AMY GOODMAN: We continue with Goldman Sachs.
JUAN GONZALEZ: 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
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
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
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.
So, I mean, it is unconscionable that Wall Street has completely
lost touch with the reality. They’ve forgotten that there is their
mathematical formula, there’s virtuality, on the one hand—"Gee, I can
make a lot of money by making a formula"—and on the other hand, there’s
reality. There are real things that they are affecting, and they’ve
completely forgotten about it, to devastating effect.
AMY GOODMAN: What do you think needs to be done?
FREDERICK KAUFMAN: Well, the solution is interesting, and
it certainly is not going to be solved by the financial reform bill
we’ve just seen, because, of course, the people I talk to at the
Minneapolis Grain Exchange and all over, they’re already prepared for
every single trade being exchange-traded. The people at the Minneapolis
Grain Exchange have already prepared 50,000 exchange-traded slots for
anything that people want to trade. Now, when I was talking to the hedge
fund guys and the traders and all my contacts on this, and I said, you
know, "What if Wall Street—I’m sorry, what if the federal government
regulates you?" they just laugh. They literally laugh. They scoff at
federal regulators, because they’re like, "By the time they get around,
they figure out what we’re doing, we’re so far beyond it." And in fact,
the commodity index funds, the long-only commodity index funds that I
looked at now, they’re already dinosaurs. They’re onto second-, third-
and fourth-generation reiterations of this. There’s no way the federal
government is going to be on top of them, because they’re so far ahead.
So, what’s the other possibility? The other possibility is simply
outlaw it, say, if you’re a bank, you’re not allowed a stake, you’re
not allowed a stake in actual commodity markets. And I said to these
guys, you know, "What if they just outlaw you?" And once again, rather
unsurprisingly, their reaction is outright laughter, because it takes
them about ten seconds to get over that problem. Either they make a
phone call to London and do all their trading out of the London
Exchange, or they do an over-the-counter swap with a Cargill or a Nestlé
or a bona fide hedger, and it’s taken care of.
So what’s the solution? I think the best solution that’s been
floated around in Washington in the groups I’ve been close to is an
actual international or national grain reserve. I mean, we actually in
this country, before this kind of mania of deregulation, had a
farmer-owned grain reserve under the Clinton administration, real grain
held back, so that in times of a bubble like this, regulators can say,
"Look, you know, we have plenty of real wheat. Here’s a hundred million
bushels of wheat. We can bring it to the market. We can bring that price
back into a stable band." And this is, I think, in some ways, the best
solution: real wheat to counter virtual madness.
JUAN GONZALEZ: Well, yet, as you were saying, that the
Wall Street firms are always able to devise new ways to get around
regulation. I was reading in today’s paper on the new bill, the
financial regulation bill, that the banks have already devised new
methods. For instance, that they are no longer able to charge such
exorbitant interest rates on credit cards, so now they’re going to begin
imposing fees on checking accounts. And they just come up with an
immediate new solution to keep making huge amounts of money and getting
around the regulators. So, even with this reserve situation that you
raise about creating grain reserve, are there potentials for the Wall
Street firms to figure out a new way to continue to control and make
money off the food supply?
FREDERICK KAUFMAN: Well, I think the theory behind what
you’re saying, Juan, is called "market capture," in the sense that
whenever you have a group of people, be they in the auto business or in
the healthcare business, whenever they fear regulation from the
government, this group is, of course, the most at-risk group. They are
the ones who put more of their resources into understanding this
regulation than anybody else, more of their lobbyists, more of their
money into understanding what’s going on, and therefore, they’re the
ones who ultimately—the people whose interest it touches most
intrinsically are the ones who then capture that reform, market capture.
So what I like about the grain reserve is that it’s actually outside of
the purview, outside of the financial purview. As I said before, it’s
no longer in the realm of the virtual; it’s no longer in the realm of
the numbers. It’s actual real wheat, and you can actually bring it to
bear. You can bring it to markets. There was a complete madness for hard
red spring wheat in 2008, when you had international orders coming in
from Nigeria, from all over the world, and there literally was the
perception that there was no wheat out there. And so this thing, as you
say, goes up and up and up and up and up. If there is actually somebody
who can say, who can bring real wheat and calm these markets, you’re
going to save lives. It’s not just that you’re going to save mortgages
or that you’re going to save, you know, finances; it is that, literally,
you no longer have those outrageous numbers of starving people on
earth, most of them women and children.
AMY GOODMAN: We’re going to leave it there. I want to
thank you very much for being with us. "The Food Bubble" is Frederick
in Harper’s Magazine, "How Wall Street Starved Millions and Got
Away With It." We’ll link to it at democracynow.org.