How Goldman Gambled on Starvation
July 2nd, 2010

I’ll point to my commentary on this from 2008, CBOT Resembles Carnival Act as Billion Dollar Black Box Operators Move In:

   Leveraged speculation on commodities shouldn’t be allowed. Speculate on things like indexes, stocks, bonds and currencies until you’re blue in the face. None of those things are real anyway. But leveraged speculation on tangible goods actually makes a mockery of the market system by distorting prices.

    If I buy a wheat contract, I should have to take delivery of the physical wheat on the specified date. If I sell a wheat contract, I should have to deliver the physical wheat on the specified date. I should not be allowed to buy or sell those leveraged contracts without having to take delivery, or deliver, physical goods. I shouldn’t be allowed to close my position without an exchange of goods.

    The same should hold true for gold, coffee, palladium or any other commodity.

    It is absolute madness that commodities are bought and sold using leveraged vehicles in markets that allow participation by speculators; individuals and organizations who have no interest or connection to the underlying physical commodity.

Via: Independent:

By now, you probably think your opinion of Goldman Sachs and its swarm of Wall Street allies has rock-bottomed at raw loathing. You’re wrong. There’s more. It turns out that the most destructive of all their recent acts has barely been discussed at all. Here’s the rest. This is the story of how some of the richest people in the world – Goldman, Deutsche Bank, the traders at Merrill Lynch, and more – have caused the starvation of some of the poorest people in the world.

…

To understand the biggest cause, you have to plough through some concepts that will make your head ache – but not half as much as they made the poor world’s stomachs ache.

For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer, he’ll lose some cash, but if there’s a lousy summer or the global price collapses, he’ll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked.

Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into “derivatives” that could be bought and sold among traders who had nothing to do with agriculture. A market in “food speculation” was born.

So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutsche Bank, who sell it on for £30,000 to Merrill Lynch – and on and on until it seems to bear almost no relationship to Farmer Giles’s crop at all.

If this seems mystifying, it is. John Lanchester, in his superb guide to the world of finance, Whoops! Why Everybody Owes Everyone and No One Can Pay, explains: “Finance, like other forms of human behaviour, underwent a change in the 20th century, a shift equivalent to the emergence of modernism in the arts – a break with common sense, a turn towards self-referentiality and abstraction and notions that couldn’t be explained in workaday English.” Poetry found its break with realism when T S Eliot wrote “The Wasteland”. Finance found its Wasteland moment in the 1970s, when it began to be dominated by complex financial instruments that even the people selling them didn’t fully understand.

So what has this got to do with the bread on Abiba’s plate? Until deregulation, the price for food was set by the forces of supply and demand for food itself. (This was already deeply imperfect: it left a billion people hungry.) But after deregulation, it was no longer just a market in food. It became, at the same time, a market in food contracts based on theoretical future crops – and the speculators drove the price through the roof.

Here’s how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world’s frightened investors stampeded on to this ground.

So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.

When I asked Merrill Lynch’s spokesman to comment on the charge of causing mass hunger, he said: “Huh. I didn’t know about that.” He later emailed to say: “I am going to decline comment.” Deutsche Bank also refused to comment. Goldman Sachs were more detailed, saying they sold their index in early 2007 and pointing out that “serious analyses … have concluded index funds did not cause a bubble in commodity futures prices”, offering as evidence a statement by the OECD.

How do we know this is wrong? As Professor Ghosh points out, some vital crops are not traded on the futures markets, including millet, cassava, and potatoes. Their price rose a little during this period – but only a fraction as much as the ones affected by speculation. Her research shows that speculation was “the main cause” of the rise.

So it has come to this. The world’s wealthiest speculators set up a casino where the chips were the stomachs of hundreds of millions of innocent people. They gambled on increasing starvation, and won. Their Wasteland moment created a real wasteland. What does it say about our political and economic system that we can so casually inflict so much pain?

There is a story that is huge in France right now that no one in the States cares about, but I think it has a lot to say about the banksters and the current economic meltdown.  Type in "Jerome Kerviel."  He was an average investor working at a major French bank who was gambling more money than the bank had, or near to it, on his trades.  Imagine if some typical office drone nearly brought down Chase Manhattan and you'll get some idea of how far he went.  

He claims that he was only trying to make money for his bank, with his ambition being just to get a bonus!  He has a good defense, because there is no proof of theft against him -- he just made incredibly risky trades.  His defense for THAT is that his actions were secretly encouraged by his bosses, that they don't care how you make money as long as you make it, and that they turned a blind eye to his trades as long as he was profitable.  He is only in trouble now because his schemes backfired.  It is quite plausible, isn't it?  How could he have been making these risky trades for a year, apparently on a central computer system, with no one at the bank finding out?

The result is that a David vs. Goliath story has developed, and Kerviel has managed, at least in the court of public opinion, to turn the scrutiny onto the ruthless business practices of the banks.  However, some say he is a genius con man who played humble in order to outwit his superiors, and by the way he preens and poses for the camera ( he has tall, dark and handsome looks ) there may be some validity to that explanation as well.  

It's a fascinating news story, and I don't even care about news stories.  It makes me want to make a movie about it.