Monday, July 22, 2013

You can make a lot of money in the Free Market, if you know it's rigged

In the Friday news dump there was a one sentence announcement that the Federal Reserve is reviewing the 2003 decision that allowed Wall Street banks to trade in physical commodities. They plan to announce the new policy in September.

We've know for a long time that investment banks have been manipulating oil and gas prices. This became vivid with the banking collapse in 2008. The price of gasoline fell by 60% once banks were out of the market. In September 2008 the Fed granted the surviving investment banks the same status as commercial banks allowing them to borrow trillions from the Fed. Having all the cheap money they wanted put market manipulation by these banks on steroids.

For example Goldman Sachs has an aluminum warehousing scheme that involves actually buying up huge amounts of physical aluminum and taking it dark. Dark means it wouldn't show up on any public reporting of supply as it would if they simply traded on the futures market. This makes it look like the metal is in short supply and Goldman and their clients clean up. Of course you can't keep driving the price up forever, so periodically they would make their huge inventory public again creating a market glut and crashing the price. Goldman of course having placed bets on the price falling since they were the only people who knew that there had really been a market glut all along.

An obscure Federal agency that regulates power lines and pipelines has slapped Deutsche Bank and Barclay's with fines of $450m each while JPMorgan Chase could pay a cool billion for manipulating electricity prices. Basically they would buy electricity on the futures market on the cheap, then buy the output of entire power plants from operators and take the plants offline by raising the rate the plant was charging so high no utility would buy. This would create a shortage making the electricity they owned more valuable. They also get compensation from a market program for 'not selling' electricity because they are ostensibly on standby if the power grid needs electricity.

This is the 'free market' that Bill Clinton and the Republican Congress brought us, and with George Bush there was no limit on deregulation, or more accurately decriminalization. Besides screwing the users of energy and commodities they also extract money from pension funds by suckering them into investing in commodities that are being manipulated.

One little bright spot in our situation with China dominating all rare earth production worldwide. US government researchers have discovered that all those gold rush mines left behind tailing piles that loaded with rare earth minerals. It also turns out that early copper mines that didn't pan out are a great source one on the more desirable rare earths. Now if we just had factories to make use of these metals.  Twitter @BruceEnberg


Anonymous said...

Bottled water cost more per gallon than gasoline. And you can drink tap water for almost free ... A recent rally has brought RBOB gasoline futures up to $3.10 per gallon, but compare that to the $7.57 per gallon you're paying for water if you buy 16.9 ounce bottles for a dollar each.

Dave said...

Knowing the game is rigged doesn't help you if you're the skinee as opposed to the skinner. I think we all know which side of that transaction most working people are on.

So how do you like paying to be abused and then paying a service charge on the payment-transaction?
Are we having fun yet?