Goldman Sachs, the food crisis, and offshore London

May 4th, 2011

Take a look at this article in Foreign Policy magazine, arguing that Goldman Sachs helped create, and profit hugely from, vast speculative markets in grain and other agricultural commodities, causing food prices to rise, with terrible effects. Goldman, it seems, helped turn a commodity derivatives market worth a sleepy $13 billion in 2000 into a half-trillion-plus market inside eight years. It continued:

“Today, bankers and traders sit at the top of the food chain — the carnivores of the system, devouring everyone and everything below. Near the bottom toils the farmer. . . . 250 million people joined the ranks of the hungry in 2008, bringing the total of the world’s “food insecure” to a peak of 1 billion — a number never seen before.”

I have no idea of the extent to which Goldman really did cause or help cause this stuff to happen – the role of speculation in food prices is not my terrain — though the article seems reasonable.  But the offshore perspective needs pointing out. First, a quote from the author Frederick Kaufman:

The last time I visited the Minneapolis Grain Exchange, I asked a handful of wheat brokers what would happen if the U.S. government . . .  outlawed all long-only derivative products?

Once again, laughter. Problem solved with another phone call, this time to a trading office in London or Hong Kong; the new food derivative markets have reached supranational proportions, beyond the reach of sovereign law.

That last bit in bold is a frightening statement. There we have it again: the offshore problem, with London and Hong Kong as the crowbars, this time. ‘Don’t regulate us too much or we’ll move offshore!’ Exactly, exactly, what I talk about in Treasure Islands.

Now take a look at the seminal event behind all of these things that happened: the deregulation of the Commodities Futures Trading Commission in 1999. What was the background to that? Why did it happen? Well, take a look at this 1998 hearing of the U.S. House of Representatives Committee on Banking and Financial Services. Look at these comments from Dennis Oakley of Chase Manhattan Bank:

Let me be frank. If the legal uncertainty posed by CFTC assertions of jurisdiction is not removed, Chase will be forced to move this business to another location, probably London. . . . In the case of clearing systems, if U.S. law makes it unattractive to locate the facilities in the United States, we will support siting them in London and use them from our London branch.

Make no bones about this: it is not so much a statement, as a threat. Here is a naked display of the power that offshore grants to financial firms. We must always, always, remember that Wall Street’s top offshore jurisdiction is not Cayman, but London. And it has been so for half a century, as Treasure Islands explains in great detail. There’s plenty more London stuff from this episode, such as this:

“In June 1998, the London Clearing House petitioned CFTC for an exemption from most of the provisions of the CEA for its swaps clearinghouse, called SwapClear. . . In March 1999, CFTC approved the London Clearing House’s petition.”

Once you have an eye for this stuff, you can see the process of regulatory competition at work, every day. It’s deadly – and it’s eviscerating our democracies.

P.S. there’s a Johann Hari podcast on Goldman Sachs and the food crisis here.

P.P.S. Foreign Policy, I should add, has a terrible record of ignoring, and at times publishing idiotic articles about, tax havens. Still, it carries a lot of interesting and counter-intuitive material too.

(Adapted from the Treasure Islands blog.)

Written by Nicholas Shaxson

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