Lucas van Praag: "Don't Blame Goldman For The Food Crisis, Blame The Middle Class"

Tyler Durden's picture

Last week, an article by Fred Kaufman in Foreign Policy magazine ripped off a gangrenous scab: the topic of Goldman manipulating markets, a theme extensively dissected over the past two years, only in this case a rather sensitive one: that of food prices. Since the topic of Goldman being involved in market manipulation is nothing new to Zero Hedge, which first exposed the firm's prop trading shenanigans in 2009, a trope that was merely validated when Lucas van Praag responded to our allegations, to be promptly followed by Volcker making prop trading by banks semi-illegal, we were not surprised to read this piece. What did surprises is that Goldman once again exhibited horrendous PR sense by issuing yet another Lucas van Praag response, literally minutes ago, in the same venue. While van Praag does touch upon some valid points, the overall response is beyond weak and along the lines of the traditional excuse: "we generously provide liquidity/markets/capital, etc." which merely exacerbates the overarching theme: Goldman's relentless condescension, and assumption that it always is dealing with idiots who have no idea how the firm operates. As Goldman is about to find out, this will do nothing but generate a firestorm of angry responses by the "non-faceless" crowd which will now have a scapegoat to blame, since by taking he defensive, Goldman once again validates the allegation. What happens next to Goldman, and the GSCI, is unclear but will likely not be favorable in light of Obama's recent witchhunt against "speculators." Yet at the end of the day what can one expect from a firm that will always have to live with the following classical example of shooting itself in the foot: "When asked about these emails, Mr. Swenson also denied that Goldman had attempted to squeeze the CDS short market. He claimed that the cost of single name CDS shorts had gone too high, and the purpose behind Goldman’s actions was to restore balance to the market. Mr. Swenson could not explain, however, why in an effort to restore balance to the market, he used the phrases “cause maximum pain,” and “this will have people totally demoralized".”

From Lucas van Praag, Foreign Policy

Don't Blame Goldman Sachs for the Food Crisis

Blame the meat-loving middle class.

Frederick Kaufman's article "How Goldman
Sachs Created the Food Crisis," ignores a
number of important facts about the underlying economic, social, and political
factors that have driven the rise in food prices.

The assertion that Goldman Sachs introduced speculation into commodity
markets is incorrect. The Commodity Research Bureau (CRB) Index has been
investible since the early 1970s, and futures on the CRB Index have been traded
since 1986, five years before the creation of the Goldman Sachs Commodities
Index (GSCI). Gary Cohn, the president of Goldman Sachs,
was not involved in the creation of the index, contrary to the article's
assertion. The GSCI was purchased by Standard and
Poor's in 2007 and retains a connection to Goldman Sachs in name only.

More importantly, the article does not present any credible evidence
that commodity index investing is responsible for the rise in food prices.
Serious inquires, such as one conducted by the OECD in the wake of the 2008
price spike, have concluded that "index funds did not cause a bubble in commodity futures prices."
Rather than destabilizing futures markets, commodity index funds provide them
with a stable pool of capital, improving farmers' ability to insure themselves
against the risks inherent in agricultural prices. This, in turn, can allow
farmers to produce more food at a lower cost. The pension and endowment funds
providing this vital capital are investing the savings of individuals. They are
not faceless "speculators." They represent people, often pensioners, who seek
to protect the value of their savings
against inflation and rising food prices.

Finally, the article suggests that because commodity indices are
"long-only" they, therefore, inflate prices. This is not the case.
Futures contracts expire on a set date, meaning that "rolling" them over
simply
involves a re-investment of the original funds by selling one contract
and
buying another. This "roll-over" is akin to renewing home-owners
insurance from
year to year and is not like purchasing a
second or third home, which could inflate prices.

The real drivers of food inflation and food shortages are long-term
trends, like increased meat consumption by the growing middle class in emerging
markets and greater use of biofuels in the developed markets. Monetary policy,
climate change, and protectionism also play key roles. Historical facts and
demonstrable economic trends cannot be disregarded if there is to be a
productive discussion about this vital issue.

Sincerely,

Lucas van Praag
Managing Director
Goldman, Sachs & Co.

 

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.

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jerry_theking_lawler's picture

where did everybody go??

topcallingtroll's picture

Every once in a while i have to take a piss.

Yen Cross's picture

Cute. Block writing is un-intelligent! Grammar posters? A little Grammer? Seee you all in London. Love those 10 YR. BUND prices! A smack in the ass they are!

floydian slip's picture

THE QUESTION IS MOOT!

 

Glodman Squid tis but a tentacle

 

Keri at Bankster Report's picture

Over to the Bloomberg archives, July 2010:

"Turning commodity futures into securities unleashed a much larger sales force -- stockbrokers selling a product many of them didn’t understand, he says. Passive buy-and-hold investors at one point in mid-2008 held the equivalent of three years of production of soft red winter wheat. Wall Street’s success in attracting those buyers boosted demand for futures contracts, which helped determine what consumers would pay for baked goods. 

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, New York, to fire five of its 32 employees. “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Cocoa futures reached a 30-year high early this year because of speculators, according to Juergen Steinemann, chief executive officer of the world’s largest maker of bulk chocolate, Zurich-based Barry Callebaut. At the airport, the new $25 charge for checking a suitcase exists partly because airlines have to set aside cash to hedge against sharper ups and downs in oil prices, says Bob Fornaro, CEO of AirTran Holdings. “This has been very, very good for Wall Street,” he says."

break

"With no job, Forero holed up in his home office, sifting through data with a Hewlett-Packard scientific calculator. He became convinced that the products UBS had sold were hurting investors and disrupting supply and demand for basic commodities. 

“I’ve always been a little naïve, and maybe I still am,” he says. “But how can the government allow that? People in our industry talk about it -- everybody knows about it. This has to come to light.” UBS spokesman Doug Morris declined to comment."

break. and my favorite:

"Goldman owns a global network of aluminum warehouses.  Morgan Stanley chartered more tankers than Chevron last year (2009), according to shipbroker Poten & Partners.  And JPMorgan Chase hired a supertanker to store heating oil off Malta last year, likely earning returns of better than 50 percent in six months, says oil economist Philip Verleger. “Many, many firms did this,” he adds, explaining that ETF investors created this “profitable, risk-free arbitrage opportunity” when they plowed into commodities. Futures are bilateral; if someone’s buying, someone else is selling. “And the only way to attract sellers is to offer them a bigger profit,” Verleger says. “So, ironically, passive investors have been sowing the seeds of their own defeat” -- and contributing to the contango that does in their funds."

The article is worth reading again.

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investor...

IdioTsincracY's picture

 

...the topic of Goldman being involved in market manipulation is nothing new to Zero Hedge

...in light of Obama's recent witchhunt against "speculators."

 

Please, reconcile 'manipulation is nothing new' with witchhunt ...

Thnks!

Tyler Durden's picture

One can "Speculate" without being a "hedge fund of scale", large enough to manipulate a market, and/or break established trading rules (as weak as they may be). Reconciled.

MayIMommaDogFace2theBananaPatch's picture

Ah, you can speak quite well with an economy of words when you try!  Nicely said.

IdioTsincracY's picture

Still, i do not see a witchhunt ... no witch there, just all too real, as a matter of fact..

 

[BTW: Tyler, thanks for your all your work!]

Stormdancer's picture

Do you really believe that Obama is really going to go after the real manipulators of prices and markets in anything?

Since "witch hunt", in my mind, implies a concerted effort to lay blame on the innocent as a way to divert attention from the guilty, "witch hunt" is appropos.

DaveyJones's picture

Well said. Kauffman's reply handled it as well. The irony of the meat eating emerging markets theory is that its true and the last thing we should be doing in a world where food and food production is getting tighter is allow this kind of market makers

Urban Redneck's picture

I think Kauffman's reply was a hell of a lot better than his original BS piece, which completely ignored Bernank's incessant money printing, and Wall Street's self-destruction/ponzi collapse of all their other fiat "investment" outlets.  In addition, as FP is a lobbying rag, it is convenient that Kauffman ignored the role of the CFMA in increasing speculation, I guess he didn't want to get on the bad side of anyone he might be lobbying next week.  In his original piece Kauffman also provided misleading statistics on commodity inflows in 2008, blurring the distinction between Goldman's role as an innovator of paper crap, and its role as one of countless Wall Street purveyors of paper products that seek a paper yield based on some "correlation" to the price movements of an underlying basket tangible assets.  Finally, the way he focused specifically on a wheat commodity roll trade makes me wonder  if his financial background doesn't include washing out of a Wall Street sausage grinder.  That said, I think van Praag's pathetic response which somehow missed a lot of the points mentioned above, provided Kauffman a wonderful opportunity to properly rip Goldman a new one.  

pan-the-ist's picture

It is true, but it isn't the cause.  The market decides the price of a 16 oz Ribeye, but Goldman sux shouldn't be fleecing their clients just before that steak reaches my plate.

topcallingtroll's picture

Then someone develop short only.commodity index funds?

dcb's picture

sco or cmd, these double shorts I trade and try to make sure I have them around the roll over days for easy pickings. the easiest trade around.

rocker's picture

+1  One can also trade overseas in mostly unregulated futures markets.

Yen Cross's picture

Most over seas markets are well regulated. It's about keeping money onshore. (USA) people are expatriating.

Muir's picture

@Tyler

"One can "Speculate" without being a "hedge fund of scale", large enough to manipulate a market, and/or break established trading rules (as weak as they may be). Reconciled."

-

fuck that was good.

-

zaknick's picture

Amerika, the KKK empire!

topcallingtroll's picture

What fantastically enlightened country do you live in?
Has any of your minorities ever been elected president?
Does your country even have elections? Or civil rights?

zaknick's picture

Dude, in my country minorities aré displaced from their homes by CIA authorized paramilitary drug traffickers. They are murdered by these same paramilitaries tgat work for Chiquita (Rockefeller) Drummond Coal, Shell (British Crown and Rothschild), Occidental Petroleum (Bush), Anglo Gold Ashanti (Oppenheimer/Cecil Rhodes money)....etc etc

guess who's coming to town this year?

Xe! wheeee... formerly known as

You really think OBH is just some regular Joe? How brainwashed!

topcallingtroll's picture

U must be really embarrased about where you live if you wont give us the name.

I am sure that all of your problems are caused by foreigners, since you third worlders are so virtuous and perfect.

You give us trolls a bad name.

zaknick's picture

...,total redneck

lost cause... u drank deeply from their Kool Aid.

topcallingtroll's picture

Like i said.

Give us the name of the third world shit hole you live in.

topcallingtroll's picture

Creo que eres de Columbia, maricon.

Cuando yo estaba en Venezuela y Columbia yo tiraba con muchas latinas. Siempre ellas prefieren gringos, juevon.

zhandax's picture

My Spanish is a little rusty....you fucked a lot of them or you shot a lot of them?

topcallingtroll's picture

It may just be a local venezuelan slang, but anyone from colombia would know what i said. Go to latin america , learn the language, and as an american you will be in poontang heaven.

I dont appreciate gratuitous insulting comments from a colombian who is angry he cant get a usa visa.

IdiotsOutWalkingAbout's picture

Troll you are plain dumb.

Colombia is a country. Columbia is a bunch of other stuff like schools and companies.

Your Spanish skills really suck. Get a clue. 

topcallingtroll's picture

Hehehe.

I mispelled one word.

Very sorry!

Stormdancer's picture

Have you ever travelled more than 50 miles from your birthplace??

topcallingtroll's picture

Quite a bit actually.

I just want him to answer the question.

Stormdancer's picture

You obviously didn't learn anything significant in your travels.  You are the epitome of the "ugly American" stereotype ....absolutely clueless as to the incredible rape second and third world peoples have experienced at the hands of US based international companies.

For a while I wondered why the various brown skinned people I came to know harbored such resentment toward the US.  It was easy to mark it down to "jealousy" for awhile.  But, as I got to know them and listened to their stories around meagre meals they sacrificed much to share with me, I found out different.  I thought I was carrying an M-16 for the love of God, Mom, apple pie and bringing freedom to oppressed people.  Boy was I deluded.

topcallingtroll's picture

Ugly American?

I dont recall going to a south american website and making gratuitous insulting remarks.

I just want to know what country he is from.

Stormdancer's picture

Gratuitous??  ROFL....  you prove my point.  You don't need to know what country he's from.  There are dozens to choose from.  Anywhere in South America, the Middle East, India, most of  Southeast Asia and significant portions of Africa will do just fine.  You really need to do some digging into the hideous practices corporations routinely employ behind the wall of protection provided by US Army hobnailed boots.

topcallingtroll's picture

I figured it out by his comments.

They were poor before we were even developed. They will be poor long after we are gone.

I am sure their own people and political systems have nothing to do with their backwardness.

It always feels better to externalize blame on evil foreigners. That way people never have to look inward.

Stormdancer's picture

It always feels better to externalize blame on evil foreigners. That way people never have to look inward.

There is none so blind as he who will not see.

Stormdancer's picture

If you really want to extend your education and get a clue how this world really works, start with Iran.

Just google "Mohammed Mossadegh", "Reza Pahlavi" and "Savak".  Had it not been for "our" choices (I use "our" very advisedly because most Americans are clueless about what was done in our name), and you'll see a tale of hypocrisy, murder, graft and corruption that is the back story and the fundamental reason for why Iran is what it is today.  We live in a very dangerous world...of our own making.

The same story has played out all across central and south America in so many iterations it'll blow your mind.  If you dare face truth. 

 

Edit:  Google "General Smedley Butler" if you care to get a clue what's gone on in South America ... and how long it's been going on.

topcallingtroll's picture

r

Dude I speak spanish and spent quite a bit of time in south america and it is pretty funny how presumptious you are. I read smedley's book and dont get my education from google snippets

Stormdancer's picture

Then it is certainly true of you when it was said

"...ever learning but never coming to a knowledge of the truth."

Stormdancer's picture

I read smedley's book and dont get my education from google snippets

You have read Smedley's book and you speak Spanish.  Isn't that special!

Yet you cannot sympathize with or understand the righteous anger people feel after having their faces repeatedly ground into the dirt because in your judgement they're from some "third world shit hole"???

You are not human.  It's very likely that the same forces are in the process of turning this nation into one of those third world shit holes and you'll get an opportunity to experience some of the same injustices you currently blind yourself to.  I feel no joy in the thought, but there is a certain sense of justice about it.  Enjoy your share of the blowback.

Redneck Makin-tosh's picture

Righteous anger never focuses on the guilty and is best endured with polite gratitude.

bill40's picture

Love your comments but zerohedge is largely a morality free zone imho. Keep the faith.

zaknick's picture

Civil rights in Amerikkka? Only for white people and even then it's iffy with the paramilitarization of the police. What about the millions of blacks in prison for "drugs"(tgat the CIA brought in like crack)?

War on Drugs is part Jim Crow ethnic cleansing and part imperialism (a black market with its ensuing criminality and violence used to destabilize countries /old colonialism trick). 95% of "drug offenders" are blacks and Hispanics (see www.leap.cc ).

I know the states very well and a black actor as president doesn't fool me. The state dept does that too; use "ethnic" spokespeople to hide their ugly redneck thug faces. Most people don't know better and are fooled. Kinda like ur little imbecilic rant.

Schooled again.

Stormdancer's picture

It appears the schooling will be completely ineffective, but please keep trying.  Some will get it ... some are getting it.  It's very likely too late, but while I live I maintain hope that perhaps we can take back what was designed to be a great nation and a blessing to the world.  It can be again if we can get back to our roots and I truly believe most Americans would be appalled at what our wealth, influence and military might have really been used for.

pan-the-ist's picture

Columbia -

You should move to a better country.  That one sucks.

RKDS's picture

If the war on drugs is really about ethnic cleansing, they're doing a ridiculously poor job of it.  All you ever seem to see or hear is more of those people moving in to this or that town/city/state.