Democracy Now! - July 16, 2010

While Goldman Sachs agreed to pay $550 million to resolve a civil fraud lawsuit filed by the SEC, Goldman has not been held accountable for many of its other questionable investment practices. A new article in Harper’s Magazine examines the role Goldman played in the food crisis of 2008 when the ranks of the world’s hungry increased by 250 million. We speak to Harper’s contributing editor Frederick Kaufman.


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AMY GOODMAN: We continue with Goldman Sachs.

Well, while Goldman Sachs agreed Thursday to pay $550 million to resolve a
civil fraud lawsuit filed by the SEC, Goldman has not been held accountable for many of its other questionable investment practices. A new article in Harper’s Magazine examines the role Goldman played in the food crisis of 2008, when the ranks of the world’s hungry increased by 250 million. The article is titled "The Food Bubble: How Wall Street Starved Millions and Got Away With...

AMY GOODMAN: The author of the article, Frederick Kaufman, joins us now. He’s a contributing editor at Harper’s Magazine.

Well, explain. We’re talking about Goldman Sachs today, this—they call it a landmark settlement, but they made more after-hours in trading last night than they will have to pay. So let’s look at Goldman Sachs and its record
overall.

FREDERICK KAUFMAN: Yeah, this is really—it’s really outrageous. And on a certain level, this reform bill is really a sham, because it does not cover, in any way, shape or form, what Goldman Sachs—and really, let’s be honest here, it wasn’t just Goldman; it was Goldman, and it was Bear, and it was AIG, and it was Lehman, it was Deutsche, it was all across the board, JPMorgan Chase — what these banks were able to do in commodity markets, really which reached its peak from 2005 to 2008, in what is now known as the food bubble. And as Juan points out, this is unconscionable what happened, in the sense that their speculation and their restructuring of these commodity markets pushed 250 million new people into food insecurity and starving, and brought the world total up to over a billion people. This is the most abysmal total in the history
of the world.

JUAN GONZALEZ: Now, what were these commodities markets like before the Wall Street firms got involved? And you have a haunting picture, especially of the Minneapolis Exchange, what it was before, what it was like. Could you talk about how things operated and then what Goldman Sachs did
precisely?

FREDERICK KAUFMAN: The wheat markets, in particular, in this country are the outcome of a process of development of over 150 years. And that is why, from about 1903 to 2003, the real price of wheat in this country has gone down. And this was one of the great reasons for America’s great
twentieth century, the fact that we had cheap food, we had cheap bread.
And Goldman, in 1991, came up with a new idea and a new product, which, as I said before, completely restructured this market and completely
threw it out of whack.

But before we go there, we just have to maybe review for a second a little bit about how these markets worked and what kept that wheat price stabilized. And Juan, you mentioned the Minneapolis Grain Exchange, this kind of obscure
syndicate in the Midwest, which is where the price of this particular kind of wheat, hard red spring wheat, which is the most widely traded wheat in the world, and it’s the most widely exported wheat from the American continent — we kind of set the world price on this wheat. This is where it happens. What’s the history of that price being stabilized is you have, traditionally, in the wheat futures market, two kinds of players: one of the farmers and the millers and the warehousemen—right?
And this, of course, includes players like Domino’s Pizza and Sara Lee and General Mills, very large business, capitalist stakes are in this wheat market, right? And they are called bona fide hedgers, because they’re actually buying and selling real wheat. As the price fluctuates in the futures markets, you also traditionally have speculators in this market, people who don’t want wheat, who wouldn’t have any place to put it if they bought it, but they’re making money off buy orders and sell orders, as the price fluctuates each day, and hopefully they’re bringing in some money for themselves every day.
That’s the idea.

Now, the key here is that both the bona fide hedgers and the speculators, every time they buy, they’re also selling, and every time they sell, they eventually buy. So their positions are cleared off at the end of the day, OK? Goldman, we have to understand, and a lot of these banks, are not interested in the particular structure of any of these markets. I think it’s a lot of mistake people make when they think about how these bankers are working. We think that they’re actually interested in the markets. We think that they’re—no. What they’re after are very large pools of cash for themselves. They’re after accumulating huge pools of money that they can do with whatever they like on a day-to-day basis.
Right? And so, Goldman, in 1991, came up with this idea of the commodity index fund, which really was a way for them to accumulate huge piles of cash for themselves. It wasn’t really about the markets, anyway. The market was just an excuse. And so, the fact that they threw these wheat markets out of whack didn’t really matter to them.

How did this work? Instead of a buy-and-sell order, like everybody does in these markets, they just started buying. It’s called "going long." They started going long on wheat futures. OK? And every time one of these contracts came due, they would do something called "rolling it over" into the next contract. So they would take all those buy promises they had made and say, "OK, we still—we’re just going to—we’ll buy more later. And plus we’re going to buy more now." And they kept on buying and buying and buying and buying and accumulating this unprecedented, this historically unprecedented pile of long-only wheat futures. And this accumulation created a very odd phenomenon in the market. It’s called a "demand shock." Usually prices go up because supply is low, right? That’s the idea. There’s not a lot of supply, so the price goes up. In this case, Goldman and the other banks had introduced this completely unnatural and artificial demand to buy wheat, and that then set the price up. Now, a lot of people are saying, "Oh, it was biofuel production. It was drought in Australia. It was floods in Kazakhstan." Let me tell you, hard red
wheat generally trades between $3 and $6 per sixty-pound bushel. It went
up to $12, then $15, then $18. Then it broke $20. And on February 25th,
2008, hard red spring futures settled at $25 per bushel. This is
completely beyond the pale, particularly at a—

JUAN GONZALEZ: Almost ten times its historic price.

FREDERICK KAUFMAN: Yeah. It was just completely out of control. And, of course, the irony here is that in 2008, it was the greatest wheat-producing year in world history. The world produced more wheat in 2008 than ever before.

And here’s the other outrage of it, which is that at the time that Goldman and these other banks are completely messing up the structure of this market, they’ve protected themselves outside the market, through this really almost diabolical idea called "replication," which is what I discovered when I was looking into how they had structured this. What they do—let’s say, Juan, you want me to invest for you in the wheat market. You give me a hundred bucks, OK? Well, what I should be doing is putting a hundred bucks in the wheat markets. But I don’t have to do that. All I have to do is put $5 in. Good-faith promise. And with that $5, I can hold your hundred-dollar position. Well, now I got ninety-five of your dollars. What am I going to do with them? Well, what Goldman did with hundreds of billions of dollars, and what all these banks did with hundreds of billions of dollars, is they put them in the most conservative—no fools, they—they put them in the most conservative investments conceivable. They put it in T-bills. And then what did they do? Well, now that you have hundreds of billions of dollars in T-bills, you can leverage that into trillions of dollars. This is what I’m talking about, large pools of cash for themselves. And then they take that trillion dollars, they give it to their day traders, and they say, "Go at it, guys. Do whatever is most lucrative today." And so, as billions of people starve, they use that money to make billions of dollars for themselves.

JUAN GONZALEZ: And the result was, as the price went up, that there were food riots around the world.

FREDERICK KAUFMAN: Yeah.

JUAN GONZALEZ: And what about the human dislocation that occurred?

FREDERICK KAUFMAN: Yeah, in 2008, there were food riots in more than thirty countries. The global price of food rose over 80 percent. This had an effect not only on wheat, but on corn, on soy, on cooking oil, on rice.
You know, people talk about globalization. "We don’t need to set prices or have tariffs, because we’re globalized. You know, people can buy their wheat, anyway." Well, gee, guess what happened. When the price of wheat started to go through the roof, something new, which was something old, came up, called "nationalism," and people said, "OK, sorry, we’re closing our wheat, and we’re setting up tariffs." And you had—you had riots. You had hunger. You had a disaster. You had a global disaster, because, remember, in America, we’re spending maybe 15 percent of our weekly paycheck on food, right? I mean, maybe you remember, a couple years ago, why was that dozen eggs so expensive? Why was that milk so expensive? Why was that meat so expensive? That’s 15 percent. For most people on the earth, they’re spending more than 50 percent of their daily income on their daily bread. And when their daily bread moves up 80 percent, they’ve just moved right into the ranks of the food
insecure. And it was not only in Burkina Faso. This was in America. You had 49 million hungry families in America. You had one out of five children in America at soup kitchens. You had a million hungry people in Los Angeles.

Read more: http://www.informationclearinghouse.info/article25955.htm