The
Vampire Squid Strikes Again: The Mega Banks' Most Devious Scam Yet
Banks are no longer just financing heavy
industry. They are actually buying it up and inventing bigger, bolder and
scarier scams than ever
Matt
Taibbi
February 12, 2014
But the crazy thing is, nobody at the time
quite knew it. Most observers on the Hill thought the Financial Services
Modernization Act of 1999 – also known as the Gramm-Leach-Bliley Act – was just
the latest and boldest in a long line of deregulatory handouts to Wall Street
that had begun in the Reagan years.
Wall Street had spent much of that era
arguing that America's banks needed to become bigger and badder, in order to
compete globally with the German and Japanese-style financial giants, which
were supposedly about to swallow up all the world's banking business. So through
legislative lackeys like red-faced Republican deregulatory enthusiast Phil
Gramm, bank lobbyists were pushing a new law designed to wipe out 60-plus years
of bedrock financial regulation. The key was repealing – or
"modifying," as bill proponents put it – the famed Glass-Steagall Act
separating bankers and brokers, which had been passed in 1933 to prevent
conflicts of interest within the finance sector that had led to the Great
Depression. Now, commercial banks would be allowed to merge with investment banks
and insurance companies, creating financial megafirms potentially far more
powerful than had ever existed in America.
All of this was big enough news in itself.
But it would take half a generation – till now, basically – to understand the
most explosive part of the bill, which additionally legalized new forms of
monopoly, allowing banks to merge with heavy industry. A tiny provision in the
bill also permitted commercial banks to delve into any activity that is
"complementary to a financial activity and does not pose a substantial
risk to the safety or soundness of depository institutions or the financial
system generally."
Complementary to a
financial activity.
What the hell did that mean?
"From the perspective of the
banks," says Saule Omarova, a law professor at the University of North
Carolina, "pretty much everything is considered complementary to a
financial activity."
Fifteen years later, in fact, it now looks
like Wall Street and its lawyers took the term to be a synonym for ruthless
campaigns of world domination. "Nobody knew the reach it would have into
the real economy," says Ohio Sen. Sherrod Brown. Now a leading voice on
the Hill against the hidden provisions, Brown actually voted for
Gramm-Leach-Bliley as a congressman, along with all but 72 other House members.
"I bet even some of the people who were the bill's advocates had no
idea."
Today, banks like Morgan Stanley, JPMorgan
Chase and Goldman Sachs own oil tankers, run airports and control huge
quantities of coal, natural gas, heating oil, electric power and precious
metals. They likewise can now be found exerting direct control over the supply
of a whole galaxy of raw materials crucial to world industry and to society in
general, including everything from food products to metals like zinc, copper,
tin, nickel and, most infamously thanks to a recent high-profile scandal,
aluminum. And they're doing it not just here but abroad as well: In Denmark,
thousands took to the streets in protest in recent weeks, vampire-squid banners
in hand, when news came out that Goldman Sachs was about to buy a 19 percent
stake in Dong Energy, a national electric provider. The furor inspired mass
resignations of ministers from the government's ruling coalition, as the Danish
public wondered how an American investment bank could possibly hold so much
influence over the state energy grid.
There are more eclectic interests, too. After
9/11, we found it worrisome when foreigners started to get into the business of
running ports, but there's been little controversy as banks have done the same,
or even started dabbling in other activities with national-security
implications – Goldman Sachs, for instance, is apparently now in the uranium
business, a piece of news that attracted few headlines.
But banks aren't just buying stuff, they're
buying whole industrial processes. They're buying oil that's still in the
ground, the tankers that move it across the sea, the refineries that turn it
into fuel, and the pipelines that bring it to your home. Then, just for kicks,
they're also betting on the timing and efficiency of these same industrial
processes in the financial markets – buying and selling oil stocks on the stock
exchange, oil futures on the futures market, swaps on the swaps market, etc.
Allowing one company to control the supply of
crucial physical commodities, and also trade in the financial products that
might be related to those markets, is an open invitation to commit mass
manipulation. It's something akin to letting casino owners who take book on NFL
games during the week also coach all the teams on Sundays.
The situation has opened a Pandora's box of
horrifying new corruption possibilities, but it's been hard for the public to
notice, since regulators have struggled to put even the slightest dent in Wall
Street's older, more familiar scams. In just the past few years we've seen an
explosion of scandals – from the multitrillion-dollar Libor saga (major international
banks gaming world interest rates), to the more recent
foreign-currency-exchange fiasco (many of the same banks suspected of rigging
prices in the $5.3-trillion-a-day currency markets), to lesser scandals
involving manipulation of interest-rate swaps, and gold and silver prices.
But those are purely financial schemes. In
these new, even scarier kinds of manipulations, banks that own whole chains of
physical business interests have been caught rigging prices in those
industries. For instance, in just the past two years, fines in excess of $400
million have been levied against both JPMorgan Chase and Barclays for allegedly
manipulating the delivery of electricity in several states, including
California. In the case of Barclays, which is contesting the fine, regulators
claim prices were manipulated to help the bank win financial bets it had made
on those same energy markets.
And last summer, The New York Times described how Goldman
Sachs was caught systematically delaying the delivery of metals out of a
network of warehouses it owned in order to jack up rents and artificially boost
prices.
You might not have been surprised that
Goldman got caught scamming the world again, but it was certainly news to a lot
of people that an investment bank with no industrial expertise, just five years
removed from a federal bailout, stores and controls enough of America's
aluminum supply to affect world prices.
How was all of this possible? And who signed
off on it?
By exploiting loopholes in a dense, decade-and-a-half-old
piece of financial legislation, Wall Street has effected a revolutionary change
that American citizens never discussed, debated or prepared for, and certainly
never explicitly permitted in any meaningful way: the wholesale merger of high finance
with heavy industry. This blitzkrieg reorganization of our economy has left
millions of Americans facing a smorgasbord of frightfully unexpected new
problems. Do we even have a regulatory structure in place to look out for these
new forms of manipulation? (Answer: We don't.) And given that the banking
sector that came so close to ruining the world economy five years ago has now
vastly expanded its footprint, who's in charge of preventing the next crash?
In this Brave New World, nobody knows.
Moreover, whatever we've done, it's too late to have a referendum on it.
Garrett Wotkyns, an Arizona-based class-action attorney who has spent more than
a year investigating the banks' involvement in the metals markets and is suing
Goldman and others over the aluminum case on behalf of two major manufacturers,
puts it this way: "It's like that line in The Dark Knight Rises," he says.
"'The storm isn't coming. The storm is already here.'"
To this day, the provenance of the
"complementary activities" loophole that set much of this mess in
motion remains something of a mystery. We know from congressional records that
a vice chairman of JPMorgan, Michael Patterson, was one of the first to push
the idea in House testimony in February 1999 and that, later that year, an
early version of the bill put forward in the Senate by Phil Gramm also
contained the provision.
But even one of the final bill's eventual
authors, Republican congressman Jim Leach, can't remember exactly whose idea
adding the "complementary activities" line was. "I know of no
legislative history of the provision," he says. "It probably came
from the Senate side."
Moreover, Leach was shocked to hear that
regulators had pointed to this section of a bill bearing his name as the legal
authority allowing banks to gain control over physical-commodities markets.
"That's news to me," says the mortified ex-congressman, now a law
professor at the University of Iowa. "I assume no one at the time would
have thought it would apply to commodities brokering of a nature that has
recently been reported."
One thing that is clear in the public record
is that nobody was talking, at least publicly, about banks someday owning oil
tankers or controlling the supply of industrial metals.
The JPMorgan witness, Michael Patterson, told
the House Financial Services Committee at the 1999 hearing that his idea of
"complementary activities" was, say, a credit-card company putting
out a restaurant guide. "One example is American Express, which publishes
magazines," he testified. "Travel + Leisure magazine is complementary to the
travel business. Food
& Wine promotes dining out . . . which might lead to greater
use of the American Express card."
"That's how insignificant this was
supposed to be," says Omarova. "They were talking about being allowed
to put out magazines."
Even apart from the "complementary"
provision, Gramm quietly added another time bomb to the law, a grandfather
clause, which said that any company that became a bank holding company after
the passage of Gramm-Leach-Bliley in 1999 could engage in (or control shares of
a company engaged in) commodities trading – but only if it was already doing so
before a seemingly arbitrary date in September 1997.
This meant that if you were a bank holding
company at the time the law was passed and you wanted to get into the
commodities business, you were out of luck, because the federal law prohibited
banks from being involved in physical commodities or any other forms of heavy
industry. But if you were already a commodities dealer in 1997 and then somehow
became a bank holding company, you could get into whatever you pleased.
This was nuts. It was a little like passing a
law that ordered you to leave the Army if you were gay in November 1999 – but
if you were a heterosexual soldier as of September 1997 and then somehow became
gay after 1999, you could stay in the Army.
To this day, nobody is exactly clear on what
the grandfather clause means. If a company traded in tin before 1997 and then
became a bank holding company in 2015, would it have to stick with tin? Or did
the fact that it traded tin in 1997 mean the company could buy oil tankers and
pipelines in 2020?
In 2012, the Federal Reserve Bank of New York
– the most powerful branch of the Fed, the primary regulator of bank holding
companies and the final authority on these things – put out a paper saying it
had no clue about the exact meaning of the provision. "The legal scope of
the exemption," a trio of New York Fed officials wrote in July that year,
"is widely seen as ambiguous." Just a few weeks ago, the Fed's
director of banking supervision, Michael Gibson, told the Senate, "I'm not
a lawyer," and that it's "under review."
It almost didn't matter. For nearly a decade,
this obscure provision of Gramm-Leach-Bliley effectively applied to nobody.
Then, in the third week of September 2008, while the economy was imploding
after the collapses of Lehman and AIG, two of America's biggest investment
banks, Goldman Sachs and Morgan Stanley, found themselves in desperate need of
emergency financing. So late on a Sunday night, on September 21st, to be exact,
the two banks announced they had applied to the Federal Reserve to become bank
holding companies, which would give them lifesaving access to emergency cash from
the Fed's discount window.
The Fed granted the requests overnight. The
move saved the bacon of both firms, and it had one additional benefit: It made
Goldman and Morgan Stanley, which both had significant commodity-trading
operations prior to 1997, the first and last two companies to qualify for the
grandfather exemption of the Gramm-Leach-Bliley Act. "Kind of convenient,
isn't it?" says one congressional aide. "It's almost like the law was
written specifically for them."
The irony was incredible. After fucking up so
badly that the government had to give them federal bank charters and bottomless
wells of free cash to save their necks, the feds gave Goldman Sachs and Morgan
Stanley hall passes to become cross-species monopolistic powers with almost limitless
reach into any sectors of the economy.
And they weren't the only accidental
beneficiaries of the crisis. JPMorgan Chase acquired the commodity-trading
operations of Bear Stearns in early 2008, after the Fed pledged billions in
guarantees to help Chase rescue the doomed investment bank. Within the next two
years, Chase also acquired the commodities operations of another failing bank,
the newly nationalized Royal Bank of Scotland, which included Henry Bath, a
U.K.-based company that owns a large network of warehouses throughout Europe.
As a result, entering 2010, these three
companies were newly empowered to go out and start doubling down on investments
in physical industry. Through a fortuitous circumstance, the cost of financing
for bank holding companies had also dropped like a stone by the end of 2009, as
the Fed slashed interest rates almost to zero in a desperate attempt to
stimulate the economy out of its post-crash doldrums.
The sudden turning on of this huge faucet of
free money seems to have been a factor in an ensuing commodities shopping spree
undertaken by all three firms. Morgan Stanley, for instance, claimed to have
just $2.5 billion in commodity assets in March 2009. By September 2011, those
holdings had nearly quadrupled, to $10.3 billion.
Goldman and Chase – along with Glencore and
Trafigura, a pair of giant Swiss-based conglomerates that were offshoots of a
firm founded by notorious deceased commodities trader and known market
manipulator Marc Rich – all made notably coincidental purchases of
metals-warehousing companies in 2010.
The presence of these Marc Rich entities is
particularly noteworthy. According to famed Forbes reporter Paul Klebnikov, who was assassinated
in 2004 after years of reports on Russian corruption, Rich made a fortune in
the early Nineties striking crooked deals with the Soviet bosses who controlled
the U.S.S.R.'s supplies of raw materials – in particular commodities like zinc
and aluminum. These deals helped create a fledgling class of profiteers among the
bosses of the crumbling Soviet empire, a class that would go on years later to
help push Russia out of its communist past into its kleptocratic present.
"He'd strike a deal with the local party
boss, or the director of a state-owned company," Klebnikov said back in
2001. "He'd say, 'OK, you will sell me the [commodity] at five to 10
percent of the world-market price . . . and in return, I will
deposit some of the profit I make by reselling it 10 times higher on the world
market, and put the kickback in a Swiss bank account.'"
Rich made these reported deals while in exile
from the United States, which he fled in 1983 after the U.S. government charged
him with tax evasion, wire fraud, racketeering and trading with the enemy after
being caught trading with rogue states like Iran, among other things. The state
filed enough counts to put him away for life, and he remained a fugitive until
January 2001, when a little-known Clinton administration Justice Department
official named Eric Holder recommended Rich be pardoned. A report by the House
Committee on Government Reform later concluded that Holder had not provided a
credible explanation for supporting Rich's pardon and that he must have had
"other motivations" that he didn't share with Congress. Among other things,
the committee speculated that Holder had designs on the attorney general's
office in a potential Al Gore administration.
In any case, in 2010, a decade after the Rich
pardon, Holder was attorney general, but under Barack Obama, and two Rich-created
firms, along with two banks that have been major donors to the Democratic
Party, all made moves to buy up metals warehouses. In near simultaneous
fashion, Goldman, Chase, Glencore and Trafigura bought companies that control
warehouses all over the world for the LME, or London Metals Exchange. The LME
is a privately owned exchange for world metals trading. It's the world's
primary hub for determining metals prices and also for trading metals-based
futures, options, swaps and other instruments.
"If they were just interested in
collecting rent for metals storage, they'd have bought all kinds of
warehouses," says Manal Mehta, the founder of Sunesis Capital, a hedge
fund that has done extensive research on the banks' forays into the commodities
markets. "But they seemed to focus on these official LME facilities."
The JPMorgan deal seemed to be in direct
violation of an order sent to the bank by the Fed in 2005, which declared the
bank was not authorized to "own, operate, or invest in facilities for the
extraction, transportation, storage, or distribution of commodities." The
way the Fed later explained this to the Senate was that the purchase of Henry
Bath was OK because it considered the acquisition of this commodities company
kosher within the context of a larger sale that the Fed was cool with –
"If the bulk of the acquisition is a permissible activity, they're allowed
to include a small amount of impermissible activities."
What's more, according to LME regulations, no
warehouse company can also own metal or make trades on the exchange. While they
may have been following the letter of the law, they were certainly violating
the spirit: Goldman preposterously seems to have engaged in all three
activities simultaneously, changing a hat every time it wanted to switch roles.
It conducted its metal trades through its commodities subsidiary J. Aron, and
then put Metro, its warehouse company, in charge of the storage, and according
to industry experts, Goldman most likely owned some metal, though the company
has remained vague on the subject.
If you're wondering why the LME would permit
a seemingly blatant violation of its own rules, a good place to start would be
to look at who owned the LME at the time. Although it eventually sold itself
to a Hong Kong company in 2012, in 2010 the LME was owned by a consortium of
banks and financial companies. The two largest shareholders? Goldman and
JPMorgan Chase.
Humorously, another was Koch Metals (2.32
percent), a commodities concern that's part of the Koch brothers' empire. The
Kochs have been caught up in their own commodity-manipulation schemes,
including an episode in 2008, in which they rented out huge tankers and used
them to store excess oil offshore essentially as floating warehouses, taking
cheap oil out of available supply and thereby helping to drive up energy
prices. Additionally, some banks have been accused of similar oil-hoarding
schemes.
The motive for the Kochs, or anyone else, to
hoard a commodity like oil can be almost beautiful in its simplicity. Basically,
a bank or a trading company wants to buy commodities cheap in the present and
sell them for a premium as futures. This trade, sometimes called
"arbitraging the contango," works best if the cost of storing your
oil or metals or whatever you're dealing with is negligible – you make more
money off the futures trade if you don't have to pay rent while you wait to
deliver.
So when financial firms suddenly start buying
oil tankers or warehouses, they could be doing so to make bets pay off, as part
of a speculative strategy – which is why the banks' sudden acquisitions of
metals-storage companies in 2010 is so noteworthy.
These were not minor projects. The firms put
high-ranking executives in charge of these operations. Goldman's acquisition of
Metro was the project of Isabelle Ealet, the bank's then-global commodities
chief. (In a curious coincidence commented upon by several sources for this
story, many of Goldman's most senior officials, including CEO Lloyd Blankfein
and president Gary Cohn, started their careers in Goldman's commodities
division.)
Meanwhile, Chase's own head of commodities
operations, Blythe Masters – an even more famed Wall Street figure, sometimes
described as the inventor of the credit default swap – admitted that her
company's warehouse interests weren't just a casual thing. "Just being
able to trade financial commodities is a serious limitation because financial
commodities represent only a tiny fraction of the reality of the real commodity
exposure picture," she said in 2010.
Loosely
translated, Masters was saying that there was a limited amount of money to be
made simply trading commodities in the traditional legal manner. The solution?
"We need to be active in the underlying physical commodity markets,"
she said, "in order to understand and make prices."
We need to make prices. The head of Chase's
commodities division actually said this, out loud, and it speaks to both the
general unlikelihood of God's existence and the consistently low level of
competence of America's regulators that she was not immediately zapped between
the eyebrows with a thunderbolt upon doing so. Instead, the government sat by
and watched as a curious phenomenon developed at all of these new bank-owned
warehouses, in the aluminum markets in particular.
As detailed by New York Times reporter David
Kocieniewski last July, Goldman had bought into these warehouses and soon began
pointlessly shuttling stocks of aluminum from one warehouse to another. It was
a "merry-go-round of metal," as one former forklift operator called
it, a scheme of delays apparently designed to drive up prices of the metal used
to make the stuff we all buy – like beer cans, flashlights and car parts.
When Goldman bought Metro in February 2010, the
average delivery time for an aluminum order was six weeks. Under Goldman
ownership, Metro's delivery times soon ballooned by a factor of 10, to an
average of 16 months, leading in part to the explosive growth of a surcharge
called the Midwest premium, which represented not the cost of aluminum itself
but the cost of its storage and delivery, a thing easily manipulated when you
control the supply. So despite the fact that the overall LME price of aluminum
fell during this time, the Midwest premium conspicuously surged in the other
direction. In 2008, it represented about three percent of the LME price of
aluminum. By 2013, it was a whopping 15 percent of the benchmark (it has since
spiked to 25 percent).
"In layman's terms, they were
artificially jacking up the shipping and handling costs," says Mehta.
The intentional warehouse delays were just
one part of the anti-capitalist game the banks were playing. As an incentive to
get metal under their control, they actually paid the industrial producers of
aluminum extra cash to store the metal in their warehouses, fees reportedly as
much as $230 a metric ton.
Both Goldman and Glencore reportedly offered
such incentives, which not only allowed the companies to collect more rent
(Goldman was charging a daily rate of 48 cents a metric ton) but also served to
discourage industrial producers like Alcoa or the Russian industrial giant
Rusal (which has Glencore CEO Ivan Glasenberg on its board of directors) from
selling directly to manufacturers.
The result of all this was a bottlenecking of
aluminum supplies. A crucial industrial material that was plentiful and even in
oversupply was now stuck in the speculative merry-go-round of the bank finance
trade.
Every time you bought a can of soda in 2011
and 2012, you paid a little tax thanks to firms like Goldman. Mehta, whose fund
has a financial stake in the issue, insists there's an irony here that should
infuriate everyone. "Banks used taxpayer-backed subsidies," he says,
"to drive up prices for the very same taxpayers that bailed them out in
the first place."
Dave Smith, Coca-Cola's strategic procurement
manager, told reporters as early as the summer of 2011 that "the situation
has been organized to artificially drive up premiums." Nick Madden, the
chief procurement officer of Novelis, a leading can-maker, said at roughly the
same time that the delays in Detroit were adding $20 to $40 a metric ton to the
price of aluminum.
Coca-Cola was the first to file a complaint
against Goldman over the warehouse issue, doing so in mid-2011, and many people
in and around the industry weren't surprised that it was the world's biggest
and most powerful corporate consumer of aluminum that came forward first. Other
manufacturers, many believe, kept their mouths shut out of fear the banks would
punish them. "It's very likely that commercial companies deliberately
avoided an open confrontation with Goldman because it was a Wall Street
powerhouse with which they had – or hoped to establish – important credit and
financial-advisory relationships," says Omarova. One government official
who has investigated the issue for Congress said even some of the country's
largest aluminum users have been reluctant to come forward. "When some of
these huge transnationals don't want to talk about it, it makes you
wonder," the aide noted.
Still, a few days after the Times published its
aluminum-storage exposé in late July 2013, Sen. Brown held hearings to
investigate the causes of the alleged manipulation. (One executive, Tim Weiner
of MillerCoors, would testify that global aluminum costs for manufacturers had
been inflated by $3 billion in just the past year.) After those hearings, and
after word leaked out that regulatory agencies had launched investigations,
Goldman curtly announced new plans to reduce the delivery times of its aluminum
stocks. The bank has consistently maintained that its interest in the warehouse
company Metro is not "strategic," that it only bought the firm
"as an investment," and will sell it within 10 years. JPMorgan Chase
and other banks announced that it might be getting out of the physical
commodities business altogether. The LME, meanwhile, had already come up with
plans to force its member warehouses to increase their output of aluminum.
A few weeks later, on August 9th, 2013, a
company called CME Group – one of the world's leading derivatives dealers –
announced that it would henceforth be selling a new kind of aluminum swap
futures contract. The new instrument, the firm said, would be "the first
Exchange product that enables the aluminum Midwest premium to be managed."
What this signaled was that before that
moment, no one in the financial sector wanted to get within a hundred miles of
selling price insurance against the Midwest premium, because it was so
obviously corrupt. But then the Times let the cat out of the bag, and next thing you
knew, now that everyone was watching, a major derivatives purveyor suddenly
felt confident enough to sell a hedging insurance against the Midwest premium,
given that it was now presumed, once again, to be free from manipulation and
subject to market forces.
"That should tell you a lot about how
completely people in the business understood that the metals market was
broken," says Wotkyns.
One other bizarre footnote to the aluminum scandal:
According to the Bank Holding Company Act of 1956, any company that becomes a
bank holding company must divest itself of certain commercial holdings it may
own within two years. To that two-year grace period, the Fed may add up to
three additional years. This was done for both Goldman and Morgan Stanley. The
aluminum scandal broke, coincidentally, just a few months before Goldman's
five-year grace period was scheduled to end. There was some expectation that
the Fed might order the banks to divest some of their commercial holdings.
But there was a catch. "Congress in its
infinite wisdom left an ambiguity," says Omarova. Although the Bank
Holding Company Act mandated that the companies had to be compliant at the end
of the review period, it didn't actually specify what the Fed had to do if they
weren't. When Goldman's review period passed, "the Fed took the position
that nothing had to happen," says Omarova. "So nothing
happened."
The aluminum delays were not just an isolated
incident of banks scheming to boost rent revenue. Recently, evidence has
surfaced that the same kinds of behavior may be going on across the LME. In
order for a parcel of metal to be traded on the LME, it has to be what's called
"on warrant." If you are the owner of a metal that you no longer want
to be traded, you can "cancel the warrant" – essentially taking it
out of the system. It's still in the warehouse, but in a kind of administrative
limbo.
When the world LME supply of a metal features
high percentages of canceled stock, that typically means someone is moving
metals around a lot even after they've been put into storage – perhaps in a
Goldman-style "merry-go-round," perhaps for some other reason, but
historically it has not been something seen often in functioning, healthy
metals markets.
In January 2009, before the American
too-big-to-fail banks and the shady Swiss commodities giants bought into all of
these warehouses, less than one percent of the total global supply of LME
aluminum was "canceled warrant." Today, with world supplies of
aluminum about double what they were then, 45.2 percent of the total stock is
classified as canceled. In Detroit, where Goldman is supposedly cleaning things
up, the percentage is even crazier: 76.9 percent of the aluminum stock has canceled
warrants.
You can see hints of the phenomenon in other
LME metals. Five years ago, just 1.3 percent of the LME's copper stocks had
canceled warrants. Today, 59 percent of it does. In January 2009, just 2.3
percent of zinc stocks were canceled; it's at 32 percent today. Zinc
incidentally has something else in common with aluminum – a
shipping-and-handling-like premium, called the U.S. zinc premium in the United
States, which has skyrocketed in recent years, increasing by 400 percent
between the summer of 2012 and the summer of 2013, when the price plateaued
just as the aluminum scandal broke.
Then there's nickel. Thirty-seven percent of
the global stock is now classified as canceled. Five years ago, 0.5 percent
was. One industry insider, who is very familiar with and utilizes the nickel
market, says that despite the fact that there is a massive global oversupply of
the metal, prices are being artificially propped up as much as 20 to 30
percent.
He blames the banks' speculative weigh
stations, saying that nickel producers, despite low global demand, are
cheerfully selling their stocks to bank-run warehouses, which are paying
above-market prices to put raw materials into the merry-go-round. "They
are happy to sell to the banks and to the warehouse supply, while they pray for
demand to pick up," the insider said.
This leads to the next potentially disastrous
aspect of this story: What happens if the Fed suddenly raises interest rates,
and the banks, their access to free money cut off, can no longer afford to sit
on piles of metal for 16 months at a time?
"Look at nickel," says Eric
Salzman, a financial analyst who has done research on metals manipulation for
several law firms. "You could see the price drop 20 to 30 percent in no
time. It'd be a classic bursting of a bubble."
But the potential for wide-scale manipulation
and/or new financial disasters is only part of the nightmare that this new
merger of banking and industry has created. The other, perhaps even darker
problem involves the new existential dangers both to the environment and to the
stability of the financial system. Long before Goldman and Chase started buying
up metals warehouses, for instance, Morgan Stanley had already bought up a
substantial empire of physical businesses – electricity plants in a number of
states, a firm that trades in heating oil, jet fuels, fertilizers, asphalt,
chemicals, pipelines and a global operator of oil tankers.
How long before one of these fully loaded
monster ships capsizes, and Morgan Stanley becomes the next BP, not only
killing a gazillion birds and sea mammals off some unlucky country's shores but
also taking the financial system down with them, as lawsuits plunge the company
into bankruptcy with Lehman-style repercussions? Morgan Stanley's CEO, James Gorman,
even admitted how risky his firm's new acquisitions were last year, when he
reportedly told staff that a hypothetical oil spill was "a risk we just
can't take."
The regulators are almost worse. Remember the
2008 collapse happened when government bodies like the Fed, the Office of the
Comptroller of the Currency and the Office of Thrift Supervision – whose entire
expertise supposedly revolves around monitoring the safety and soundness of
financial companies – somehow missed that half of Wall Street was functionally
bankrupt.
Now that many of those financial companies
have been bailed out, those same regulators who couldn't or wouldn't smell
smoke in a raging fire last time around are suddenly in charge of deciding if
companies like Morgan Stanley are taking out enough insurance on their oil
tankers, or if banks like Goldman Sachs are properly handling their uranium
deposits.
"The Fed isn't the most enthusiastic
regulator in the best of times," says Brown. "And now we're asking
them to take this on?"
Banks in America were never meant to own
industries. This principle has been part of our culture practically from the
beginning of our history. The original restrictions on banks getting involved
with commerce were rooted in the classically American fear of overweening
government power – citizens in the early 1800s were concerned about the
potential for monopolistic abuses posed by state-sponsored banks.
Later, however, Americans also found
themselves forced to beat back a movement of private monopolies, in particular
the great railroad and energy cartels built by robber barons of the Rockefeller
type who, by the late 1800s, were on the precipice of swallowing markets whole
and dictating to the public the prices of everything from products to labor. It
took a long period of upheaval and prolonged fights over new laws like the
Sherman and Clayton anti-trust acts before those monopolies were reined in.
Banks, however, were never really regulated under
those laws. Only the Great Depression and years of brutal legislative trench
warfare finally brought them to heel under the same kinds of anti-trust
concepts that stopped the robber barons, through acts like Glass-Steagall and
the Bank Holding Company Act of 1956. Then, with a few throwaway lines in a
1999 law that nobody ever heard of until now, that whole struggle went up in
smoke, and here we are, in Hobbes' jungle, waiting for the next fully legal
catastrophe to unfold.
When does the fun part start?
This story is from the February 27th, 2014 issue of Rolling Stone.