The ongoing bankruptcy story of SemGroup LP continues to grow. Forbes has a cover story for April 13 that asks, “Did Goldman Goose Oil?” The story says Goldman Sachs, through J.Aron & Co., its commodities trading arm, was in “prime position” to know about SemGroup’s trading positions.
Ex-SemGroup CEO Tom Kivisto has been made the villain of the bankruptcy, which included leaving Kansas oil producers holding the bag for about $140 million in unpaid receipts. The story suggests he may have some company.
16 Comments
I’m disappointed that this story hasn’t registered with those of you I’ve talked with over the past year about the manipulation of the oil markets for personal and corporate gain.
Not to mention what this story tells us – again – about the dangers of deregulated markets.
Bill,
I found this presentation by economist Steven Horwitz very insightful, especially on greed. It does not specifically address “manipulation of the oil markets” but definitely addresses the “Great Recession”.
http://myslu.stlawu.edu/~shorwitz/gsutalk.htm
Interesting reading, although I have to tell you that one of the common denominators I find in any presentation by an economist on the current economic situation is that they are:
a) invariably ideologically driven;
and
b) hyper-analytical
The one thing Mr. Horwitz writes which is inescapably true is that greed, driven through specific vehicles, is dangerous.
I find it disingenuous, frankly, to move toward absolution of the private sector while dumping blame on government policy and intervention – hence, the ideologically driven comment above. I’m not sure how you can leap from the dubious financial instruments devised by some sectors of the mortgage industry to a blanket indictment of state-sponsored housing.
There’s plenty of blame for all to go around.
It’s admittedly a regulatory tightrope – too much government intervention in the market is a problem, one we seem to be moving toward. As we’ve seen, no government intervention or oversight in the market is a problem.
I’m still searching for a truly objective analysis of the current economy. I suspect I’ll find the true meaning of life before I find it.
Obviously I got a much different perspective after reading it than you. I did not find it “ideological” nor “hyper-active”. I thought it to be a well thought out, constructive summary on how we got here.
It should not be a “leap” of any kind to understand if the government is going to GUARANTEE a company, regardless of the financial instruments that it offers, individuals will absolutely take advantage of that. That’s being shrewd, not greedy.
I thought the comments on the role of the Fed was quite interesting. Greenspan has really gotten a free pass in all of this.
I am in favor of additional regulations, but I would like to see only targeted regulation of certain activities, not markets as a whole. I don’t believe that can ever be without loopholes because Congress needs to continue to feed at the trough. Blaming government when government is responsible is not “disingenuous”. It’s right on the mark.
We all have a front row seat for the next brilliant strategy: General Motors. Wait til we see the money trail on this one.
I guess I’m not sure how the risk followed the guarantee, Jerry.
It looks to me like the risks preceded the guarantee – in almost every case.
Bill, here’s where the risk (very little) followed the guarantee. From the presentation I referenced earlier:
“A state-sponsored push for more affordable housing has been a staple of several prior administrations. Fannie Mae and Freddie Mac are key players here. Although they did not orginate the questionable mortgages, they did develop a number of the low down-payment instruments that came into vogue during the boom. More important, they were primarily responsible for the secondary mortgage market as they promoted the mortgage-backed securities that became the investment vehicle du jour during the boom. Both Fannie and Freddie are, we must remember, not “free-market” firms. They are “government-sponsored entities,” at one time nominally privately owned, but granted a number of government privileges, in addition to carrying an implicit promise of government support should they ever get into trouble. With such a promise in place, the market for mortgage-backed securities was able to tolerate a level of risk that truly free markets would not. As we now know, that turned out to be a big problem.”
With such low risk, this was shooting fish in a barrel.
As it pertains to housing, I agree with that in total. Horwitz is not without his good points. What I disagree with in his work, fundamentally, is the suggestion that greed and deregulation don’t have a place at the blame table.
Housing, and the notion that every living and breathing American can and should own an expensive home, is a big stakeholder at the table, for sure, as is government – in both its willingness to look the other way while secondary financial instruments with dubious futures were developed and its willingness to totally deregulate. The American citizen has been failed, it would appear, by the nonsensical notion that everyone from homebuyers to financial advisors to banks to the government will ultimately do right by America.
The common denominator, unfortunately, in all of these scenarios is human nature – which is a factor that few economists seem willing to consider.
In concept, there’s zero question that a deregulated free market is preferable. The question that I believe all Americans have to ask themselves, though, is this: Do any of us truly believe that each of us can be trusted to act ethically and morally in a deregulated free market? There’s a ton of evidence out there that’s been reported indicating otherwise.
It’s a sobering and cynical way to look at our country. I drift back to the words of Doris Kearns Goodwin, “What America needs now are statesmen.”
“affordable housing” has not been the problem. It all the mega-bucks McMansions and condos. Check out the ‘jumbo mortgages’ that are upside-down.
Really, at the root of the housing element of this issue is an assumption so flawed as to strain the bounds of sanity: Homes, regardless of value, were always going to appreciate.
Anyone with even a rudimentary grasp of history should know better.
Which, of course, brings us back to the profit motive. As of now, I’d say that any credible discussion of the current economy will land right there.
A home went from being a roof over your head to being a speculative investment.
I am in the process of some major home improvements. While the payback ration is important to me the personal benefits I will derive from their use is more important. I really look forward to long relaxing soaks in the jetted tub after working in the yard this summer. Along with a nice cup of tea and relaxing music …
Indeed it did, as did the long-term financial instruments which financed those acquisitions.
It’s the profit motive, again: What I can do to maximize my personal gain, greater consequences notwithstanding.
Homes have always been a speculative investment. They should always remain a speculative investment. It may not be looked upon as speculative to the occupier of the home, but it is and will always be speculative to the noteholder. UNLESS THAT NOTE IS GUARANTEED BY THE FEDERAL GOVERNMENT REGARDLESS OF THE AMOUNT OF RISK. No more speculation.
Those notes can guarantee the value of a shack out back or a mega mansion. Millions of notes, all guaranteed by the Federal Gov’t because as Bill so eloquently stated, housing values could never drop.
These notes get “packaged” with other securities involving oil, energy, bonds, foreign investments etc and now we have the credit derivatives, put together by that mathmatical wunderkind from MIT that Bill brought to our attention. These derivatives receive very high (AAA) ratings from the Moody’s, Fitches and S&P’s of the world. Why? Because they were guaranteed payback on a portion due to the guarantees of our US Govt. In the meantime, these are insured through companies like AIG. Quite a mess.
So it’s no longer greed, it’s “profit motive”? That’s the issue here? The economy is in shambles because businesses wanted to make a profit. Try working without profits. Works great for newpapers, auto manufacturers and even socialism. All will work just fine until the money runs out.
Madoff was greed, but he did not cause this meltdown. This economy is in shambles because of our elected officials.
Jerry, we fundamentally disagree on what caused this economic mess, although we do not disagree in concept that public policy shares a substantial chunk of the blame.
The complicity of the government is in its failure to monitor the development of doomed-to-failure financial instruments written to back the ill-conceived conversion of the housing market into a commodities market, devised by people looking for a fast buck.
Perhaps this discussion boils down to philosophy: I don’t believe that anything should go in the pursuit of the almighty dollar. In fact, our own Charles Koch’s concept of market-based management demands – it doesn’t ask, it demands – ethical behavior from his employees. Morality is a foundational principle of Koch’s economic philosophy, and its absence is stark as you wade through the accounts from Wall Street, residential real estate, etc.
Greed brought down the free market in the United States, aided and abetted by self-serving public policy conceived for the financial benefit of a few, without interest or regard for consequences.
As I’ve said before, there’s plenty of blame to go around on this one.
jerry – I also must disagree. When I bought my first home ‘way back when’ I put the old traditional 20% down payment on the table. I bought a house I could afford for my young (at the time) family to live in. For the bank risk was minimized by the fact that I was 20% ‘in’. For me the house payment was basically the same as rent. So, even if the house ‘deflated’ neither I nor the bank would have suffered terribly.
The big change came when people were encourages to buy way beyond their means based on the theory of 10+% annual appreciation. Coupled with 95% loans (or even 100+% loans) this was a recipe for disaster. I am familiar with one in E-berg in bankruptcy where the loan amount is about 120% of the home value. I ahve to wonder – WHAT WAS THE LOAN OFFICER THINKING???!!!
The loan officer was thinking “Hey, since the federal government has mandated that I must do this loan due to the Community Reinvestment Act, and the federal government has guaranteed that all loans I make from this are 100% covered, I’d better make this loan!”
I used to believe it was greed that caused this mess, and some of my earlier blog posts in previous discussions reflected that opinion. But the article I posted above changed my opinion on that.
As I’m sure everyone who reads this is aware, greed is one of the seven deadly sins. It has always been here, and will always be here. Greed didn’t decide to raise it’s head to some new level of greediness for the economic crisis.
Our elected officials caused this by the following
1) Guaranteeing home mortgages
2) The repeal in 1999 of Glass-Steagall which then allowed large banks to start dealing in mortgage backed securites and Collaterized Debt Obligations (CDO’s)
3) Eliminating the uptick rule. The lowest denominator stocks could be shorted was on an upward movement of an 1/8th (12.5 cents). When the markets changed to the decimal system any movement of just a penny could trigger a short sell. The rule was done away with and stocks can be shorted at anytime. This was manipulated by huge hedge funds running businesses into the ground by the systematic selling of stocks (see G. Soros).
The coup de grace. Fannie and Freddie are paying $210 million in retention bonuses.
http://online.wsj.com/article/SB123876318076986497.html#articleTabs%3Darticle