Whether it be LIBOR, the London Whale, MFGlobal and on, all of which have recently come to light, what has hardly ever been a focus of public discussion nor opprobrium is the nefarious role the banks have been playing in lubricating the massive distortion in the high price of oil as clearly set forth in congressional testimony by Rex Tillerson, Chairman/CEO of ExxonMobil, in which he testified that the price of oil should be no higher than $60-$70/bbl --this while prices of oil and gasoline continue to reach outside all bounds of supply and demand. This position was further substantiated by Bart Chilton, the one CFTC commissioner who truly has the public's interest at heart; he issued a statement earlier this year focusing on the damaging influence that unbridled speculation has on commodity prices including oil.
That the banks have been playing a major role in the distortion of oil prices has been a constant theme of this corner over the years. And yet the banks continue on their malevolent way without any governmental intercession nor anyone holding them to account.
On Monday, July 15, the Financial Times laid it out clearly in their article, "US Banks Step Up Oil Trade Role."
A sweeping overview on the broad inroads of banks such as JPMorgan Chase, Morgan Stanley and Goldman Sachs have on the oil trade, "wading deeper into the business supplying oil as they compete with oil merchants selling crude to refineries" and in many cases taking delivery of varied downstream products as petrol, diesel, lubricants, etc. Ironically the banks' increasing role in oil supply comes as U.S. regulators proceed with rules limiting the size of the banks' oil derivatives positions. Yet banks are able to deal with these prospective limitations by using physical oil cargoes to offset their quota of derivative positions.
It is here exactly where the malignity of banks as oil traders takes hold, and where the near cost-free and near limitless borrowing from the Fed window available to these 'bank holding companies' distorts the playing field to the benefit of the banks' P&L, to the oil industry and to the massive detriment of the consuming public.
The outrageous use of physical cargoes as a Fed-financed instrument of speculation in the oil trade, and as a forceful determinant in the ever-increasing price of oil, is not new and not isolated. In a post in this corner going back to 2009, Morgan Stanley was cited for having chartered the supertanker "Argenta" with DWT capacity of over 200,000 tonnes, loading some 2 million barrels of oil to be held at anchor, at sea for months at a time (Please see "Your Tarp Money Is Being Used To Prop Up The Price Of Oil' 01.23.09).
Subsequently there was JPMorgan Chase's nine-month charter of the VLCC super tanker "Front Queen," again with a dead weight tonnage in excess of 200,000 tons, holding a cargo of more than 2 million barrels of heating oil to be held as a storage/market gamble off the coast of Malta for a period of nine months. How many homes in Maine and elsewhere could have been heated with those 2 million barrels, how many home mortgages could have been renegotiated with the hundreds of millions of dollars tied up as heating oil sitting at anchor off the coast of Malta, and how high did JPMorgan and Morgan Stanley push up the price of oil and heating oil by taking this product off the market, speculating for it to increase in value, and what role did the Fed play in financing this outrage? (Please see "Is JPMorgan a Bank or a Government-Funded Casino?" 06.09.09) These are but singular examples of a constant theme of bankers playing oil casino that has now gone on for years. And no one has even whistled 'Dixie.'
There was a time when banks played a positive and essential role in the oil market. They financed production, they helped finance inventory, they facilitated the international trade in oil by issuing letters of credit making it possible for producers, or consumers to bridge the formidable obstacles of offshore or second party credit worthiness, permitting trade to flow unhampered.
But for them to now assume the role of principals, that is taking title and attempting to influence the market in the direction of their position holdings, is close to unconscionable especially in that they are the guardians of customer deposits guaranteed in large measure by the FDIC, and especially in that they have access to the Fed window, a facility hardly meant to be an enabler of their casino instincts and betting posture that derives its profits from the ever higher price of oil and downstream products at the nation's consumers expense. And of course coming under that ultimate safety net as "too big to fail."
Ironically the last paragraph of Monday's FT article advises that JPMorgan Chase and Morgan Stanley are lobbying regulators to carve out "forward" commodity contracts from the Volcker rule, which bans proprietary trading. Morgan Stanley, in a letter warned that restricting banks' ability to compete in commodities would force customers to turn to "trading houses," energy merchant companies and oil companies with trading desks or other types of traders. Really?! As if the banks themselves had not become the very essence of traders, but with the help of the Fed and myriad government programs have stacked the game to their gross advantage, to their profit and to the public's loss. And by the way, those other "traders" are in the game with their money and at their risk, not piggybacking on the Fed's munificence and FDIC insured deposits. (Just as an aside, Jamie Dimon, Chairman and CEO of JPMorgan Chase, sits on the board of the New York Fed. No conflict of interest there, of course).
Today, Federal Reserve Chairman Ben Bernanke will be testifying before a House Financial Services Committee. Would it not be timely if he were asked about the role the Fed plays in facilitating the bank holding companies to hold sway in the oil market? But don't hold your breath.