Goldman Sachs Has A Way With Words, and Deeds

Frederick Kaufman wrote an article detailing how Goldman Sachs created the Goldman Sachs Commodity Index (GSCI) which was a vehicle with which to speculate without having access to real products. Food speculation helps to raise the price of agricultural products which in turn causes difficulty in poor countries whose citizens cannot afford to pay higher food prices. The creation of a food derivative market is really a place to make money.

Lucas van Praag, Goldman's PR man, wrote a rebuttal article in FP entitled, "Don't Blame Goldman Sachs for the Food Crisis." He argues the finer points of causing a bubble, creating the index and praising the liquidity that speculation provides the market. In the end, he blames the middle class penchant for eating meat and other causes rather than the Index. (The poor middle class, attacked by all and sundry.)

It is Kaufman's reply that brings into focus the kinds of manipulation, by word and deed, that Goldman Sachs engages in when answering its critics. It is this mastery of argumentation that makes GS always appear plausible. But GS is in the commodities market to make money and that's the thing it does best. I do not think they care much about the price as long as it makes money for them in the end.

Below is Kaufman's reply found in FP (Foreign Policy):

Frederick Kaufman replies:

Instead of working to undo the damage Goldman Sachs and other banks have done by transforming our daily bread into nothing but a financial product, and instead of elucidating the murky world of over-the-counter swaps and baroque derivatives, Lucas van Praag has chosen to offer up yet another example of the fact-twisting and blindness that have unfortunately become the 21st century banking industry's norm.

My article "How Goldman Sachs Created the Food Crisis" did not accuse Goldman of introducing speculation to the commodity markets. To the contrary, the editors at Foreign Policy allowed a great deal of space for the history of American commodity markets, including an explanation of the traditional role of bona-fide hedgers and speculators. Of course, it is not traditional speculation that has sparked the historically unprecedented rise in the price of food, but the demand-shock Goldman and their industry followers introduced to the markets with their long-only Goldman Sachs Commodity Index fund -- the two-decades-old food, energy, and precious metals derivative that has come to be widely imitated throughout the financial industry.

Regarding the role of Gary Cohn, we need only review his testimony to Congress in September of 2008, in which Goldman's president articulated the ideas and concepts that lay behind the birth of the GSCI: "There was no natural long in the market," Cohn explained to the Senate. "The consumers are so fragmented that they don't amalgamate to a big enough position. So we actually, as a firm, came up with the idea in the early 1990s to create a long only, static investor in the commodity markets." In other words -- and contrary to van Praag's assertion -- the traditional buy/sell or sell/buy activity of the commodities futures market did not satisfy Goldman, nor allow them nor their largest clients (in this case, multinational oil firms) the market position they desired, a position which had little to do with the long-standing price discovery function of the futures market. Long-only indexes subsequently hijacked this role from this market.

Van Praag's assertion that the index funds were created to help "pensioners, who seek to protect the value of their savings against inflation and rising food prices" is a classic case of Wall Street posing as Main Street. Spurred by the institutional sales force of Goldman and other banks, the weight of hundreds of billions of dollars of new money from hedge, pension, and sovereign wealth funds has pushed up the slope of the agricultural price curve. Meanwhile, the contango markets caused by the demand shock the long-only indexes themselves introduced have created a negative yield for investors -- who lose money five times a year as commodity prices surge and the price-insensitive funds buy. The regular, 5-times-a-year "roll" of long futures has given commodity insiders the opportunity for immense profit at the expense of investors, and it is simply misleading for van Praag to compare the unnatural, subversive market behavior of the banks to a responsible property owner who regularly renews her home insurance policy.

While the OECD study has turned a blind eye, both the United Nations and the Senate Committee on Homeland Security and Government Affairs -- in their investigation of the role of long-only index funds as a threat to interstate commerce -- concluded that these funds must bear some of the blame for the rising cost of food. Of course, supply and demand matter, as do monetary policy, climate change, and nationalistic policies of protectionism. But despite all protestations of innocence, the long-only index funds have added regular doses of kerosene to the commodity conflagration that has come to mark the new millennium. No surprise, then, that both the U.S. Commodities Future Trading Commission and the G-20 agricultural ministers have put long-only index fund speculation near the top of their lists of the most egregious financial abuses.

Read the rebuttal and reply here

Read the original article here