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Goldman Sachs Made 400 Million Betting On Food Prices In 2012 While Hundreds Of Millions Starved

Starving Child In Ethiopia - Photo by Cate Turton - Department for International DevelopmentWhy does it seem like wherever there is human suffering, some giant bank is making money off of it?  According to a new report from the World Development Movement, Goldman Sachs made about 400 million dollars betting on food prices last year.  Overall, 2012 was quite a banner year for Goldman Sachs.  As I reported in a previous article, revenues for Goldman increased by about 30 percent in 2012 and the price of Goldman stock has risen by more than 40 percent over the past 12 months.  It is estimated that the average banker at Goldman brought in a pay and bonus package of approximately $396,500 for 2012.  So without a doubt, Goldman Sachs is swimming in money right now.  But what is the price for all of this “success”?  Many claim that the rampant speculation on food prices by the big banks has dramatically increased the global price of food and has caused the suffering of hundreds of millions of poor families around the planet to become much worse.  At this point, global food prices are more than twice as high as they were back in 2003.  Approximately 2 billion people on the planet spend at least half of their incomes on food, and close to a billion people regularly do not have enough food to eat.  Is it moral for Goldman Sachs and other big banks such as Barclays and Morgan Stanley to make hundreds of millions of dollars betting on the price of food if that is going to drive up global food prices and make it harder for poor families all over the world to feed themselves?

This is another reason why the derivatives bubble is so bad for the world economy.  Goldman Sachs and other big banks are treating the global food supply as if it was some kind of a casino game.  This kind of reckless activity was greatly condemned by the World Development Movement report

“Goldman Sachs is the global leader in a trade that is driving food prices up while nearly a billion people are hungry. The bank lobbied for the financial deregulation that made it possible to pour billions into the commodity derivative markets, created the necessary financial instruments, and is now raking in the profits. Speculation is fuelling volatility and food price spikes, hurting people who struggle to afford food across the world.”

So shouldn’t there be a law against this kind of a thing?

Well, in the United States there actually is, but the law has been blocked by the big Wall Street banks and their very highly paid lawyers.  The following is another excerpt from the report

“The US has passed legislation to limit speculation, but the controls have not been implemented due to a legal challenge from Wall Street spearheaded by the International Swaps and Derivatives Association, of which Goldman Sachs is a leading member. Similar legislation is on the table at the EU, but the UK government has so far opposed effective controls. Goldman Sachs has lobbied against controls in both the US and the EU.”

Posted below is a chart that shows what this kind of activity has done to commodity prices over the past couple of decades.  You will notice that commodity prices were fairly stable in the 1990s, but since the year 2000 they have been extremely volatile…

Commodity Prices

The reason for all of this volatility was explained in an excellent article by Frederick Kaufman

The money tells the story. Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds. To put the phenomenon in real terms: In 2003, the commodities futures market still totaled a sleepy $13 billion. But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities — including food — seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash. “You had people who had no clue what commodities were all about suddenly buying commodities,” an analyst from the United States Department of Agriculture told me. In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets. Food inflation has remained steady since.

The money flowed, and the bankers were ready with a sparkling new casino of food derivatives. Spearheaded by oil and gas prices (the dominant commodities of the index funds) the new investment products ignited the markets of all the other indexed commodities, which led to a problem familiar to those versed in the history of tulips, dot-coms, and cheap real estate: a food bubble. Hard red spring wheat, which usually trades in the $4 to $6 dollar range per 60-pound bushel, broke all previous records as the futures contract climbed into the teens and kept on going until it topped $25. And so, from 2005 to 2008, the worldwide price of food rose 80 percent –and has kept rising.

Are you angry yet?

You should be.

Poor families all over the planet are suffering so that Wall Street bankers can make bigger profits.

It’s disgusting.

Many big financial institutions just seem to love to make money on the backs of the poor.  I have previously reported on how JP Morgan makes billions of dollars issuing food stamp cards in the United States.  When the number of Americans on food stamps goes up, so does the amount of money that JP Morgan makes.  You can read much more about all of this right here: “Making Money On Poverty: JP Morgan Makes Bigger Profits When The Number Of Americans On Food Stamps Goes Up“.

Sadly, the global food supply is getting tighter with each passing day, and things are looking rather ominous for the years ahead.

According to the United Nations, global food reserves have reached their lowest level in nearly 40 years.  Global food reserves have not been this low since 1974, but the population of the world has greatly increased since then.  If 2013 is another year of drought and bad harvests, things could spiral out of control rather quickly…

World grain reserves are so dangerously low that severe weather in the United States or other food-exporting countries could trigger a major hunger crisis next year, the United Nations has warned.

Failing harvests in the US, Ukraine and other countries this year have eroded reserves to their lowest level since 1974. The US, which has experienced record heatwaves and droughts in 2012, now holds in reserve a historically low 6.5% of the maize that it expects to consume in the next year, says the UN.

“We’ve not been producing as much as we are consuming. That is why stocks are being run down. Supplies are now very tight across the world and reserves are at a very low level, leaving no room for unexpected events next year,” said Abdolreza Abbassian, a senior economist with the UN Food and Agriculture Organisation (FAO).

The world has barely been able to feed itself for some time now.  In fact, we have consumed more food than we have produced for 6 of the last 11 years

Evan Fraser, author of Empires of Food and a geography lecturer at Guelph University in Ontario, Canada, says: “For six of the last 11 years the world has consumed more food than it has grown. We do not have any buffer and are running down reserves. Our stocks are very low and if we have a dry winter and a poor rice harvest we could see a major food crisis across the board.”

“Even if things do not boil over this year, by next summer we’ll have used up this buffer and consumers in the poorer parts of the world will once again be exposed to the effects of anything that hurts production.”

We desperately need a good growing season next summer, and all eyes are on the United States.  The U.S. exports more food than anyone else does, and last summer the United States experienced the worst drought that it had seen in about 50 years.  That drought left deep scars all over the country.  The following is from a recent Rolling Stone article

In 2012, more than 9 million acres went up in flames in this country. Only dredging and some eleventh-hour rain kept the mighty Mississippi River from being shut down to navigation due to low water levels; continuing drought conditions make “long-term stabilization” of river levels unlikely in the near future. Several of the Great Lakes are soon expected to hit their lowest levels in history. In Nebraska last summer, a 100-mile stretch of the Platte River simply dried up. Drought led the USDA to declare federal disaster areas in 2,245 counties in 39 states last year, and the federal government will likely have to pay tens of billions for crop insurance and lost crops. As ranchers became increasingly desperate to feed their livestock, “hay rustling” and other agricultural crimes rose.

Ranchers were hit particularly hard.  Because they couldn’t feed their herds, many ranchers slaughtered a tremendous number of animals.  As a result, the U.S. cattle herd is now sitting at a 60 year low.

What do you think that is going to do to meat prices over the next few years?

Meanwhile, the drought continues.  According to the U.S. Drought Monitor, this is one of the worst winter droughts the U.S. has ever seen.  At this point, more than 60 percent of the entire nation is currently experiencing drought.

If things don’t turn around dramatically, 2013 could be an absolutely nightmarish year for crops in the United States.  If 2013 does turn out to be another bad year, food prices would soar both in the U.S. and on the global level.  The following is from a recent CNBC article

The severe drought that swept through much of the U.S. last year is continuing into 2013, threatening to cripple economic growth while forcing consumers to pay higher food prices.

“The drought will have a significant impact on prices, especially beef, pork and chicken,” said Ernie Gross, an economic professor at Creighton University and who studies farming issues.

So let us hope for the best, but let us also prepare for the worst.

It looks like higher food prices are on the way, and millions of poor families all over the planet will be hard-pressed to feed their families.

Meanwhile, Goldman Sachs will be laughing all the way to the bank.

A Global Food Crisis Is Coming - Are You Ready? - Photo by Oxfam East Africa

Goldman Sachs And The Big Hedge Funds Are Pushing Leverage To Ridiculous Extremes

Goldman Sachs And The Big Hedge Funds Are Pushing Leverage To Ridiculous Extremes - Photo by bfishadow on FlickrAs stocks have risen in recent years, the big hedge funds and the “too big to fail” banks have used borrowed money to make absolutely enormous profits.  But when you use debt to potentially multiply your profits, you also create the possibility that your losses will be multiplied if the markets turn against you.  When the next stock market crash happens, and the gigantic pyramid of risk, debt and leverage on Wall Street comes tumbling down, will highly leveraged banks such as Goldman Sachs ask the federal government to bail them out?  The use of leverage is one of the greatest threats to our financial system, and yet most Americans do not even really understand what it is.  The following is a basic definition of leverage from Investopedia: “The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.”  Leverage allows firms to make much larger bets in the financial markets than they otherwise would be able to, and at this point Goldman Sachs and the big hedge funds are pushing leverage to ridiculous extremes.  When the financial markets go up and they win on those bets, they can win very big.  For example, revenues at Goldman Sachs increased by about 30 percent in 2012 and Goldman stock has soared by more than 40 percent over the past 12 months.  Those are eye-popping numbers.  But leverage is a double-edged sword.  When the markets turn, Goldman Sachs and many of these large hedge funds could be facing astronomical losses.

Sadly, it appears that Wall Street did not learn any lessons from the financial crisis of 2008.  Hedge funds have ramped up leverage to levels not seen since before the last stock market crash.  The following comes from a recent Bloomberg article entitled “Hedge-Fund Leverage Rises to Most Since 2004 in New Year“…

Hedge funds are borrowing more to buy equities just as loans by New York Stock Exchange brokers reach the highest in four years, signs of increasing confidence after professional investors trailed the market since 2008.

Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to data compiled by Morgan Stanley. Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show.

So why is this so important?

Well, as a recent Zero Hedge article explained, even a relatively small drop in stock prices could potentially absolutely devastate many hedge funds…

What near record leverage means is that hedge funds have absolutely zero tolerance for even the smallest drop in prices, which are priced to absolute and endless central bank-intervention perfection - sorry, fundamentals in a time when global GDP growth is declining, when Europe and Japan are in a double dip recession, when the US is expected to report its first sub 1% GDP quarter in years, when corporate revenues and EPS are declining just don’t lead to soaring stock prices.

It also means that with virtually all hedge funds in such hedge fund hotel names as AAPL (the stock held by more hedge funds – over 230 – than any other), any major drop in the price would likely lead to a wipe out of the equity tranche at the bulk of AAPL “investors”, sending them scrambling to beg for either more LP generosity, or to have their prime broker repo desk offer them even more debt. And while the former is a non-starter, the latter has so far worked, which means that most hedge funds have been masking losses with more debt, which then suffers even more losses, and so on.

By the way, Apple (AAPL) just fell to an 11-month low.  Apple stock has now declined by 26 percent since it hit a record high back in September.  That is a very bad sign for hedge funds.

But hedge funds are not the only ones flirting with disaster.  In a previous article about the derivatives bubble, I pointed out the ridiculous amount of derivatives exposure that some of these “too big to fail” banks have relative to their total assets…

According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives.  Just check out how exposed they are…

JPMorgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

Take another look at those figures for Goldman Sachs.  If you do the math, Goldman Sachs has total exposure to derivatives contracts that is more than 362 times greater than their total assets.

That is utter insanity, but we haven’t had a derivatives crash yet so everyone just keeps pretending that the emperor actually has clothes on.

When the derivatives crisis happens, things in the financial markets are going to fall apart at lightning speed.  A recent article posted on goldsilverworlds.com explained what a derivatives crash may look like…

When one big bank faces some kind of trouble and fails, the banks with the largest exposure to derivates (think JP Morgan, Citygroup, Goldman Sachs) will realize that the bank on the other side of the derivatives trade (the counterparty) is no longer good for their obligation. All of a sudden the hedged position becomes a naked position. The net position becomes a gross position. The risk explodes instantaneously. Markets realize that their hedged positions are in reality not hedged anymore, and all market participants start bailing almost simultaneously. The whole banking and financial system freezes up. It might start in Asia or Europe, in which case Americans will wake up in the morning to find out that their markets are  not functioning anymore; stock markets remain closed, money at the banks become inaccessible, etc.

But for now, the party continues.  Goldman Sachs and many of the big hedge funds are making enormous piles of money.

In fact, according to the Wall Street Journal, Goldman Sachs recently gave some of their top executives 65 million dollars worth of restricted stock…

Goldman Sachs Group Inc. GS -0.76% handed insiders including Chief Executive Lloyd Blankfein and his top lieutenants a total of $65 million in restricted stock just hours before this year’s higher tax rates took effect.

The New York securities firm gave 10 of its directors and executives early vesting on 508,104 shares previously awarded as part of prior years’ compensation, according to a series of filings with the Securities and Exchange Commission late Monday.

And the bonuses that employees at Goldman receive are absolutely obscene.  A recent Daily Mail article explained that Goldman employees in the UK are expected to receive record-setting bonuses this year…

Britain’s army of bankers will re-ignite public fury over lavish pay rewards as staff at Goldman Sachs are expected to reward themselves £8.3 billion in bonuses on Wednesday.

The American investment bank, which employs 5,500 staff in the UK, will be the first to unveil its telephone number-sized rewards – an average of £250,000 a person – as part of the latest round of bonus updates.

The increase, up from £230,000 last year, comes as British families are still struggling to make ends meet five years after banks brought the economy to the brink of meltdown.

Wouldn’t you like to get a “bonus” like that?

Life is good at these firms while the markets are going up.

But what happens when the party ends?

What happens if the markets crash in 2013?

When you bet big, you either win big or you lose big.

For now, the gigantic bets that Wall Street firms are making with borrowed money are paying off very nicely.

But a day of reckoning is coming.  The next stock market crash is going to rip through Wall Street like a chainsaw and the carnage is going to be unprecedented.

Are you sure that the people holding your money will be able to make it through what is ahead?  You might want to look into it while you still can.

Goldman Sachs New World Headquarters

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