`THE LONDON LOOPHOLE'
On Oil Prices, Senators Want Truth, Not Soros
by Paul Gallagher
From the London Independent and Financial Times, you'd have thought that George Soros, the British financial oligarchy's favorite megaspeculator, had dominated the June 2 hearings in the U.S. Senate on speculation and manipulation of oil prices. The Financial Times opened dramaticallyon how "George Soros stood before the panel of U.S. Senators, and witheringly..." etc.and went on for a couple of thousand words in that vein. But in truth, Soros was sitting down throughout the hearing, like the other witnesses; and far from being "withered" by his testimony, the six Democrats and two Republican Senators generally ignored it, as they demanded hard information from other witnesses about the "London loophole" for investment banks' and hedge funds' massive speculation on oil prices, and how the United States could close it.
Soros simply did not tell the panel of the Senate Commerce Committee the truth about what's driving the exploding hyperinflation in oil prices, and they knew it. Addressing them as if they were fellow futures market speculators, Soros warned them that the "speculative bubble" in oil futures might collapseobvious to them alreadyand even suggested they might keep pension funds and mutual funds from investing in oil. But he kept hidden what he knows about who's driving that speculative explosion.
Not so, two other witnesses, University of Maryland law professor Michael Greenberger, a consultant to the Justic Department and the Commodity Futures Trading Commission (CFTC), and Dr. Mark Cooper of the Consumer Federation of America. So while Soros sat virtually silent for two hours, Senators Cantwell (D-Wash.), Dorgan (D-ND), Nelson (D-Fla.), Snowe (R-Me.), Boxer (D-Calif.), Thune (R-SD), and Carper (D-Del.) engaged in urgent colloquy with Greenberger and Cooper about unregulated energy speculation on London's "offshore" futures markets.
London's Offshore in Atlanta
At a time when bank and hedge fund speculation, fleeing the securities markets on which it has taken huge losses, has been pouring into the commodities futures markets for metals, foods, and especially oil products, sweetheart agreements between the U.S. CFTC and the British Financial Services Agency has made American commodities futures markets into, essentially, London offshore havens. Greenberger and Cooper laid out in detail, how 35% of West Texas crude futures are traded on a market headquartered in Atlanta, Georgiathe Intercontinental Commodity Exchange, or ICEwhich by CFTC staff actions, is juridically a London offshore market overseen only by the British Financial Services Authority (FSA)! Cooper called the FSA, correctly, "a bad jokelook how it regulated in the Northern Rock Bank case." And oil futures trading on the New York Mercantile Exchange (NYMEX) is now "regulated" only by the London-controlled financial authority of Dubai, under another CFTC staff agreement.
On what are effectively British offshore markets, Greenberger said, a group of banks and hedge funds are simply "continuing and repeating the 'subprime' crash of the securities markets, and all their derivatives, on the commodities markets." He named the investment banksGoldman Sachs, Morgan Stanleyalong with JPMorgan Chase. Some 70% of all oil futures trading in the United States is speculative, Greenberger said, and 30% of all U.S. oil futures trading is being done by Goldman Sachs, Morgan Stanley, and JPMorgan Chase. "I find it highly ironic that when you control the price of oil, you can 'predict' when it will go from $130 to $200 a barrel," he noted, answering Senator Cantwell's question about the "predictions" of $150-200 oill by Goldman Sachs and Morgan Stanley, which around May 20 launched the latest superspike in prices.
These banks and hedge funds are also buying large volumes of oil products and holding them off the market while they play the falling dollar, which continually raises the oil products' price. This hoarding is not just speculation, but manipulation of the market, whose existence is denied by the CFTC and Securities and Exchange Commission. But "the biggest owner of heating all in the Northeast is Morgan Stanley," Greenberger reported.
The "London loophole" is actually at least two. The CFTC, deferring to the British FSA as "its model," is allowing these banks and hedge funds to be designated "commercial" rather than "speculative" tradersas if they were airlines or gasoline distributors which needed to buy future oil productsand thus subject to no speculative limits on how large their positions. And second, with one-third or more of futures trading for West Texas crude oil going through British offshore "dark markets," no reporting of trades and speculative positions is going to any U.S. regulatory agency. Add margin requirements of only 5-6% for trades (i.e., a debt leverage ratio of 15-20 to one, like that which blew out Bear Stearns and the debt securities markets nor required to report them), and you have London and Wall Street financial firms driving a wild speculative hyperinflation.
On May 25, Cantwell and 22 other Senators had released a letter to the CFTC and the Federal Trade Commission (FTC) demanding that the "London Loophole" be closed. CFTC chairman Walter Lukken had responded on May 29 promising action, after which he earnestly requested that the British FSA give the CFTC some data by Fall. "He's [Lukken] gotten down on his knees to the British," Greenberger said to questions by Sen. Byron Dorgan.
Cooper told the Senators, "Roll up your sleeves, assert the national authority of the United States, and regulate these markets. Overhaul the futures markets from top to bottom."
Senator Cantwell said after the June 2 hearing, "Now there will be a lot more than 23 Senators; and I believe CFTC will take the action required by the economy, and by the morality of the American people, now." If not, she believes the Senate will legislate to force CFTC's hand.
Soros: It's Really Just Supply and Demand
As for George Soros, he had also repeated, in his testimony, the claims of executives of the ICE futures market, who told the Washington Post that U.S. government reregulation would drive the speculative banks and funds to flee U.S. oil futures markets. Greenberger strongly disagreed with this threat by the ICE, but added, "If a Morgan Stanley really flees, goes offshore, we'd have a lower oil price as a resultI'd say, 'Let them go.' "
Late in the June 2 proceedings, Soros appeared to become uncomfortable at being pushed aside in the hearing, and interjected strong disagreement with Greenberger and Cooper. "I think this whole approach [focussing on speculation] is the wrong way of looking at it," Soros complained. "What is happening with the oil price is fundamentally a matter of demand and supply.... You have, oil fields around the world are aging. Consumption is growing by nations in the Third World. The recession will bring down the bubble, but only temporarily. The more important issue is the longer term, which is global warming."
So much for Soros "witheringly" warning the Senators about a giant bubble created by speculators! He was flustered into making the same "nobody here but us fundamentals" argument as the CEO of British Petroleum, or the head of the CFTC, Mr. Lukken.
Adding insult to the injury to the great speculator's British ego, Sen. Byron Dorgan then directed the first question to him in an hour: "You reportedly, with your hedge funds, made a profit of $3 billion last year. ... Did any of that come from speculation in oil?" "No, no!" said Soros. "And you're saying," pursued Dorgan, "that this price bubble will be wiped out by a recession, that we don't have to do anything about it?" "No, no," Soros repeated, and explained hurriedly that he really didn't know very much about oil futures markets at all!
Lyndon LaRouche commented that Soros's surprising isolation at the hearing could indicate that "the word is out, and some people are getting disgusted at what he's doing" politically, with the huge sums he has thrown into Democratic Party factions on behalf of British political objectives.
See: "LaRouche: Bankrupt Speculators with $25 Per Barrel Oil," EIR, June 11, 2004.