Makers and Takers: How Wall Street Destroyed Main Street by Foroohar Rana

Author:Foroohar, Rana [Foroohar, Rana]
Language: eng
Format: epub, azw3
ISBN: 9780553447255
Publisher: The Crown Publishing Group
Published: 2016-05-16T21:00:00+00:00

FOXES IN THE HENHOUSE

Many of the biggest institutional investors who are now in the market for oil and other commodities have gotten there via banks like Goldman Sachs and Morgan Stanley, who run dedicated commodities trading desks that specialize in betting on the future prices of natural resources. Both Goldman and Morgan, unfettered until 2008 by the prudential banking regulation imposed on commercial banking institutions, had since the 1980s been serious players in commodities trading. As investment banks, they could pretty much do what they liked in the area. Goldman, which started its namesake Commodity Index in 1991 (one of the key steps that allowed for the huge influx of pension money into commodities)31 already ran a large over-the-counter (OTC) derivatives trading business. These types of trades were historically unregulated since they were done off exchanges.32

Goldman also owned physical commodities—so many of them, in fact, that in 1994 the bank actually got a complaint from airport officials in the Netherlands regarding the large masses of aluminum it was storing around Rotterdam. The piles had gotten so big that they were starting to reflect the sun in ways that were confusing local air traffic controllers. Airport officials asked if Goldman could please throw a tarp over its metal stash to make the skies a bit safer.33

Morgan Stanley was an even bigger player in the physical ownership and movement of commodities. Between 2002 and 2012, its commodities unit generated an estimated $17 billion in revenue, trading both financial contracts and physical commodities.34 In the early 1990s, its chief oil trader, Olav Refvik, struck so many deals to buy and deliver oil to large commercial users around the world that he was known as the King of New York Harbor.35 The company had its own oil tank operation, a fuel distributor, electricity plants, fertilizers, asphalt, chemicals, and pipelines, all of which gave it special insight into the trading markets for these things.

What was already a hot business heated up further after the repeal of Glass-Steagall regulations in 1999. Banks like Goldman Sachs and Morgan Stanley were suddenly facing competition from much bigger publicly traded and publicly backed institutions. They needed to come up with more revenue fast, and trading was the easiest and most profitable way to do it. Speculation in commodities got an even bigger boost from the passage of the Commodity Futures Modernization Act (CFMA) in 2000.36 Not only did that law, in one fell swoop, exempt financial derivatives traded over the counter or off regulated exchanges from CFTC or SEC oversight; it also turned back centuries of common law that said it was fine to trade such instruments, but the government wouldn’t necessarily enforce the contracts unless the parties involved could prove that they were used for real hedging of real assets. Now the CFMA made OTC derivatives speculation legally enforceable even if traders couldn’t prove it was being done for anything but pure speculation.37 There was no longer any reason not to engage in as much speculation as possible, which helps explain why the OTC derivatives market has grown exponentially between then and now.

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