July 20, 2013

Ban Goldman Sachs from Playing in Commodity Markets

By EconMatters


Federal Reserve Review

On Friday Reuters reported that the Federal Reserve is going to review the 2003 decision that allowed regulated banks to trade in physical commodity markets: “The one-sentence statement suggests the Fed is taking a much deeper, wide-ranging look at how banks operate in commodity markets than previously believed, amid intensifying scrutiny of everything from electricity trading to metals warehouses.” Reuters goes on to say, “While the Fed has been debating for years whether to allow banks including Morgan Stanley (MS.N) and JPMorgan (JPM.N) to continue owning assets like oil storage tanks or power plants, Friday's surprise statement suggests it is also reconsidering whether all bank holding firms should be able to trade raw materials such as gasoline tankers and coffee beans.” 

Big Banks & Unintended Consequences of Fed Policy

The Fed is finally getting that the Big Banks are canceling out any intended good that may accrue to wealth creation by pushing up stock prices, if at the same time these same financial institutions also push up commodities like oil, gasoline, copper, heating oil, wheat, corn, and soybeans with the same cheap QE stimulus money.

The fed is trying to weed out some of the unintended consequences of their QE stimulus program. Because on one hand they are trying to stimulate the “Wealth Effect” with higher stock prices, but these bankers have so much cheap capital available to them, and with the fed mandate to boost asset prices, they cannot help but juice up commodities at the same time. 
This leads to adding a huge tax drag on small business, consumers and the overall economy with commodity prices trading well above the fundamentals of a sluggish global economy, and a domestic US economy treading water at an anemic 1.8%.

The fed is finally realizing that they should be getting much more bang from their monetary stimulus efforts, and the added economic costs of over-inflated commodity prices just negates any positives of their stimulus programs.

Where have the Regulators been?

But it is a shame that it takes the Fed to finally clamp down on the banks in this area as regulators should have banned these firms for trading commodities after the oil run-up of 2007 when banks pushed oil to $150 a barrel. 

The patterns of banks manipulating markets are so numerous and widespread in financial market history that there is no way regulators should have let them anywhere near economic sensitive staples for consumers like Wheat, Soybeans, Oil and Gasoline. Furthermore, if the regulators did any investigating at all they would find much more abusive market manipulation practices than Libor Rate Rigging.

Is there a market the Big Banks haven`t tried to Manipulate?

Name me one market these banks haven`t tried to manipulate or Rig? Whether it is the recent settlements or future settlements in the Power Industry or the many manipulative practices discussed regarding “Metals Warehousing” to outright manipulation of key commodities by artificially taking supply off the market which has happened many times in the history of the oil markets. 

The point is these firms cannot be trusted, their past behavior in anything market related from CDS, MBS to levering up their balance sheets by 40 to 1 ratios, should serve as a warning to any critical regulative body that it is a bad idea to let them “play” around in any essential commodity that consumers rely on for daily living purposes.
Congress initiated the Fed Review

It is about time that Congress started doing their jobs and initiated this inquiry by the Federal Reserve. The bigger question is why did it take 5 years after the financial crisis to realize these banks are bad market participants? 

The Oil Market is the most Manipulated Market in the World

Just look at Oil prices above $80 a barrel when the Global economy was in a full blown recession. You actually think Oil prices were there because of the fundamentals of supply and demand in the market? Please, the United States was importing 5 Billion barrels of oil a year in 2006, and now we are importing 3 and a half Billion barrels of oil in 2013, and prices are 40% higher with China`s economy at stall speed?


 Banning the Banks brings back the Fundamentals into the Oil Market

This is an amazing reduction in imports of 1.5 Billion and prices are 40% higher with increased Global production. Consumers, Regulators, and Businesses have no clue how Big Banks have totally changed the pricing of everyday commodities like Oil and Gasoline once they started trading these markets electronically, and utilizing their other manipulative strategies to game these markets! 



40 to 1 Leverage is never good for Markets


Excuse my French here, but Get these “Regulated” Banks out of Essential Commodities, and never let them back in! It is about Freaking Time, and it really took ‘Regulators’ that long to realize that banks trading gasoline was never going to be good for consumers and the economy? Where do you think that 40 to 1 leverage goes? The recent 20% gain in gasoline prices in a month in an over-supplied market is where that leverage goes!

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