In Sprecher We Trust. Hopefully.

Jeffrey Sprecher built a better mousetrap. But a mousetrap big enough to catch a whale? Apparently so.

Jeffrey Sprecher built a better mousetrap. But a mousetrap big enough to catch a whale? Apparently so. Sprecher is the founder and president of the Intercontinental Exchange (ICE) based in Atlanta. For all practical purposes he is the poster-boy of electronic trading and the man responsible for the meteoric rise of commodities trading. He’s also about to become the owner of the New York Stock Exchange. Do I have your attention yet?

In little more than a decade the commodities market has gone from $10 billion– a speck on the trading horizon – to more than half a trillion dollars. Nathaniel Popper’s front-page story in the business section of the New York Times today pulls the veil back on Sprecher the man and describes how he grew a little-known southern exchange into a juggernaut capable of purchasing the vaunted New York Stock Exchange. As Popper himself writes, “It sounds preposterous.”

That’s because it is.

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 Franken-exchange that is buying the biggest, most well known exchange on Earth.

Sprecher was even a bridesmaid recently when he nearly scuttled a merger between the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange by coming in with a higher bid for the CBOT. The Chicago trading establishment was so freaked out by Sprecher’s surprise bid that they put their legendary differences aside and came to a deal faster than might otherwise have occurred had he not been breathing down everyone’s neck.

Though he was unsuccessful in his last minute bid, Sprecher moved deftly like a great white shark through the rocky financial seas in search of his next prey. Never sleeping, always moving, forever hungry.

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. If the Bloomberg terminal revolution was in providing information quickly and precisely then the Sprecher ICE revolution was in giving traders (and the houses they worked for) the ability to act upon information in the same fashion. My criticism of Sprecher – and Popper for that matter – is the way in which the story of the ICE has come to be told and accepted.

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 even if the corporation itself was in the business of energy. This is the simplest way to convey its net result. The second loophole (and more meaningful for the ICE) was a maneuver by the Bush administration that granted the ICE foreign status as an exchange despite being based in Atlanta. This initiated a massive shift of trading dollars, and influx of new ones, onto the ICE for one reason: this singular move placed the ICE outside the purview of U.S. regulators at the Commodities Futures and Trading Commission (CFTC). Essentially, corporations could now trade energy futures electronically through the ICE without oversight or disclosure.

Sprecher has often stated that one of the great benefits of electronic trading is its inherent transparency. Theoretically, performing trades between parties on a screen reduces the likelihood of transactions being rigged. In some ways he’s right. We are unlikely to witness an old school “corner” where one party dupes all others into trading with it until it controls the vast majority, or position, of the item being traded. Electronic trading moves too quickly and there are too many players involved. But speed does not imply market transparency and openness.

Moreover, the mere fact that the founding investors of the ICE are some of the world’s largest investment banks and oil companies (Morgan Stanley, Goldman Sachs and BP) speaks to how little transparency there truly is. The fact that some of these banks (Morgan Stanley in particular) own and control oil companies and oil companies operate trading desks outside U.S. jurisdiction demonstrates how little need there is for small-time corners. Why pull off a two-bit corner when you have already cornered the entire marketplace?

Now, as Sprecher prepares to close on this historic transaction, investors, citizens and the government are about to be one step further removed from any realistic shot at transparency and oversight.

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 supermarket. The most important and direct relationship most of us have to Jeff Sprecher’s mousetrap is the high cost of the gas we pump and food we consume. Banks and oil companies have a vested interest in Sprecher’s success and in increasing their own revenues. Both are perfectly, mutually aligned. So far they have been able to grow profits with alacrity, free from federal oversight and bolstered by our collective ignorance of the process.

We’ve all been caught in Jeffrey Sprecher’s mousetrap. Now the question is will he “catch and release” or dispose of us in search of his next conquest. I hope he’s as nice and down-to-earth as Popper suggests.

 

Image: From 2008 Long Island Press cover story explaining the rise of the ICE and how Morgan Stanley became one of the largest oil companies in the world. For more on this story view the video below:

 

Wall Street Regulation

Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren… The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Part 4 of the Special “Off The Reservation” Election Series in the Long Island Press.

The Banking Act of 1933, commonly known as Glass-Steagall, was established to tame the harmful speculative behavior of an industry run amok in the early part of the 20th century; behavior many observers at the time credited for the market crash that precipitated the Great Depression. For some, the repeal of Glass-Steagall, by the Gramm-Leach-Bliley Act of 1999, was the deathblow to financial prudence on Wall Street.

 In reality it was simply the formal recognition of careless financial practices that were largely in place already. Since the near-collapse of the banking industry in 2008, Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren, the former federal consumer protection advocate now running for Senate in Massachusetts. The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Wall Street reform is as important as it was in 2008 but both President Obama and Gov. Mitt Romney have taken great pains to avoid talking about it too much. For his part, President Obama seems content to rest on the laurels of the Dodd-Frank Act, Congress’s attempt to rein in Wall Street excess, which had enough support to pass but not enough to be properly funded or enforced. According to Romney’s platform, he would “Repeal Dodd-Frank and replace with streamlined, modern regulatory framework.” That’s the extent of his vision for the future of Wall Street according his platform. Ten words.

So while the rest of the country is suddenly talking about a law enacted almost 80 years ago, these guys aren’t going anywhere near it. The truth is, Wall Street reform and, more specifically Glass-Steagall, is more complicated, making it easy for Obama and Romney to be evasive.

So let’s answer two questions. What would actual Wall Street reform look like and what exactly was Glass-Steagall?

The purpose of the original act was to establish a barrier between traditional banks and the risk-taking investment firms, denying investment banks access to consumer deposits and secure, interest-bearing loans. The unwritten effect of Glass-Steagall, however, was to establish a culture of prudency in the consumer and business banking realm, leaving sophisticated professional investments to more savvy financiers who had the ability to calculate the inherent risk of a financial instrument. For decades to follow, the merits of Glass-Steagall would continue to be debated, but it nevertheless drew a marked distinction between the function of a consumer bank and an investment bank.

Today reinstating Glass-Steagall is a common rallying cry among those who decry the bad behavior of Wall Street. Its repeal has become the fulcrum of nearly every debate surrounding deregulation. Actually accomplishing this, of course, is easier said than done.

The best way to reconcile the debate over whether to reinstate Glass-Steagall is to appreciate that the culture of Glass-Steagall was more important than the act itself. Over time the restrictions placed on bankers under the act were chipped away, but the culture that governed the banking industry endured beyond its measures. Eventually, savvy bankers and politicians found ways to loosen its screws and interpret the act to their own benefit.

Don’t Just Blame Republicans

In 1978, President Jimmy Carter oversaw the passage of the International Banking Act, a bill that should probably receive as much, if not more attention than Gramm-Leach-Bliley. Essentially, the act allowed foreign banks or entities that engaged in “banking-like activities” to participate in domestic financial markets. For the first time, foreign investment firms were able to make competitive loans so long as they didn’t compete for consumer deposits; initially individual states could determine whether their regulatory structure could support this new activity. The government would go on to loosen restrictions governing the competition for consumer deposits and allowing bank holding companies to treat money markets like checking accounts.

In his book “End This Depression Now,” economist Paul Krugman argues that perhaps the most influential step with respect to the banking sector came with Carter’s passage of the “Monetary Control Act of 1980, which ended regulations that had prevented banks from paying interest on many kinds of deposits. Unfortunately, banking is not like trucking, and the effect of deregulation was not so much to encourage efficiency as to encourage risk taking.”

 By 1987 the bank holding companies, including foreign companies allowed to operate within the U.S. banking system, were granted access to mortgages to create a package of investments called mortgage-backed securities; the threshold for the amount of investing activity in instruments such as these was also increased, paving the way for the growth of investments backed by the strength (or weakness) of the consumer market.

During that same year, members of the Federal Reserve began calling for the repeal of Glass-Steagall as then-chairman Paul Volcker was providing the tie-breaking resistance. But this was a mere formality because by this time, Glass-Steagall was effectively over.

Yet even though most of the threads of regulation had been pulled from the overcoat that protected consumers from risky banking practices, the culture of prudent banking still existed to an extent; maintaining the Glass-Steagall Act on the books was an indication of this sentiment. Throughout the decades when regulations were steadily eroding, powerful national figures such as Paul Volcker under Carter and Reagan, and Treasury Secretary Nicholas Brady under George H.W. Bush managed to temper the enthusiasm of the movement.

That George Bush Senior heeded their admonitions was an admission that the public’s appetite for deregulation was actually beginning to wane in the post-Reagan hangover. Richard Berke’s New York Times article of Dec. 11, 1988, on the eve of the Bush presidency, encapsulated this feeling. Berke wrote, “Lawmakers and analysts say the pressure is fed by a heightened public uneasiness about deregulatory shortcomings that touch the daily lives of millions of Americans: from delays at airports and strains on the air traffic control system to the presence of hazardous chemicals in the workplace to worries about the safety of money deposited in savings institutions.” Alas, these four years would prove to be a momentary hiccup in the deregulation movement.

During the Clinton years, the nation’s leadership was largely comprised of proponents of deregulation. In fact, by his second term, Clinton was almost entirely surrounded by rabid free market enthusiasts. A former chairman at Goldman Sachs, Robert Rubin, was Secretary of the Treasury, Alan Greenspan was still at the helm of the Federal Reserve and Phil Gramm was the head of the powerful Senate Banking Committee. All of these men had close ties to Wall Street and made no secret of their intention to release bankers from the burdensome shackles of regulation and oversight.

Reforming Reform

In 2008, economist Joseph Stiglitz warned of the enduring negative consequences of deregulation. At a hearing held in front of the House Committee on Financial Services, Stiglitz invoked Adam Smith saying, “Even he recognized that unregulated markets will try to restrict competition, and without strong competition markets will not be efficient.” One of Stiglitz’s solutions was to restore transparency to investments and the markets themselves by restricting “banks’ dealing with criminals, unregulated and non-transparent hedge funds, and off-shore banks that do not conform to regulatory and accounting standards of our highly regulated financial entities.”

For emphasis he noted, “We have shown that we can do this when we want, when terrorism is the issue.”

Still, the nagging question remains as to what reform might look like. After all, not all deregulation is irresponsible. Most of the discussion in the media surrounding deregulation revolves around the concept that our banking institutions are “too big to fail.” Thus the rallying cry for reinstating Glass-Steagall and separating banks from investment banks. I’m in tepid agreement with the underlying principle, but the reality of the situation is far more complicated. The fact is banking has gone global and the deregulation genie is out of the bottle.

As I said earlier, Glass-Steagall was as much about instilling a culture of prudency to the banking world as it was about erecting a barrier between commercial banks and investment banks. Advocates like Elizabeth Warren like to say that prior to 1999 and the repeal of Glass-Steagall, the economy functioned through periods of both prosperity and recession since 1934 without the banking sector once collapsing. It’s a fair, but oversimplified assertion that overlooks the fact that Glass-Steagall was on a ventilator in 1978 and dead by 1980. A 30-year run of prosperity from 1978 to 2008, with a few brief recessions in between, is nothing to sneeze at.

Restoring balance to the banking sector does not necessarily require separating the banks. Not yet at least. It begins with transparency and reestablishing the culture of prudency that has been conspicuously absent over the past decade. After all, you cannot value what you cannot see; nor can you mitigate risk unless you first manage reward.

What this really boils down to is accountability, which is ultimately a behavioral issue. Allowing investors to actually see how a bank behaves by viewing the size and scope of their transactions would theoretically assuage their appetite for risk. Given these conclusions, it’s easier to make the case that our current president would provide more accountability and inspire behavioral changes on Wall Street, particularly given Romney’s intransigence when it comes to considering financial reform. But tough talk against Wall Street has all but disappeared from Obama’s rhetoric leaving little hope that a second term will elicit any further positive change. So this week, while neither man seems serious about financial reform, the status quo is better than further deregulation and letting bankers rule the roost.

Tie goes to the incumbent.

The Grammy’s, Lin-Sanity, Jon Stewart (and Iran)

This is another column about the burgeoning crisis between the US and Iran. Since I have yet to gain any traction with this issue I have decided to sprinkle gratuitous pop-culture references throughout the piece to generate interest.

This column first appeared in the February 16th, 2012 edition of the Long Island Press.

Over the past couple of weeks my frequent collaborator, Dorian Dale, and I have set the burgeoning conflict between Iran and the United States in our sights, determined to bring this potential disaster further forward in our nation’s collective consciousness. But while Whitney Houston’s body is in search of an arena large enough to hold her mourners, talk of the next Great War generates barely enough interest to fill a teacup.

Therefore, I have decided to shamelessly sprinkle gratuitous pop-culture references throughout this column in order to reach a larger audience. (References are bolded for navigational ease.)

Iran is the slow moving accident you can’t take your eyes off of. It’s LIN-sanity. For that matter, so is the global economy, the crisis in the Eurozone and the price of oil. Let’s add in the GOP primary season for good measure to bring this tainted stew to a boiling point because the decision-making process in America this year will be guided by partisan politics rather than practical policies.

New Yorkers would be wise to look up from their smartphones for a moment to see what’s really happening. Not only is New York home to the United Nations and ethnic communities from around the globe, it bears visible scars of terrorism. Many of its residents’ livelihoods are directly or indirectly tied to the world financial district, and don’t forget that The Daily Show with Jon Stewart is also taped in the city. Moreover, conventional wisdom (if there is such a thing) has it that should the wheels come off the Obama train, our current governor will be a top Democratic contender to challenge whichever GOP dipshit is lucky enough to hoodwink America into voting for him.

One way for Obama to lose the upcoming election is if oil prices continue to get out of hand. As it is, we are already experiencing higher-than-normal pricing during the winter months. Analysts are already warning that if the trend continues and conflict with Iran steers toward the inevitable, oil could hit $200 per barrel this year, translating into approximately $6 at the pump. If this were to happen, Barack Obama’s chances at re-election would be slimmer than Adrien Brody.

Many in the media have dismissed the likelihood of confrontations between the U.S. and Iran as “saber rattling,” but there have been some very real world occurrences that are beyond rhetoric. The attempted bombing of the Israeli embassy in Bangkok this week by an Iranian man and successful assassinations of nuclear engineers within Iran over the past few months have heightened tensions between Israel and Iran. For its part, the United States is positioning itself to defend against the threatened closure of the Strait of Hormuz, a key “choke point” for oil tankers in the Middle East. Along the way, the United States rescued Iranian fishing vessels twice in one week—events that garnered brief, but small international attention as opposed to George Clooney’s performance in “The Descendants,” which has received international acclaim and Oscar nominations.

While the world does its familiar dance of deadly brinksmanship, consider for a moment the case of Morgan Stanley. Never has one company had so much to say about, or perhaps to gain, from the pressing issues at hand. Morgan Stanley embodies the intersection of finance, politics, oil and war more than any other corporation on Earth. If ever there was an example of the “corporatization” of America, this is it. I’m reviving my frequent criticism of Morgan Stanley so we may, in the words of Belgian-born artist Gotye, “Walk the plank with our eyes wide open.”

First off, trying to drill down into Morgan’s structure is like jumping down the rabbit hole in search of Johnny Depp.  The list of Morgan Stanley subsidiaries is a 25-page, single-spaced document with 207 corporations registered on the Cayman Islands alone. What most people, and even some savvy investors, don’t realize is that among them you will find a host of companies directly related to or involved in the oil industry.

Take, for example, Heidmar, a global oil shipping company with 120 vessels. Or TransMontaigne, which controls a third of the oil terminal business in the United States. Both are wholly-owned subsidiaries of Morgan Stanley. Furthermore, Morgan owns $1.2 billion in shares of ExxonMobil and $900 million in shares of Chevron. Oh, and many of the oil futures contracts are traded on the Intercontinental Exchange in Atlanta, which was founded by Jay-Z. No, jk, lmfao. It was founded by Morgan Stanley, Goldman Sachs and BP.

Piece this together and you will quickly understand that there are two things of critical importance to Morgan Stanley where the oil business is concerned: price and volatility. When you add to the equation that the leading energy analysts in the world who predict the future price and volatility of oil are from… you get the point.

To borrow from the Occupy Wall Street movement—This is what democracy doesn’t look like.

Now let’s get our conspiracy freak on for a moment and take a look at whom Morgan Stanley is backing for president of the United States. No, it’s not Steven Colbert. Morgan is steadfastly behind Willard “I support military action in Iran” Romney. In fact, it is Romney’s third top contributor in the 2012 election cycle behind only Goldman Sachs and JP Morgan, two companies that also know a little bit about gaming the financial markets.

Allow me to go one step further. Conflict in the Strait of Hormuz would be the best thing to happen to Morgan’s oil interests, as they deal mostly in the Western Hemisphere and would benefit greatly from their own prognostications of skyrocketing oil prices. Because the United States is officially now a net-exporter of oil, the American petroleum business and those financial companies that profit from it would experience a boom like never before.

The very thought of gas and oil prices going even higher sends chills down the spine, especially here in New York where we rely so heavily on home-heating oil and transportation in our daily lives. But don’t worry, New Yorkers, we’re in good hands there, too: Morgan Stanley owns the majority stockpile of home-heating oil reserves in the Northeast. Charlie Sheen can only dream of “winning” as much as Morgan Stanley.

 

All photos from the Associated Press. 

Fracking: The Ultimate Scam Revealed

By touting natural gas as the clean-burning fossil fuel that is cheaper to use and helps reduce our dependence on foreign oil, the industry has nailed the PR trifecta: cheaper, cleaner and patriotic.

gas mask hydrofrackingOne of the great joys of writing, as in science, is the accidental discovery. To wit: penicillin. And while this entry hardly ranks near Alexander Fleming’s pharmaceutical breakthrough, it does relieve a particular itch that has been nagging my brain. For months I have been vexed by the discrepancy in pricing between crude oil and natural gas. (Wait, I know how tedious commodities can be but I promise you this column is worth sticking with.) Unable to settle on any fundamental market-based explanation, I placed the issue on the mental backburner. It was only when I decided to update a series of articles on the role of speculation in the commodities markets that I happened upon the most plausible solution to this puzzle.

First, a little context. Over the past couple of years New York State has been flirting with the idea of hydraulic fracturing, or “fracking.” The discovery of enormous pockets of natural gas in the Marcellus Shale formation that runs from West Virginia, Pennsylvania and New York to as far as Ohio, has led to a modern-day gold rush in the region, with Pennsylvania several years ahead of New York. While the gas has always been there, it wasn’t until the turn of the millennium when controversial chemical enhancements invented by Halliburton were added to a difficult horizontal drilling technique that accessing this gas became feasible.

Almost immediately, however, environmental concerns began to mount. Stories of contaminated groundwater, intense air pollution and, most recently, a ruptured fault line and mini-earthquake in Youngstown, Ohio, on Dec. 31, have begun leaking into public consciousness. Gasland, a documentary by Josh Fox, increasingly agitated environmental organizations, and high-profile activists such as actor Mark Ruffalo have helped fracking reach the tipping point in the media. Once seen as a panacea for rural land owners in depressed parts of the country, fracking has become a pariah in the environmental community, setting the stage for yet another battle between the oil and gas industry and environmentalists. Caught in the middle of the entire fiasco at the moment is Gov. Andrew Cuomo, who is cautiously moving toward legalizing fracking in New York, though his public reticence highlights how tenuous this decision truly is.

Early on, I came down firmly against fracking in New York, and the Long Island Press was in the vanguard of reporting on it downstate. So I’m on record quite clearly as to why I believe fracking to be a disaster for New York, or anywhere else for that matter. No need to rehash this position. Still, one piece of the broader issue was missing—until now.

Here’s the issue: Fracking is expensive. The prolonged low market price of natural gas is the most logical deterrent to increasing drilling because it barely pays to pull the gas out of the ground. Moreover, the U.S. Energy Information Administration projects that natural gas demand in the United States should rise only 11 percent over the next 25 years compared to a projected rise of more than 300 percent in China over the same period.

Here’s where the market rationale gets murky. Analysts point to increased demand for fossil fuel in developing economies as the primary reason behind the steady rise in oil prices. Goldman Sachs’ most recent forecast of Brent Crude Oil, commonly known as “sweet light crude,” is $120 a barrel for 2012, with most market analysts following suit. A weak dollar, the ongoing crisis and uncertainty in the Eurozone, a burgeoning conflict between the U.S. and Iran, and continued growth in China, India and Brazil are the oft-given reasons behind these prognostications.

Historically, natural gas and oil prices have generally moved in tandem, and with natural gas gaining momentum as the fossil fuel of choice, it only makes sense that they would continue their mirrored trajectory. Instead, the opposite has occurred. Crude oil remains stubbornly high and creeping ever higher while natural gas remains depressed.

A closer look reveals that the world has record stockpiles of both fuels, and has developed incredible potential for new sources such as the Marcellus Shale play or the tar sands in Canada. Then there are the yet-to-be-developed fields in Iraq that, according to the New York Times, are “expected to ramp up oil production faster than any other country in the next 25 years, with a capacity…more than traditional leaders like Saudi Arabia.” Or, if you prefer, the real reason we went to war in Iraq.

Excess supply, new discoveries, and sluggish demand—and yet only natural gas is acting appropriately in the markets. This behavior is undeniable proof that the invisible hand of speculation is at work, which naturally begs the question as to why traders would suppress the price of gas but not oil.

For this answer we must turn back the clock once again and revisit several acts in Congress over the past two decades that made it possible for banks to merge with investment banks and trade commodities without limits and without transparency. Much of this trading is done on the Intercontinental Exchange, a trading platform that was founded and owned by Morgan Stanley, Goldman Sachs and BP. When you understand that markets today are dominated by investment banks and oil companies, who are at times one in the same (Morgan Stanley’s direct holdings in oil companies, fossil fuel infrastructure and transportation companies make it one of the largest oil companies in America), it is possible to fully comprehend the psychology behind natural gas pricing. Oil companies and investment banks have the ability to move the market by forecasting prices and investing in their own products through opaque exchanges that they own, so no matter where prices are they are making money.

Now you’re ready for the secret behind the fracking con job.

As previously mentioned, domestic natural gas is difficult to procure. The process is devastating to human health and the environment, and the effects are irreversible. To gain momentum and influence public opinion, the oil and gas companies have launched an ingenious propaganda assault on America. By touting natural gas as the clean-burning fossil fuel that is cheaper to use and helps reduce our dependence on foreign oil, the industry has nailed the PR trifecta: cheaper, cleaner and patriotic. And with an earnest pitchman like T. Boone Pickens, who wouldn’t believe it?

The problem is none of the above is true. First, natural gas might burn cleaner than oil but the process to extract it is so harmful it doesn’t matter. And second, because the same companies who are in control of the product are in control of the pricing, once they sew up the drilling rights they can simply jack up the price. This leaves the final argument that is wrapped in the American flag and served with a side of apple pie: reducing dependence on foreign oil for the sake of the union.

For the truth, let’s check in with the rest of the world to see what they say. (This was the happy accident that prompted this column.)

According to India’s leading daily business newspaper, the Business Standard, “the increasing shale gas production in the U.S. has led to a surplus, likely to increase in the coming years. The U.S. is, therefore, eyeing export to countries like China, Japan, Korea and India… In the past, the U.S. has been an importer of gas.” The article goes on to quote A. K. Balyan, chief executive officer of Petronet LNG, India’s largest liquefied natural gas importer, who states, “With an increase in U.S. gas production, the gas receiving terminals need to be converted to exporting terminals.”

Ta-dah!

The average life of a fracking site is seven years. At best. The environmental and human health catastrophe is forever. All of the current talk of job creation and reducing dependence on oil is a sham. Our natural gas stockpiles are higher than ever and the demand for natural gas, by our own country’s admission, will remain basically flat until 2035. The oil and gas companies are planning to export gas from the Marcellus Shale region to the same developing economies we’re supposed to be competing against. How’s that for homeland security?

The real insult? American oil and gas companies are willing to risk the health and welfare of our own citizens by fracking on our land in order to export fuel they claim is more beneficial to the environment. Normally, our companies are busy screwing up other countries in pursuit of their natural resources for our own consumption. As if this isn’t bad enough, they are finally committing the cardinal sin of shitting where they eat.

Let’s do the right thing for once: Ban fracking now. There’s no other way.

JANUARY 11th – FINAL DAY FOR PUBLIC COMMENT ON DEC WEBSITE. CLICK HERE

Main Photo Image: Photograph from AP. April 22, 1970, the first Earth Day.
Long Island Press cover image. Original art by Jon Sasala
T. Boone Pickens
. AP Photo.

This article was published in the January 5th, 2012 edition of the Long Island Press.

Onions and Oil

The marriage of deregulation and technology over the past several decades has birthed franken-markets that influence nearly every aspect of our daily lives.

Sam Siegel and Vincent Kosuga were an unlikely duo. Siegel owned cold-storage facilities on the outskirts of Chicago, which held and distributed, among other things, onions delivered by farmers from around the country. Kosuga was a boisterous, larger-than-life farmer and amateur chef from the Catskills who grew onions that would find their way to Siegel’s warehouses. The man could cook just about anything as long as the recipe called for onions. Perhaps his greatest concoction, however, was the scheme he cooked up while trading onions on the floor of the Chicago Mercantile Exchange (the “Merc”) with his storage partner-turned accomplice, Sam Siegel.

Both men made good money hedging their onion farming and gathering operations by trading onion futures in the 1950s at the Merc. Like most of the men they traded alongside, Siegel and Kosuga possessed iron constitutions for risk. To outsiders theirs was a bizarre world filled with a ragtag bunch of gamblers who spoke furiously with their hands, called one another by their trading nicknames and kept mostly to themselves. It was an insular existence. Then one day Siegel and Kosuga’s actvities drew an unwelcome light on the clandestine world of commodities trading and prompted Congress to blacklist onions from trading on the exchanges.

Here’s how it went down. Because Kosuga controlled a large portion of onion growth and both men had the capacity to store excess supply along with the financial wherewithal to purchase contracts for delivery from other onion growers, they effectively controlled the price when the product came to market. It was a classic “corner.” When the harvest came in 1956, they bet against the same growers they contracted with by placing sell orders in the Merc while simultaneously dumping their excess inventory, thereby flooding the market with onions and driving prices into the ground. In an instant, Siegel and Kosuga made millions while many farmers went broke, buyers were left bewildered and onions were rendered worthless.

Their plan worked so well that President Dwight D. Eisenhower signed the Onions Futures Act in 1958 to prevent the trading of onions forever. Onions, it seemed, were too important to allow unscrupulous speculators to monkey with.

By and large the commodities markets were extraordinary examples of self-regulation. Instances of malfeasance such as the corner perpetrated by Siegel and Kosuga were typically rooted out quickly. Volatility might have been a trader’s best friend, but fraud was never tolerated. It was somewhat of a code of honor, the trader’s ethos. The self-policing activities at the Merc or their crosstown rivals at the Chicago Board of Trade caught the eye of free market ideologues like the economist Milton Friedman who would argue in the latter half of the 20th century that free markets were pure and without boundaries; that any outside influence, particularly governmental, would dilute and corrupt the process.

Friedman’s work would not only earn him a Nobel Prize in Economics, it would inspire a generation of free-market enthusiasts such as Alan Greenspan, Federal Reserve chairman, and Robert Rubin, Secretary of the Treasury. But it was Friedman’s friend and protégé, Leo Melamed, the egotistical and charismatic head of the Merc, who would change the nature of trading more than any other person in modern history.

In 1972 Melamed established the International Monetary Market (IMM) within the Merc to facilitate the trading of currencies afer President Richard Nixon repealed Bretton-Woods, which removed the United States from the gold standard and allowed world currencies to float. In short order Chicago would no longer be known as the “second city” when it came to trading. The IMM caught fire and opened the possibility of trading futures on just about anything. Everything, that is, except onions.

Without historical context, it would be impossible to comprehend why President Barack Obama isn’t doing more to contain the ravenous behavior of market traders. There are really two overarching reasons why this is the case. First, to understand these markets is to appreciate how institutionalized and endemic trading is to Chicago culture. Then-Illinois Sen. Obama, for example, was one of the first to congratulate the aging Melamed on the historic merger of the Merc and the Board of Trade to  create the behemoth CME Group. The political and financial elite in Chicago would sooner give up the Cubs rather than commodities trading.

The second, more obvious reason is that financial markets today dwarf the federal government. Trading futures on commodities such as wheat, flax, onions and potatoes are quaint reminders of a bygone era. Images of bleary-eyed traders crammed into pits, throwing paper on the ground and making quizzical gestures in the air belong on the walls of a museum.

The marriage of deregulation and technology over the past several decades has birthed franken-markets that influence nearly every aspect of our daily lives. From controlling pensions and mortgages to home-heating oil and bread, traders are pagan gods and we are their minions. Although markets today are bigger and faster, the underlying truth to the trading game is simple, proven and unwavering:

For every winner, there is a loser.

In today’s world Siegel and Kosuga are Goldman Sachs and Morgan Stanley. Except these guys won’t be caught because they changed the rules. They control the markets, the exchanges, the products that are traded and the currencies we use. They have the ability to name their price then bet against their own recommendations. It’s the perfect modern corner. And it has the markets behaving badly and acting counter-intuitively.

It is why exchanges no longer react to normal market forces like supply and demand, weather patterns and monetary policy. It is why oil prices remain high during a recessionary period and weak demand, why the dollar has retained relative strength despite “quantitative easing,” and why food prices remain out of reach for people in developing nations. It is why deregulation failed the public and enriched companies like Goldman and Morgan.

These companies do more than move the markets. They move economies. Nixon may have started the ball rolling and Obama might be powerless to control it today, but every Congress and president in between have been complicit in the world’s greatest shell game that moves money from around the globe into the accounts of just a handful of firms.

Deregulation fanatics can scream about the government all they want but they’re ignoring the fact that the government lost control of the country long ago. All the proof you need is in Chi-Town. Fifty years ago onions were considered too crucial to the public good for traders to bet on. Today, everything from crude oil to the almighty dollar is on the craps table and traders are using loaded dice.

If you love this shit as much as I do, check out The Futures by Emily Lambert (Basic Books) and Zero-Sum Game by Erika Olson (Wiley).

The Dow of Poo

Of all the opiate-like recovery indicators, it’s the Dow Jones Industrial Average that offers the greatest high when injected into the American psyche and, in this case, keeps the bubble inflated.

 

Tao of PoohPart III of The Season of Our Disconnect

Benjamin Graham and David Dodd published a book titled Security Analysis in 1934 that would become a staple financial resource for the investment industry. In the foreword of the sixth edition the great Warren Buffet himself described their book as a “roadmap for investing that I have now been following for 57 years.” With the stock market crash of 1929—a result of the excesses during the preceding decade—fully in the authors’ rearview mirror, they described the collapse in stark, honest light:

“The relaxation of investment bankers’ standards in the late 1920s, and their use of ingenious means to enlarge their compensation, had unwholesome repercussions in the field of corporate management. But it may not be denied that devious and questionable means were frequently employed to secure these large bonuses to the management without full disclosure of their extent to the stockholders.”

The sound investment philosophy behind Security Analysis followed assiduously by the old Oracle of Omaha and tens of thousands of investors who came before him was established as a reaction to the corrupt practices of the Roaring Twenties. Here we are again, lo these many decades later, none the wiser. Taxpayers have been picked up by the ankles and shaken furiously for any remaining change, having been duped by the same Wall Street con artists who employed “devious and questionable means” as described above. Only this time, less than a century later, the bankers weren’t doing swan dives out their windows because they did learn one invaluable lesson from the past: If you’re going to bilk the system, make sure when it all goes bad that you control the release valve on the money flow by installing bankers inside the tank.

While most of America didn’t know what was going on behind the scenes of the recent financial crisis, people like Buffet sure did. Though no longer the wealthiest person in the world (he’s the third), Buffet has maintained his reputation as the preeminent investor on the planet for quite some time in a folksy and unassuming way. He’s the Wilford Brimley of investing, giving us a wink and telling us to eat our oatmeal and buy IBM. But his $5 billion bailout (what else can you call it?) of Goldman Sucks in 2008 shows that the old codger knows a good bet when he sees one, even if the company is rolling with loaded dice. (He got his money back, with a handsome interest payment, and retained warrants on $5 billion more of Goldman stock at what looks to be a favorable strike price.) From a bird’s-eye view, here was the con in a nutshell: Goldman CEO Lloyd Blankfein and company fleece the government for gobs of free money during the bailout—with people like Buffet backstopping their liquidity—to buy up the shitty investment packages they created, sold to their investors, and then bet against themselves.

That part is history. The ensuing game of smoke and mirrors—to restore sanity and transparency into the shit show they created—was to get the government to pony up billions more for their coffers at no cost (and no risk) so they could “invest” this money back into the economy.

Only it never went back into the real economy, instead weaving its way through the banking backchannels where free money flowed to investment banks, who gave it to hedge funds, who invested in government-backed securities, mega-corporations and, yes, even the same kooky “off-balance sheet” investments like swaps and derivatives being traded on offshore exchanges none of us can track. If you failed to spot the point where it actually came back to the taxpayers or funneled through the economy, you’re not crazy because it never happened.

Buffet may have built the most successful investment enterprise in history with Berkshire Hathaway by following the sound advice of people like Graham and Dodd, but it probably didn’t hurt to know that out of all the players in the multiple-bailout fiascos beginning in 2008, Goldman Sucks would wind up on top since nearly everyone involved in engineering the bailouts were former Goldman Suckers or beholden to them. Now we’re stuck in a bizarre carnival mirror economy with high unemployment, low consumer confidence, dwindling savings, and a global debt crisis while we’re being told at the same time the country is in a recovery, Wall Street firms and major corporations are posting incredible profits and the Dow Jones Industrial Average is trading above 12,000. Quite the disconnect, indeed.

It’s called a bubble, and it’s the last one left.

When I asked my friend Peter Klein, a financial advisor on Long Island, how he would characterize our current situation, he referred to it as “the stimulus bubble.” Now the question isn’t whether the bubble will pop, but when. And it’s people like Lloyd Blankfein that are holding the pin. But like every bubble, the average person never fully realizes when he or she is floating inside of it, particularly when receiving mixed messages like the ones above. But of all the opiate-like recovery indicators, it’s the Dow Jones Industrial Average that offers the greatest high when injected into the American psyche and, in this case, keeps the bubble inflated. As average citizens we tend to look at the Dow as the answer to the eternal Ed Koch question: “How am I doing?” Every top-of-the-hour market report on radio and television begins with a Wall Street update tethered to the performance of this antiquated measure of economic health.

For his part, Peter takes little comfort in the Dow’s astounding recovery from its low of around 6,600 in 2009, preferring to monitor indices such as the S&P 500 or the Russell 2000, which have a wider breadth and reach. The Dow, after all, is only comprised of 30 companies with familiar names like Coca-Cola, WalMart and General Electric, which give the illusion that these are somehow the type of corporations our economy is based on. It’s not that these are bad companies or even that the Dow is a lousy index, it’s just that they’re no longer relevant in today’s economy as an indicator of performance. Furthermore, it doesn’t claim to be. The problem is that the Dow is financial pabulum being fed to us by the media and Wall Street alike.

Because the Dow has traditionally been the criterion by which the average person gauges America’s overall economic health, there is a tendency to believe in its healing power. And to an extent it does make a little sense. After all, stocks don’t invest in themselves, right? The money has to come from somewhere. So, if the trading volume is still high, and our major corporations are swimming in investment cash, the logical question is: “Where is the money coming from?” When I asked Peter about this, he didn’t hesitate to respond: “Hedge funds are more or less controlling daily market flows.”

This is an astounding revelation, considering hedge funds didn’t even exist 20 years ago. But today, they are the henchmen that front the investment bank cartel because unlike mutual funds that dominated institutional trading before the rise of the hedge fund, these funds can be leveraged. So not only have the investment banks like Goldman seeded these funds with investment money, they provided them with tremendous loans comprised of…you guessed it… taxpayer money. All it takes is a little reverse engineering and logic to figure out why the Dow is still riding the wave while most Americans are out to sea believing a life raft is coming at any moment. Essentially, we’ve been had, because the only safe harbor is what writer Matt Taibbi sublimely refers to as the Grifter Archipelago—islands of entities teeming with corporate raiders accountable to no one and in control of everyone. It’s a beautiful thing, really, if you’re one of them.

 

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

Lying Is Big Business

The world has transitioned from the era of “too big to fail” to “to big to tell the truth.” The bigger the entity, the larger the lie and the more we believe it

Pinocchio
"I told you I was a 'grow-er' not a 'show-er'"

The world has transitioned from the era of “too big to fail” to “to big to tell the truth.” The bigger the entity, the larger the lie and the more we believe it. The lies that big companies and governments tell are typically shrouded in logic so bent the lie actually sounds plausible. The past couple of weeks have been rife with logic-bending lies espoused by corporate spinsters and government spokespeople.

In the government category, the title of World’s Biggest Prevaricator goes to China for reporting to the International Monetary Fund that its GDP grew 11.9 percent in the first quarter. Things are going swimmingly for the world’s third-largest economy despite rising oil prices, slumping consumer demand, high global unemployment figures and rising concerns over European and American debt levels. Out here on the limb it sure looks like they’re just making it up.

Here at home, the commercial and investment banking sector has been “surprising analysts” by beating quarterly earnings estimates lately as well. The Dow is up over 11,000 on all of the positive news coming out of Wall Street and bankers are breaking their arms slapping each other on the back. But listen closely to the reports of the banking sector rebound. Most of the reports talk about how the big banks are recording huge profits on their investments, which is covering for the continuing losses on their loan portfolios. Therein lies the lie.

Banks are supposed to make money from their loan portfolios. Investment banks are supposed to make money from underwriting mergers and acquisitions. Neither is happening right now, yet the stock market is soaring once again and banks are posting sizable earnings. So even though business credit is still tight, individuals are defaulting on credit cards and mortgage payments, and there are no significant deals to be underwritten on the horizon, the banks are “surprising analysts.”

So how did we get here? When the government allowed the banks and investment banks to merge, the newly formed financial behemoths poured money indiscriminately into the markets and created investments even they couldn’t understand. (Deep breath, and…) The banks got in deep shit, so the government borrowed money from the taxpayers, gave it to the banks who then invested it in the stock market instead of loaning it to real people, which is artificially pumping up the Dow and allowing banks to reap enormous profits on their investments. On top of the bailout money, the banks are even taking out low-interest loans from the government, then reinvesting the money into government treasuries at a higher rate. Neat trick, but not sustainable.

Now it seems as though the untouchable investment firm Goldman Sachs may have known more about the time bomb that was the derivatives market and made deliberate moves to profit from the scheme while duping investors. Don’t worry, they’re getting ahead of this quite nicely. Despite the SEC’s investigation into the matter, Goldman is blaming their seemingly duplicitous behavior on the actions of one person: Fabrice Tourre, the former wunderkind specialist at Goldman is the current fall guy being spoon-fed to the media and the SEC. What I find interesting about this tactic is Goldman has forever flaunted their philosophy of constant communications at all levels of the firm as the reason they are able to foresee fluctuations in the market. During the financial meltdown they credited their stability (relative to the likes of Lehman and Bear Stearns) to their remarkable communication and management skills. Apparently Tourre wasn’t invited into the daily huddle.

Lastly, filed under “ridiculous” comes the Food and Drug Administration (FDA). The FDA would like to regulate the American salt intake. Pesticides, unregistered chemicals, preservatives, food dyes made from petroleum, bovine growth hormones, steroids and antibiotics are all still OK. But we really must get a hold of this whole salt issue. This may not be as intriguing as watching China lie about its GDP or American banks play three-card-monte with government bailout money, but it’s a wonderful example of spin from one of the finest huckster agencies in the biz.