the pricing of, oil and the varying distillates it produces. I use the term “triumvirate” loosely as it presupposes a separation among the three entities when it has become increasingly apparent they are fused into a singular, inseparable juggernaut where players move freely through revolving doors interconnected through a labyrinth of commissions and exchanges that empty into the special bureau of greed and codependence.

Listen closely to what it is we’re being sold. We’re being fed a barrage of reports about two major drivers of oil prices: demand and unrest. The latter refers to the remarkable and unrelenting spread of democratic uprisings in the Middle East and Northern Africa. While the situations in Egypt and Tunisia had little immediate impact on oil prices because they are marginal players in the energy field, Libya and Bahrain have had a dramatic effect on oil prices because they are fundamentally oil-based economies. (Bahrain, by the way, is half the length and width of Long Island.)

Yet not only does the United States maintain a military base in Bahrain where demonstrations have been organized and peaceful after a shock of initial bloodshed, but Libya produces surprisingly little oil considering the ripple effect the burgeoning civil war is causing. Moreover, the war is being funded by the continuance of oil production operations, which neither side can afford to sabotage to the point of paralysis. The upshot there is that of the 2 percent of global oil production Libya claims, most of it will continue to flow. That being said, suppose for a minute it is halted completely. How could losing temporary access to 2 percent of global production account for a 33 percent increase in pricing? It doesn’t, which leads us to the demand question.

The purported rise in global demand is being attributed to the growth in demand from developing economies and the global economic recovery. Yet in real GDP terms and with respect to indicators such as manufacturing, shipping, job creation – in short, anything that isn’t the Dow Jones Industrial Average – the global economy is still limping toward pre-recession, pre-housing bubble crash levels when oil hovered around $70 per barrel. And even at this level, several commodities experts and economists theorized that as much as 40 percent of the $70/barrel figure was pegged to speculation in the financial markets and not market forces such as supply and demand.

In regards to new demand from developing nations, new areas of production in Canada and Africa as well as deep-sea, offshore drilling are keeping pace with demand as evidenced by the sustained levels of reserves around the globe. Even the Obama administration, which has stated that tapping our own strategic oil reserves is a viable option to increase supply and suppress oil prices, admits in the same breath that supply isn’t the issue. This is hocus-pocus to distract us all from what the actual issue is. For clarity on the real reason behind the spike in oil prices, one need look no further than the mini-oil crisis in the summer of 2008 and the federal government’s response in the months, and now years, that followed.

CLICK HERE TO READ THE LONG ISLAND PRESS COVER STORY ABOUT THE OIL SCANDAL OF 2008

When the price of a barrel of crude oil topped $145 in 2008, rampant speculation was ultimately blamed for the anomaly but only after the major banks and trading institutions could no longer blame increasing demand with a straight face. They simply pushed that line too hard to keep up the ruse. If ever there was even a question about the role of speculation and the government’s willingness to cover for the big banks, all was answered in my mind by the U.S. government response, or lack thereof.

Federal regulators made a big fuss over the creation of more stringent regulation on the commodities exchanges by moving oil trading from opaque over the counter (OTC) exchanges to more “legitimate” exchanges with greater transparency. Or so we were told. The big winner in this move: The Intercontinental Exchange, or the ICE. The ICE is aptly named because any attempt to investigate this exchange ends up cold. Here’s where it gets interesting and perfectly illustrates the symbiotic relationship between the federal government and big banking.

The most helpful context I can place this explanation in is to stress the point that the ICE is a business. It was established for the purpose of providing an efficient electronic trading infrastructure for energy commodities. Trading energy futures before the Atlanta-based ICE was established was confusing, inefficient and antiquated. But the ICE was a small operation until then-President George W. Bush granted it status as a foreign exchange because it purchased a trading desk in London even though the entire trading infrastructure was based in Atlanta. Foreign exchanges aren’t subject to the same oversight as domestic ones. So even though the Commodities Futures Trading Commission (CFTC) interacts with and governs some of the procedures at the ICE, no one can actually see who is doing the trading. This one small regulatory change put the ICE on the map and set the groundwork for one of the greatest, yet most obscure, con jobs ever pulled on the American people.

I call it a con job because the ICE falsely professes to be a bastion of transparency, going so far as to describe itself as “an alternative to the previously fragmented and opaque markets.” So let’s be transparent about this supposed transparency the ICE purportedly affords. It has nothing to do with the ability to witness transactions or those who are doing them, but to simplify the transaction process. It’s the equivalent of your bank offering online banking for your checking account. It’s fast and easy but doesn’t mean your neighbor can see you doing it.

Now consider who is doing the trading. Are you? My guess is no.

The only ones with the financial strength to risk betting on oil futures that would also benefit from anonymity are financial institutions and oil companies themselves. And that’s precisely what they’re doing. Now that you’re armed with an understanding of the fundamentals behind the commodities market, take a gander at the incestuous family tree of oil trading. Once you follow the money you’ll never again question why prices at the pump are so high.

• The ICE is a public, for-profit business traded on the New York Stock Exchange that takes in almost one billion dollars in transaction fees from commodities trading and has performed better than all other major exchanges in recent years.

• The founders of the ICE are Morgan Stanley, Goldman Sachs and British Petroleum (now BP)

• Morgan Stanley is not only a financial institution. If you add up their direct holdings in the oil business, they would be one of the world’s biggest oil companies.

• Gary Gensler, chairman of the CFTC, is a former Goldman Sachs partner

• Jeffrey Sprecher, chairman and CEO of the ICE, is on the CFTC Energy and Environmental Markets Advisory Committee alongside representatives from JP Morgan, Morgan Stanley, Goldman Sachs and Merrill Lynch

The takeaway: The government has cleared the way for banks and oil companies (sometimes one in the same) to determine the price of oil by investing large sums of money no one can see on a trading exchange they own and direct.

If you follow this logic, dig this scenario. (Or “digg” it if you’re reading this online – thanks in advance for the plug). Instead of cracking down on this legalized price-fixing and collusion scheme, the government rewarded everyone involved. In 2009 it granted the ICE the ability to trade credit default swaps (remember those?) in order to provide “more transparency” to these troubled investment vehicles by moving them from OTC exchanges. Sound familiar? The ICE got this part of their exchange up and running in 2010 ahead of schedule.

With the regulatory wind of the White House at their backs and a gullible public duped by propaganda about unrest in the Middle East being responsible for the spike in oil prices, Wall Street is having its way with us all.

In case you were wondering what their take on this sorry state of affairs is, Morgan Stanley analysts David Greenlaw and Ted Wieseman offer the following sentiment: “Of course, the increase in oil prices transfers income (and wealth) to oil producers, and the effect on global growth will depend on how the producers spend their windfall.” A rhetorical question if ever there was one; after all, when’s the last time ExxonMobil cut you a check? 

So the next time you’re gritting your teeth at the pump and cursing the day you walked into the SUV dealership, you’ll know who’s really taking your money. Unfortunately, you’ll also realize that there’s not a damn thing you can do about it. 

CLICK HERE TO READ JED MOREY’S RESPONSE TO THE BP OIL SPILL AND OUR OIL ADDICTION

Crude: How Wall Street Screwed America in the Summer of 2008

The scandal that started it all. How Wall Street and Big Oil have conspired over a twenty year period to legalize price-fixing and collusion in the commodities market. This is the reason oil prices are so high. These are the people responsible.

crude
John Mack snuggling with his pump

Inside the comfortable landscape of Rock Creek Golf Club in Fairhope, Alabama, life is undoubtedly serene, a far cry from the bustling city of Houston across the Gulf where Doug Terreson, a former Morgan Stanley executive, used to reside. Less than a mile and a half from Terreson’s relocated home on the eastern shore of Mobile Bay, the price of regular gasoline at the local BP hovers around $4 per gallon––a constant reminder of the burden that Wall Street and Congress created to bolster their earnings and pad their coffers.

For Terreson––at first an unwitting, then ultimately unwilling accomplice––it is an experience he seems anxious to forget. Perhaps that’s why the high-level investment company executive has packed it all in, far away from the corner offices that contributed to the current implosion on Wall Street.

But while it is clear that the American economy is in deep trouble, there’s one part of the puzzle that still lies in a place as murky as the water surrounding the refineries in the Gulf of Mexico: the Wall Street-oil connection.

We’re all paying the price. It now costs just as much in America for a gallon of milk as it does for a gallon of gas. There are now 9.4 million Americans out of work. High fuel prices have all but sacked the airline and auto industries. Pressures on food production created by fuel subsidies and climbing oil prices may mean that the number of malnourished people worldwide could climb to 1.2 billion by 2025. You don’t have to be lectured on how tough times are.

In case you’re feeling sorry for yourself, or the world, consider the plight of Doug Terreson’s former boss, John Mack. His company had to artificially jack-up oil prices to record levels just to balance out its financial woes. To Mack, it must seem like just yesterday that he received a $40 million bonus as chairman and CEO of Morgan Stanley-the largest ever given on Wall Street at the time.

But that was at the end of 2006, a veritable lifetime ago in the financial world, and things are much, much different now. Continued fallout from the credit crisis in the U.S. has forced Morgan into a corner and Chairman Mack against a wall. It could be worse. He could have run Merrill Lynch, Lehman Brothers or Bear Stearns.

Luckily, John Mack is an oil man. In every sense of the word. How so, you say? Under John Mack, Morgan Stanley has amassed a formidable group of companies involved in every aspect of oil, from refineries to home heating oil. Mack has thus far been able to navigate through a storm that has brought three of the biggest American investment banks to their knees. And the whole world picked up the tab. By exploiting regulatory loopholes and throwing caution and conscience to the wind, Morgan Stanley, along with Goldman Sachs, has artificially thrust oil prices to record levels.

They don’t call him “Mack the Knife” for nothing.

There Will Be Blood

As one of the greatest economic disasters in modern history is unfolding before our eyes, hidden deep within is a shocking scenario that spans 16 years and three presidents and has left millions of starving and poverty-stricken people in its wake. The architects of the scheme are some of the wealthiest and most powerful people in the world. Their names read like a Who’s Who of the financial sector and the American government: Clinton. Mack. Gramm. Paulson. Bush. All are deeply involved in this scandal, which history surely will view as one of the most impactful on the nation and the world economy.

Economists and theorists have already named the economic period that is ending as of this writing. It is being referred to as the era of cheap oil, a time when multinational companies thrived on the global market as never before. Things are changing now: Oil prices remain high and the cost of doing business––in every industry-continues to rise. While it may be true that oil will never be cheap again, inconsistencies abound as to why.

Prior to the turn of the millennium, there were a few givens that had an effect on the cost of oil and energy in the world-mainly war, weather, supply and demand. The latest Russian aggression in Georgia, hurricanes in the Gulf, and the spectacular display at the Beijing Olympics that placed China on the world stage would normally have put prices through the roof.

If nothing else, China’s grand coming-out party exhibited the largesse of the Chinese economy and population. This alone should have caused a spike in oil prices. Instead, they have fallen from their stunning highs during the summer. This counterintuitive behavior in the market indicates that a significant portion of oil prices is determined by financial speculation and not just traditional forces of supply and demand.

Still, oil prices are outrageously high compared to just a few years ago, and are a topic of conversation in every American household. No one is escaping the impact of high prices at the pump or the supermarket. But we have been spoon-fed lies about demand from China and India and are expected to simply go along with the madness.

But not everyone is fooled. As the world seeks to shield itself against the crushing economic blow delivered by the skyrocketing cost of energy, many are beginning to take note of the roots of the crisis and point fingers at those responsible for the economic mess that we’re in.

In stark opposition to the oil crisis of the 1970s that left Washington in a state of panic and Americans lined up at the gas pumps, the seeds of the current condition may well have been planted not in the Middle East by the OPEC nations, but right here at home, by the very lawmakers now scrambling to undo what they set in motion.

One of the central villains in the story has become an all-too-familiar symbol of corporate malfeasance. The ghost of Enron, the defunct Texas-based energy company and its now-deceased former president, Kenneth Lay, still haunts the market today. Most are familiar with how Enron preyed on financial loopholes in the marketplace to fabricate a phantom energy market and create false gains on its balance sheet throughout the 1990s.

Enron’s grip on the energy market created spastic and turbulent movement in the marketplace resulting in events like the rolling blackouts in 2000 in California. By December 2001, when everything was unraveled, Enron was out of business, its accounting firm, Arthur Andersen, was no more and Washington lawmakers issued a slew of promises to change the regulatory environment.

Devils In The Details

During the final months of Bush 41’s White House in 1992, Wendy Lee Gramm, wife of Phil Gramm, who was then the Republican senator from Texas, was the head of the U.S. Commodities Futures Trading Commission (CFTC). Wendy Gramm is an unabashed free-market advocate once described in 1999 by The Wall Street Journal as the “Margaret Thatcher of financial regulation.” She now sits as a distinguished senior scholar of the conservative think tank Mercatus Center at George Mason University, in Virginia. Mercatus is a policy center on Capitol Hill that boasts board members such as Ed Meese-a central figure in the Iran-Contra scandal as attorney general under President Ronald Reagan-and Charles Koch, of Koch Industries, who has been investigated for stealing oil from federal property and tribal Indian lands, indicted for environmental crimes and fined $30 million by the Environmental Protection Agency (EPA) for numerous spills throughout the United States.

The CFTC oversees the commodities market and applies the regulations set forth under the 1936 Commodities Exchange Act (CEA), a measure enacted by Congress to prevent another collapse on the scale of the 1929 crash. One of Wendy Gramm’s final acts as chairwoman in January 1993 was to create an exemption that allowed Enron to trade energy futures contracts and essentially hide these trades from the CFTC itself; an energy futures contract is an agreement to deliver energy commodities such as oil or natural gas at a set price in the future.

Gramm left the CFTC, and five weeks after creating this exemption, she became a board member of-you guessed it-Enron. In return for her work deregulating the market for Enron to exploit, she racked up millions as an Enron board member prior to the company’s collapse.

Wendy and Phil Gramm were just getting warmed up.

Under the cloak of darkness at the end of President Bill Clinton’s second term and the waning days of the 106th Congress, it was then-Sen. Phil Gramm’s turn to dust off a bill, now commonly referred to as the “Enron loophole,” and attach it to an 11,000-page appropriations bill on December 15, 2000. The bill had previously died on the House floor, but Gramm resurrected it, found a new sponsor, became a co-sponsor, changed the bill number and turned it into an amendment. That’s a lot of work for one little loophole.

As a rider to a much larger bill, the Commodities Futures Modernization Act was no longer subject to the normal vetting process in Congress that a stand-alone bill would receive. Lawmakers, undoubtedly feeling the pressure of the holidays and lacking the time to thoroughly review the voluminous document, quickly approved the bill for the president’s signature.

On December 21, 2000, on a cold and blustery Washington evening, the bill with the Enron loophole rider was signed by President Clinton. Gramm’s amendment came to life and deregulated all energy futures trading. For Lay and Enron, the rest is history. But it would take another six years, another President Bush and a new Congress to open the floodgates of rampant speculation and really give it legs.

Phil Gramm? Does he sound familiar? Well, you might recall that he has been Sen. John McCain’s top economic adviser. You know, the one who called America “a nation of whiners.”

Commodities Explained

The easiest way to think about commodities is that they are things-physical things that can be measured in size, quantity or volume. Fruit. Oil. Grains. Metals. Currency. All these have unique characteristics and trade against one another on commodities exchanges throughout the world. For example, one barrel of oil might equal three bushels of corn, which may equal six bushels of wheat, and so on.

It is a complicated system that’s not for the faint of heart. Only a select few traders on Wall Street have the acumen and desire to deal in this sector, an exchange that had been efficiently regulated by the CEA since 1936. In an interview with the Press, Michael Greenberger, an outspoken critic and former employee of the CFTC, described these as “backwater markets,” but ones that recently have become “as important to understand and regulate as the securities and debt markets are.”

Commodities traders were highly specialized in their fields and their discipline was so narrow that it was largely misunderstood. Because it represented such a small portion of the vast economic market of debt and equities, it existed in the shadows of the global marketplace.

An important aspect to the commodities market is that there has always been a ceiling to the transactions and every investment made in the United States, for example, must be overseen by the CFTC. This market cap and theory of transparency kept the commodities market in relative obscurity against its much bigger counterparts, the stock market and the bond market.

But in January 2006, the CFTC, under President George W. Bush’s administration, would upend the regulatory practices held in place since the ’30s and create a virtual frenzy by recognizing a new commodities exchange-ICE Futures-that had been formed in 2001, primarily by investment banks and oil companies.

On May 20 of this year, Michael Masters, the managing member of Masters Capital Management LLC, a hedge fund that invests in private equity, testified before the Senate’s Committee on Homeland Security and Governmental Affairs. His testimony is now widely quoted by the antispeculation critics who decry the lack of oversight created by the Enron loophole.

“Commodities futures markets are much smaller than the capital markets, so multibillion-dollar allocations to commodities markets will have a far greater impact on prices,” Masters stated.

Essentially, introducing investment banks and hedge funds that have deep pockets and no one looking over their shoulders has the singular ability to move the entire market. It’s like allowing professional athletes to compete in the Olympics. It’s what Masters referred to as “demand shock.”

Morgan Stanley and Goldman Sachs: the mechanics behind high oil prices

Two primary tools have restrained zealous speculators in the commodities markets since the CEA’s adoption-transparency and position limits. The transparency came from federally regulated markets like the New York Mercantile Exchange (NYMEX), which tracks and oversees the transactions of commodities. Position limits were enacted under the CEA to keep any one investor, or group of investors, from overwhelming the exchange and flooding it with money.

The Enron loophole essentially permitted the trading of energy futures on over-the-counter markets, thereby allowing a new set of investors-hedge funds and investment banks-to trade energy futures. But the U.S. exchanges still saw relatively little activity as compared to their European counterparts, where the oversight was far more lax.

Because commodities trade in real time and U.S.-based companies have the most money to invest, the investment banks and hedge funds were still slow to drive great sums of capital into the market. What they needed to really make this thing soar was the ability to invest serious capital within the United States, like their counterparts could on the London Exchange, for example.

In 2000, Goldman Sachs, Morgan Stanley and British Petroleum became the primary founders of a little-known exchange based in Atlanta, Ga., known as the Intercontinental Exchange (ICE). A year later, it purchased the London-based International Petroleum Exchange (IPE), and was renamed ICE Futures. It was an acquisition that was fairly straightforward until 2006, when the CFTC-seemingly out of nowhere-officially recognized the ICE as a foreign-based exchange because it had purchased the IPE.

Even though the ICE is based in Atlanta, backed by U.S. banks and now traded publicly on the New York Stock Exchange, the CFTC somehow decided to treat it as if it were based in London and thereby no longer subject to federal trading regulations. Now the investment banks could trade every type of commodity, especially crude oil, without any spending limits or federal oversight. Greenberger calls it one of Wall Street’s “most successful ventures,” because the ICE was now “competitive to NYMEX.”

It was here that the wheels began to fall off the commodities market.

Mack’s Morgan

John Mack, the chairman and CEO of Morgan Stanley, has had an illustrious career, holding some of the most lucrative and prestigious positions on Wall Street.

Nicknamed “Mack the Knife” because of his hard-edged, no-nonsense approach and hardcore cost-cutting measures, Mack ran Morgan Stanley through the ’90s before accepting the job as co-CEO of Credit Suisse First Boston, a leading investment bank, in 2001. Mack left CSFB in 2004 to pursue options outside the large investment banking world but was wooed back to run Morgan Stanley in 2005. Upon his return, Mack’s Morgan Stanley went on an aggressive oil-buying spree-but not necessarily the kind you might expect.

On May 24, 2006, Morgan oil analyst Douglas Terreson announced that integrated oil equities were “15 percent undervalued” and in a research report, he wrote that “Independent refining and marketing remains the largest sector bet in the global model energy portfolio.” Soon after, on June 18, 2006, Morgan Stanley acquired TransMontaigne, Inc. and its subsidiaries-a half-billion dollar group of companies operating in the refined petroleum business.

How convenient… after their oil analyst decides that this portion of the industry is looking up, Morgan Stanley gets into the oil business and buys a refining company. However, it did not take only 25 days to conceive and work out the TransMontaigne transaction. This had to be a long-planned, well-thought-out takeover. One that worked for the great benefit of Morgan Stanley’s future oil plans.

This type of freewheeling environment, with little separation between the proprietary desks at the banks and their investment analysts, has been the subject of much scrutiny and concern of late.

“[There must be] a verifiable and hardened wall between analysts and the investment entities,” Greenberger says-it’s the only way to maintain integrity. And this is essentially what the CFTC was dismantling, right under everyone’s noses.

Morgan’s investments in the oil business continued aggressively over the next year into the far corners of the industry. In short order it closed the circle of the supply chain by acquiring Heidmar, a shipping company, and various stakes in foreign-based energy supply companies. It even snagged a contract from the U.S. Department of Energy to store 750,000 barrels of home heating oil at its corporately owned terminal in New Haven, Conn. Morgan Stanley, which was at the time the largest trader in oil futures, was now a serious international oil company.

Speculation Takes Centre Stage

It was the Masters testimony that brought speculation into the light and sent shockwaves through the halls of Congress. Masters was able to simplify the exchange and put the issues in a context that lawmakers could grasp. One of the telling examples he gives is that “Index speculators [companies such as Morgan Stanley] have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years.”

This essentially squashed the claims of the investment banks that demand from parts of the world such as China and India was solely responsible for the increase in oil futures prices. However, there are some theorists who still vehemently deny that this is the case.

James Howard Kunstler, author of The Long Emergency and creator of the popular blog Clusterfuck Nation, believes that the effect from the speculative market is “basically witch-hunt stuff.” A peak oil theorist, Kunstler, on the phone from his home in Saratoga Springs in upstate NY, says he believes that the root of the problem lies more in our global dependence upon a commodity that is quite simply disappearing.

American scientist M. King Hubbert predicted in the 1950s that American oil production would peak by the early 1970s. He was right. His predictive model was the basis for peak oil theory, which, when applied to the global market, indicates that the world may hit peak oil production within the next 20 years or sooner. Kunstler says that “the biggest thing that’s going on right now is the oil export problem or crisis.

“What that means,” he adds, “is the countries that we depend on for imported oil are less and less able to send it out and they’re using more of their own oil even as they’re in depletion. Two of the biggest cases of this are Mexico and Venezuela.”

While America imports the vast majority of its oil from Mexico, Venezuela and Canada––not the Middle East-and there is evidence to support the peak-oil predictions in some of these areas, it seems to speak more to the long-term crisis that mature and developing countries face. But it doesn’t fully explain away why oil prices would increase exponentially during the summer months and then decline shortly thereafter.

“Instead of oil going up,” Greenberger says, “oil is going down. Has India and China dramatically cut back? Nothing has changed and, in fact, the supply-demand factor has probably gotten worse because of Russia’s aggression [and] the severe weather, but oil is sinking, sinking, sinking. How can that possibly be?”

So if oil prices could be so easily manipulated, why didn’t it happen more severely and immediately when restrictions were lifted in 2006? While oil prices did indeed climb between the time the ICE was created in Atlanta and the regulations were lifted in January of 2006, they didn’t skyrocket until late in 2007.

Enter Douglas Terreson.

The Terreson timeline

Douglas Terreson, the Morgan Stanley analyst who said that independent refining and marketing companies were undervalued, was the bank’s chief oil analyst. The award-winning, nationally recognized Terreson had fielded questions in relation to oil prices and futures since the mid-1990s. On March 14 of this year, he said that oil would settle in at around $95 per barrel for the remainder of 2008. Moreover, Terreson also concluded that oil would retreat to around $83 per barrel for 2009.

This would be Terreson’s last forecast for Morgan Stanley.

Two short months later, Dow Jones Newswires reported that Terreson had been ousted in a round of layoffs. Two weeks after that, Richard Berner, Morgan Stanley co-head of global economics and chief U.S. economist, issued a statement saying that crude oil could easily reach $150 a barrel.

This speculation set off a round of speculative fervor never before seen in the market. Goldman Sachs immediately followed suit by forecasting oil to roar beyond $150, saying it could hit $200 a barrel in the near future. Oil prices were off to the races, with the investment banks in full lobbying mode while pointing the finger at China and India.

On September 19, 2007, Morgan Stanley’s stock price was $67 and oil was at $78. This was the day that Morgan Stanley began to trickle out the bad news. The worse the news was coming out of the investment banks, the higher oil prices would climb. By the time Morgan announced that Terreson was gone, Morgan’s stock was at $41 and oil was at $134.

In retrospect, the turning point appears to be Morgan’s $150 forecast by Berner. It fuelled the apprehension of the media and Wall Street alike. Americans were quick to do the math and knew that the spike would mean $5 per gallon at the pump. Maybe more. Suddenly everyone recalled the 1970s, and new terms such as “stay-cation” were on everyone’s lips.

So, where did this $150 number come from? Who better to answer that question than Richard Berner, the man behind the proclamation?

Unfortunately, a spokesperson for Morgan Stanley tells the Press that Richard Berner “doesn’t do interviews on oil stuff.” In fact, “he doesn’t deal in oil” at all, says his assistant matter-of-factly. That’s because for more than a decade this had been the exclusive domain of Terreson. Yet a month after the report that Terreson had been laid off, Morgan Stanley issued a statement claiming that Terreson voluntarily left his position at Morgan for the promise of higher pay from a hedge fund.

Not so, according to a Morgan Stanley employee familiar with the circumstances surrounding Terreson’s departure, who asked not to be identified in this story. Taken aback by the confusion surrounding Terreson’s reason for leaving, he says, “I knew they had a rightsizing, but he said he was retiring. He was getting ready to head off into the sunset.” And, just like that, Terreson was gone.

Morgan Stanley no longer has a spokesperson for oil. Nor are they willing to comment on the decision to forecast crude oil futures at $150 per barrel by someone who “doesn’t deal in oil.”

Terreson, once an integral part of the Houston community and a rising star in the financial sector, seemingly disappeared from the city altogether. His home phone has been disconnected. His former co-workers were unsure of his whereabouts. And almost no one from the firm at which he spent years as a superstar in his field wants to discuss why.

When the press finally reached Terreson at his present residence in Alabama, he simply offered, “I’m retired. I’m not with Morgan anymore and can’t talk about any of this.” When asked for a brief comment on current oil prices, Terreson responded, “I don’t feel comfortable talking about it,” and hung up the phone.

The smell coming our way

Still, the question persists: If the market conditions surrounding the price of crude oil futures remained unchanged, why were the analysts at the world’s largest banks determined to drive up the price of oil at a historic pace?

Was it merely dumb luck that this rampant speculation occurred at a time when the major investment banks were reporting record losses and write downs due to the sub-prime mortgage meltdown? It is Greenberger’s assertion that “a lot of people were very upset that they were in a sense humping their own product-not only their physical holdings but their future holdings.” What he’s referring to is the fact that Morgan Stanley doesn’t just trade oil futures; it’s also very much in the business of oil. This is a fact that is “unseemly,” according to Greenberger and many onlookers of the financial markets. One such observer is Gary Aguirre, a former staff lawyer and investigator for the Securities and Exchange Commission (SEC), who has testified several times in front of Congress and is widely considered a leading authority on financial markets.

“The way it ran up had all the earmarks of manipulation,” says Aguirre from his office in San Diego. “It looked like somebody was playing a game. I don’t know what the game was or how they did it but that was…the smell drifting my way.” As far as Morgan Stanley and Mack are concerned, Aguirre knows firsthand just how powerful the Wall Street tycoon is.

In 2005, Aguirre headed up an investigation into an insider trading claim involving Mack and a hedge fund named Pequot Capital Management. Mack’s involvement came during the period between his tenure at Credit Suisse First Boston and his return as chairman of Morgan Stanley. There were allegations of insider trading on the part of Mack by the SEC, but just when the investigation seemed to be gaining momentum, Aguirre was told to back off by his bosses at the SEC. After a glowing review from his superior, Aguirre went on vacation. When he returned, he got a pink slip, not a raise.

Aguirre insists that his own experience is merely part of a larger and much scarier problem running rampant on Wall Street.

“What we have are the markets highly leveraged, highly speculative and without any regulation, effectively, of the abuses,” he explains. “In short, it’s not much different than it was just before the crash in 1929.” This sentiment is echoed throughout Wall Street and the Beltway as the news from Wall Street grows more desperate with each piece of bad press about the economy.

The cozy relationship between oil companies and the U.S. government is nothing new to people like Aguirre who are familiar with the system. Aguirre explains the “you scratch my back” culture in monetary terms by saying, “These people are sponsored by the industry. Paulson’s straight out of Goldman. We have the fox guarding the henhouse.” (He’s referring to U.S. Treasury Secretary Henry Paulson, who was chairman of Goldman Sachs until June 2006.)

This was certainly true for Wendy Gramm, leaving the CFTC for the Enron board, and for her husband, who received nearly $100,000 in financial contributions from Enron while in office.

“These Enron traders were highly sought after,” says Greenberger. “Enron showed in its dying days how you could make a lot of money trading unregulated energy futures products.”

The real price of oil

A report titled “Double Jeopardy: Responding to High Food and Fuel Prices,” issued by the World Bank on July 2 of this year, estimates that “up to 105 million people could become poor due to rising food prices alone,” with “30 million additional persons falling into poverty in Africa alone.”

The report links the effect of high food prices directly to rising energy and oil costs-but stops short of blaming speculators, claiming that commodity investors and hedge fund activity appear to have played only a “minor role” in the increase of food and fuel prices. The report’s source: The CFTC.

The eye-opening May testimony from Masters was a scathing indictment of the CFTC’s thinking. In it, he claimed, “The current wheat futures stockpile of Index Speculators is enough to supply every American citizen with all the bread, pasta and baked goods they can eat for the next two years.”

As far as the much maligned “corn for ethanol” program that has environmentalists and lobbyists alike backing away, Masters contends that “Index Speculators have stockpiled enough corn futures to potentially fuel the entire United States ethanol industry at full capacity for a year.”

At least high oil prices have us thinking about alternative energy, right? According to Kunstler, it’s a case of too little, too late: “No amount of alternative fuels is going to allow us to run the stuff we’re running the way we’re running it, and we have to get hip to that. We’re not going to run the interstate highway system and Wal-Mart and Walt Disney World on any combination of ethanol, solar, wind, nuclear or chicken fat. We’re going to have to make other arrangements for daily life, and it’s the one thing we’re not talking about.”

Kunstler has very little faith that we can afford the new technology, let alone old fossil fuel technology. “The ‘whoosh’ that you hear in the background is the sound of capital leaving the system,” he muses. On this, most everyone agrees: Kunstler, Greenberger, Aguirre and Masters all come from diverse backgrounds, but all point out that our financial system seems to be hanging by a thread and that the corrupt regulatory system is mostly to blame.

The fallout

Given the recent government bailout of Freddie Mac, Fannie Mae, and AIG, the collapse of companies such as Bear Stearns and Lehman Brothers, and political unrest in the far reaches of the globe, there is always the possibility that the banks prolonged the collapse of our financial system. Skyrocketing oil prices have also highlighted our complete dependence and addiction to oil and brought the debate to the surface in the upcoming presidential election. For better or for worse, people are talking about oil, and not in favorable terms.

When Terreson’s oil price forecast was less than what Richard “Doesn’t-Deal-In-Oil” Berner believed it to be, his career at Morgan Stanley ended abruptly. When Berner predicted $150 oil, the entire world market responded to this claim. Was Terreson tired of shilling for Morgan and thus decided to retire at the tender age of 46? Or was he unceremoniously axed after refusing to alter his forecast on oil prices? Then again, was he part of the game all along and paid handsomely to “ride off in the sunset,” as one co-worker described?

Regardless of the reasons behind Terreson’s departure, there is still the question of motive.

Why drive oil prices beyond practical limits?

Let’s say for a moment that you run Morgan Stanley. Over the past few years you made a couple of bad deals. OK, so it was more than a couple, but not as many as your friends at Bear Stearns and Lehman Brothers. Thankfully, you have remarkable control over the price of oil-just by forecasting it. Heck, you don’t even have to “deal in oil” or do interviews “on oil stuff,” you just have to pick a number and watch the market actually try and hit it.

Not to mention you also own companies that operate refineries. You control shipping routes. The government has handed you a contract to store 750,000 barrels of home heating oil for the Northeast United States. You founded and are still an owner in a public exchange that handles energy trades that no one can really see. Win. Win. Win. Win.

It’s not difficult to see how America got here. The worst part is, it was all legal. The federal government, beginning with Wendy and Phil Gramm, cleared the way for tremendous systematic abuse in the financial markets to fatten the Gramm family bank account with blood money-Wendy Gramm’s multimillion-dollar take as an Enron board member and Phil Gramm raking in more than $335,000 in campaign contributions from the securities and investment industries.

Instead of being punished for these now well-documented actions, Wendy Gramm is still influencing Capitol Hill at the Mercatus Center and Phil Gramm has been advising McCain, the man who might be our next president.

People are beginning to contemplate peak oil and imagine that while the world may have flattened out for a while, it’s getting a whole lot rounder again. Kunstler proclaims, “Globalism was a product of a certain time and place and special circumstances, namely, a period of very cheap oil and relative peace between the great powers.” It’s what he calls the “end of the happy motoring era.”

Still, one can’t help but think about how quickly the end of this era may be arriving and for what reason. The “demand shock” that Masters speaks of also created a hunger shock that reverberated around the globe. Perhaps the analysts and speculators were acting to save their own banks in the short run––lest they wind up like Bear Stearns or Lehman Brothers.

But it seems awfully easy to manipulate the markets when you control so many pieces of the puzzle. Does saving a bank and focusing our daily discussions on renewable technology really equal thrusting millions of people into poverty and pushing price increases on the global food markets?

Congress has the ability to seize control of these markets even before the upcoming presidential election. The new president will decide whether we drill or not, but this decision has nothing to do with restoring the oversight and stability that existed in the commodities arena from 1936 until 2006. If it weren’t for federal oversight and regulation, Morgan Stanley-which was created in 1935 from the ashes of the 1929 crash-wouldn’t even exist. But history is often forgotten, or ignored, by greedy corporate raiders who are therefore destined to repeat it.

Sidebar:
How They Roll

Energias de Portugal (EDP) is the national energy producer for Portugal. For insight into how Morgan Stanley conducts its investments on the open market, the following are excerpts from a release by EDP announcing the sale of stock to Morgan Stanley subsidiaries. We have highlighted the different corporations, in case you lose track. See if you can follow along:

• “On April 21, 2008, Morgan Stanley notified EDP that as a result of a share transaction concluded on the 16th of April 2008 and in accordance with article 20 of the Portuguese Securities Market Code, it became [sic] to hold 79,157,462 ordinary shares of EDP, which represent 2.16% of EDP share capital and 2.16% of the voting rights and 16,745,810 convertible bonds into EDP shares, which represent .46% of the EDP share capital and an imputation of .46% of the voting rights.”

OK. Fairly straightforward. How did they do it? Take a deep breath and read the following sentence out loud.

• Morgan Stanley & Co. International – which is owned by Morgan Stanley UK Group, which is owned by Morgan Stanley Group (Europe), and this is owned by Morgan Stanley International Limited, that is owned by Morgan Stanley International Holding Inc that is owned by Morgan Stanley – holds 68,334,088 ordinary shares of EDP, which represent 1.86% of EDP share and capital and 1.86% of the voting rights and 16,745,810 convertible bonds into EDP shares, which represent .46% of EDP share capital and an imputation of .46% of the voting rights;

But wait, there’s more…

• Morgan Stanley & Co. Incorporated – which is owned by Morgan Stanley – holds 9,485,622 shares representing .25% of the share capital and .25% of the voting rights;

• MSDW Equity Finance Services I (Cayman) Ltd – which is owned by MSDW Offshore Equity Services, which is owned by Morgan Stanley – holds 1,000,000 shares corresponding to .02% of the share capital and .02% of the voting rights;

• Morgan Stanley Capital (Luxemborg) S.A. – Which is owned by Morgan Stanley International Holdings Inc, which is owned by Morgan Stanley – holds 316,552 shares representing .00% of the share capital and 0.00% of the voting rights;

• Bank Morgan Stanley AG (Zurich) – which is owned by MSDW Equity Finance Services I, which is owned by MSDW Offshore Equity Services, which is owned by Morgan Stanley – holds 21,200 shares corresponding to 0.00% of the share capital and 0.00% of the voting rights.

Whew.