Banks using bailout money to speculate in OIL MARKET

[rollingrock]

Will these crooks ever stop?


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Citigroup's Oil Trader's $100,000,000 Payday: A Wakeup Call for the Nation

August 5, 2009

It hit the front page of the New York Times and Wall Street Journal and papers all around the country: Paul Krugman, Nobel Laureate and New York Times columnist permitted himself to be "outraged." Here was another example of Wall Street and Banks going off the deep end after very nearly taking all of us over a cliff.


WHAT IN THE WORLD IS A BANK DOING IN THE OIL TRADING BUSINESS?!

It is one thing for a bank to finance oil or commodity trading with letters of credit or transaction financing, but to be a principal, that is, taking title on speculative positions in say oil, or other commodities, as owners and risk takers? What does that have to do with banking??

When hundreds of millions -- no, billions -- of dollars are being used by banks to play the oil contango game that is filling up supertankers with millions of barrels of oil, paid for by cheap money made available by the Fed, keeping the oil laden supertankers at sea months at a time in order to sell the oil at higher prices at a later date, thereby:

1. Tying up vast swaths of money that this economy needs for the revitalization of industry and housing. How many loans/mortgages could have been modified throughout the country with the million/billions tied up months at a time in floating oil inventory? How many payrolls of small business in deep stress could have been met?

2. By taking these positions, buying the oil now and storing it away, they are significantly impacting the price of oil and its downstream products (gasoline, heating oil and on) with price increases coming out of each consumer's pocket. Hereby the banks with their access to cheap funding, Fed programs, FDIC insured deposits, Tarp funds and government guarantees covering their speculative binge are simply returning to their irresponsible behavior, speculating instead of banking....



www.huffingtonpost.com/raymond-j-learsy/citigroups-oil-traders-10_b_251512.html

[bbinacan]

1. All because of the repeal of

Glass-Steagall

[Skink]

2. We'll just put that in the strategic reserves then.

we the tax payer bought it.

[unblock]

3. i'm not sure about the oil business in particular, but i do know about mortgage securitizations:

in a mortgage deal, investors would rather have a share in a big, diversified pool of mortgages than a like amount of straight mortgages because the diversification lowers risk. in and of itself, this is straightforward an uncontroversial.

however, to create this diversified pool, the bank's traders first takes maybe three weeks to buy up small groups of mortgages from smaller originators until it's got a big enough pool. meanwhile, the bank's salespeople line up investors willing to take various portions of the final pool. if they've got enough investors lined up to do a deal, they do it and hang on to the small portion of the deal that remains.

during the build-up and for the small portion that remains on the bank's books, they hedge their mortgage position with treasuries, trying to be immune to interest rate changes (i.e., if interest rate changes, hopefully mortgages go up while treasuries go down, or vice versa, so that they neither make nor lose money). however, such hedges aren't perfect even as far as interest rates go, nevermind that there are things that influence the price of mortgages that do not influence the price of treasuries (such as changing estimates of default rates).

for the build-up time and the remaining pieces, the bank can make or lose a ton of money if the traders are good or bad, respectively. conservative banks hope that the commissions they get for doing the deal ensure a profitable outcome even when their traders lose them money, and it's a bonus when the traders make them money.


*IF* that's the sort of thing they're doing in the oil business, then i have no real problem with it.
however, if they are, indeed, doing outright naked speculation, then i agree, they have no business doing it these days.

[DCKit]

4. Using OUR money to screw U.S.. Sweet. n/t