Wall Street Pulls an Enron With Commodities

wall street and elizabeth warrenIn an exemplary bit of reporting that appeared as the lead article in Sunday’s New York Times, the journalist David Kocieniewski exposes the corrupt practices of Goldman Sachs, JP Morgan Chase, and other big Wall Street players in rigging the aluminum and copper markets. Even before we’ve had a chance to recover from the Great Recession caused by their earlier malfeasance, the usual suspects among Wall Street’s “too big to fail” banks continue to plunder our society by artificially driving up commodity prices.

According to one document cited by Kocieniewski the Federal Reserve Board assured the public that dropping regulations forbidding banks from controlling “nonfinancial businesses” (such as aluminum or copper warehouses) could “reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, or unsound banking practices.”

The above statement is Banker-Speak for: “We’re going to change a commonsense regulation knowing full well it will be terrible for the economy but serve the interests of our friends among the profiteers.” Allowing the big banks to own commodity companies has brought about exactly the problems the Fed claimed it wouldn’t.

For example, Metro International Trade Services, a company Goldman Sachs purchased in 2010 for $500 million, has enabled the bank to manipulate the spot market in aluminum and artificially generate profits in the billions of dollars.

The London Metal Exchange, which is supposed to guard against these kinds of rip-offs (and was recently sold to a Hong Kong company), “is made up of executives of various banks, trading companies and storage companies – including the president of Goldman’s Metro International.” (This arrangement echoes the LIBOR scandal where financial insiders rig the game they’re supposed to be refereeing.)

Every time Goldman CEO Lloyd Blankfein and JP Morgan CEO Jamie Dimon testify before Congress they offer up boilerplate about how their companies’ “market making” helps to “allocate capital,” spark “innovation,” and “hedge against risk.” But it’s all a pack of lies. What they’re really doing is the age-old technique of market manipulation, spruced up with a new complexity via financial “instruments” that dance out of the heads of people like Blythe Masters.

Capitalism Isn’t Suppose to Work This Way

“Deregulation” has been the governing principle of federal “oversight” of the financial sector since Ronald Reagan’s first day in office and continues to the present despite the repeated catastrophes the unregulated banks have hurled on to the public in recent years.

In the bigger picture, ordinary working Americans have paid dearly for the unregulated financialization of the U.S. economy and the concomitant rise of Wall Street power in Washington. The big banks have captured some of the nation’s most important institutions and regulatory bodies. It’s amazing what a few hundred million dollars in lobbying money and campaign contributions can buy you these days.

The Securities and Exchange Commission, the Federal Reserve Board, and most members of Congress and the Obama Administration act more like enablers for Wall Street’s malfeasance than cops on the beat. They were the great enablers of the mortgage crisis of 2008 and the bailout that followed, and they have perpetuated “too big to fail” by allowing the four largest financial corporations to become 30 percent more consolidated than they were before the meltdown.

Goldman Sachs, JP Morgan Chase, and the rest are not only ripping off American workers but also other factions of the capitalist economy in a kind of post-modern replay of the Gilded Age. Since the 1980s and 1990s, under Republican and Democratic administrations, we’ve been saddled with countless disastrous “externalities” from an unregulated Casino Capitalism; a kind of capitalism that is unstable and damaging to the health of our society.

How ironic it is to hear CNBC commentators and other shills for whatever Wall Street wants on any given day trumpet the virtues of “free markets” at a time when banking Trusts and cartels are distorting and squeezing markets for vital commodities such as aluminum, copper, wheat, and oil.

Return of “Grandma Millie”

When it comes to aluminum, cotton, coffee, oil, wheat, and copper the behemoth banks have been charging all manner of rents and premiums for doing nothing other than controlling supply through creating artificial delays to drive up prices then reap the windfall of their own manipulation. It’s sweet for Goldman Sachs and JP Morgan – but, like Goldman’s old “Timberwolf” scam, “one shitty deal” for everyone else, even large manufacturing corporations.

Goldman Sachs is doing to aluminum exactly what Enron did to energy in the late 1990s and early 2000s: create phony bottlenecks to restrict supply to rip off consumers and skew markets in their favor for things society vitally needs. Jeffrey Skilling’s timing was off. Had he held out a few more years he’d be up for a CEOship at a big bank or Treasury Secretary in the next administration.

The Sarbanes-Oxley law was supposed to act as a deterrent to these kinds of practices, but apparently it has been about as effective in reining in Wall Street abuses as Dodd-Frank promises to be.

Harmed worse of all, of course, is the average American worker who is struggling to get by in a “down” economy but forced to pay higher prices for essentials like gasoline or wheat just because Goldman Sachs wants to squeeze a few more billion dollars out of this or that commodity.

Because these banks have thrown around so much political money in the past 30 years, and have promised lucrative jobs for former government “regulators” once they step through the revolving door, they’ve been able to get almost anything they want out of Washington. Back in the 1920s, Will Rogers used to joke about “the best Congress money can buy”; today we have the worst Congress money can buy. Our political leaders, in their slavish servitude to the big banks, have forsaken us.

The “too big to fail” banks have apparently captured the Securities and Exchange Commission, the Federal Reserve Board, and maybe the Commodity Futures Trading Commission (we’ll see). And like the ratings agencies, Moody’s and Standard and Poor’s, when they labeled junk CDOs “Triple-A,” in the case of commodities the industry regulator consists of people on the payroll of the big banks.

At least in the case of the Federal Energy Regulatory Commission’s (FERC) pursuit of JP Morgan Chase for manipulating California and other states’ energy markets there appears to be some oversight being exercised. (A FERC that did its job would be a welcome departure from the Enron days when a Texas Republican administration gave a well-connected Houston company permission to rip off people in California and the state of Washington.)

What we’ve seen in recent years is the Enronization of the entire financial sector. The ethical bankruptcy of the CEOs, executives, and traders in these mega-banks, when combined with the lack of any real oversight, the perverse incentive structure, and political clout, all means we’ve taken a Great Leap Backward toward Mercantilism. We’ll never be able to address the needs of our society so long as these parasites are given a free ride to steal from us in every way possible through their control of the supply lines of vital commodities.

Alienated Workers/Ripped-Off Consumers

“Because much of the aluminum is simply moved from one Metro [International Trade Services] facility to another,” Kocieniewski writes, “warehouse workers said they routinely saw the same truck drivers making three or more round trips each day.” What an absurdist use of human labor — playing Ring-Around-the-Rosie with aluminum warehouses around Detroit. These workers’ labor not only has a large slice skimmed off in the form of surplus value, but also, since they’re contributing nothing to the “efficient” distribution of goods (which is pretty weird for warehouse workers) they’re just another piece of the latest Wall Street scam.

The ramifications of these banks’ market manipulations far exceed the spot markets in aluminum or copper but have far-reaching effects throughout the economy. As Kocieniewski points out: “The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JP Morgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone.”

Goldman Sachs gets to wet its beak on the purchase of every 12-pack of Pabst Blue Ribbon. Maybe someone should tell the Good Ol’ Boys among the Tea Party that their aluminum cans of PBR are costing them more because of the actions of big Wall Street banks. That allegation alone should be worth a primary challenge or two against any number of Wall Street’s puppets among the Republicans starting with Representative Spencer Bachus and Senator Richard Shelby.

joseph palermoThe question is: How long are the American people going to allow themselves to be fleeced by these fat cats? Senators Elizabeth Warren and Sherrod Brown are 100 percent correct about wanting to do something about the damage the big Wall Street banks are doing to our society. With public mobilization against this latest Wall Street swindle maybe for once our representatives in Washington will respond to the needs of the people over those of the plutocracy.

Joseph Palermo
Joseph Palermo’s Blog

Monday, 22 July 2013

About Joseph Palermo

Joseph Palermo is Professor of History, California State University, Sacramento. Professor Palermo's most recent book is The Eighties (Pearson 2012). He has also written two other books: In His Own Right: The Political Odyssey of Senator Robert F. Kennedy (Columbia, 2001); and Robert F. Kennedy and the Death of American Idealism (Pearson, 2008). Before earning a Master's degree and Doctorate in History from Cornell University, Professor Palermo completed Bachelor's degrees in Sociology and Anthropology from the University of California, Santa Cruz, and a Master's degree in History from San Jose State University. His expertise includes the 1980s; political history; presidential politics and war powers; social movements of the 20th century; the 1960s; and the history of American foreign policy. Professor Palermo has also written articles for anthologies on the life of Father Daniel Berrigan, S.J. in The Human Tradition in America Since 1945 (Scholarly Resources Press, 2003); and on the Watergate scandal in Watergate and the Resignation of Richard Nixon (CQ Press, 2004).

Speak Your Mind

*