What a hoot watching two old war horses, Senators Carl Levin and John Mc Cain, take on two young gunners from Goldman Sachs during hearings of the Permanent Subcommittee on Investigations, The hearing was held to look into big bank ownership of, major commodities and related infrastructure. A comical political farce, put on for the benefit of the evening news casts, on the major television networks.
In my piece about Uber and post Social Media Regulation, I wrote about regulators trying to catch a train that had already left the station. Here is another example. The good Senators apparently based their venom upon a 400 page report trying to pin down the consequences of the American Mega Banks owning and trading in commodities such Aluminum Coal and Uranium. Unfortunately, the hearing got side tracked over antics performed by Goldman Management to maximize profits from Aluminum Warehouses in the Chicago area. Goldman did not own the Aluminum Ingots stored in the Warehouses. The facilities are run in accordance with strict LME (London Metal Exchange) regulations that keep track of billions of dollars of commodities, including gold and precious metals owned by all kinds of interesting people. Apparently the ingots (blocks of raw Aluminum) were moved around so as to increase storage charges for large users. This finding, if correct, represents but a storm in a teacup, on the outer fringe of a what is, maybe, the most shady and profitable businesses in the World, the trade in commodities.
Instead of worrying about American Banks owning physical assets such as commodities, the Senators should perhaps have been asking a far more telling question. Why are there no major commodity trading companies based in North America to investigate or tax?Instead the giant International companies are hidden away in Switzerland. the UK and Japan where their operations are shrouded in secrecy and far removed from the prying eyes of US Regulators. These institutions ARE the elephant in the room in any discussion about International trade.
It is strange that the United States no longer has ‘go to company’ to do its bidding in the trade wars over commodities. By ‘go to’ I mean companies like R.T.Z. (Rio Tinto Zinc) in Britain, whose Chairman, Sir Val Duncan was secretly charged at the outset of the Cold War, by the British Government,, to procure a secure source of Uranium in Canada for the countries’ Nuclear Program. Or how about International Nickel, whose Head Office was in New York despite being a Canadian Company that produced most of the Nickel used for U.S. massive arms build up during the Cold War. And finally perhaps the most significant of all, that of Homestake Mining, a Gold company, whose relationship with the US Government dated from the 1935 ban on Americans owning gold, and the subsequent payback by means of a government granted monopoly on Uranium production in New Mexico.
A lot has changed since those halcyon days when business and Government worked together to defeat the common scourge of communism. It was patriotic and profitable while it lasted, but with the wind-up of the Vietnam War, there was no bogeyman to drive the continued cosy relationship. In its stead the Trading Companies appeared on the International scene.
First out of the gate were the Japanese and the giant consortiums that owned the Steel makers, the engines that drove the Japanese miracle. Giants like Mitsubishi and Marubeni were charged with the responsibility of procuring and shipping the Iron Ore and Coking Coal that fed the new efficient steel furnaces. These companies became so powerful that they controlled the price and supply of many commodities by means of long-term contracts with mining companies and shippers. It was quite common for convenient Japanese Seaman Strikes to suddenly start whenever there was an over-supply of raw materials in Japan. When this happened the bulk carriers would simply not show up at ports, triggering force major escape clauses in contracts. Price adjustments were almost impossible to negotiate and so suppliers were often impoverished
Then out of the blue came the Arab Oil Embargo and the Commodity Trading world changed forever.
Into the vortex stepped a man who almost single-handedly invented the spot market in oil and became one of the richest men on earth. His name was Marc Rich, an American who renounced his American Citizenship, and lived on the lam in Switzerland for the rest of his life. He was the founder of the giant trading company now known as Glencore who coined the phrase “walking on the blade” to describe the cut-throat business of unregulated trade in commodities.
Rich traded mainly in oil, but his partners traded in just about any commodity where there was enough spread between the offer and eventual purchase price. They traded with friend and foe alike and even financed the trade were needed (with help from the big banks) For instance these bandits bought oil from Iran and sold it to Israel during the American hostage crisis in Tehran. They also supplied South Africa with oil during the embargo imposed by those opposed to the policy of Apartheid. These high jinks may have been legal in Switzerland, but it was anathema to the United States, that was so incensed , that they tried unsuccessfully to have him Rich kidnapped and returned to the US to stand Trial. In an even more bizarre act President Clinton pardoned Rich on his final day in office setting off a firestorm that continues to this day.
Small wonder then that the Senators are so touchy about the ownership and trade in commodities. Also small wonder that Merchant Banks such as Goldman Sates are reticent to talk about their role in the commodity business. it’s almost like they are afraid to get caught with their hand in the cook jar.
Believe me this story, if ever told, has legs. The righteous indignation of the same Senators can only be imagined if the truth of the gold for oil trade during the current trade embargo with Iran were to be made public.
Will this happen?