We all wonder why the price of commodities, like gasoline or potatos, skyrockets in certain years, but not in others. Nobody seems to really know, ever. But the commodities traders have an inkling - because it is their business to know. And some of them use this knowledge to manipulate the markets themselves, which Goodman describes in great detail.
In Goodman's interview with Jerr DiColo on C-SPAN, he asks her how she managed to get into the world of the commodities traders in order to write about them. How was it possible? It is a closed group, almost a closed society.
One of the people who helped her was named Danny Masters. She describes him as being "on the trading floor". If you dig around the internet a little bit, you find a little more about him, like this, from "Incisive Media Investments Limited" (they also do Risk magazine and others):
The Oil Baron who Digs Gold , Hedge Funds Review, September 2004
Masters went to JP Morgan in 1994 with his "trading expertise" and worked on their "proprietary trading program" and then their "global energy trading business" in 1997. Soon after he started a hedge fund. What did his hedge fund do? It bought and sold "energy and metals derivatives".
Goodman mentions in the CSPAN interview that Masters was married to Blythe Masters, who runs JP Morgan's commodities group. She says they were a sort of 'commodities family'.
. . .
Blythe Masters? The Blythe Masters?
Blythe Masters was in the small JP Morgan crew who created the Credit Default Swap in the 1990s. She was not just 'on the crew', she was one of the prime movers. The group also created the BISTRO, a marketing tool to sell hundreds of Credit Default Swaps in one product. This was the foundation of the 'credit derivatives' business. This was written about in exquisite detail by Gillian Tett in her book Fool's Gold. The BISTRO would later evolve into the Synthetic CDO, which would play such a primary role at the heart of the financial speculative bubble of the zeroes, the subprime mortgage industry, the crash of 2008, and the subsequent Great Recession, as detailed in books like The Big Short by Michael Lewis.
Here is a fascinating article, especially in hindsight, written by Phillip Zweig back in 1997, talking about Blythe Masters, at the time the "global head of credit derivatives" at JP Morgan:
Dizzying new ways to dice up debt: Suddenly, credit derivatives--deals that spread credit risk--are surging, July 21, 1997, Phillip Zweig, Businessweek
Blythe Masters was at the vanguard of the derivatives business for many, many years. It was only later that she became head of JP Morgan's commodities business.
Years later, Bob Pisani of CNBC asked Masters this question:
"Do you think commodities prices are being manipulated by speculators?"
"No, in the long run it's not possible for investors to manipulate commodity prices, unless they interfere with the underlying forces of supply and demand, and we have no evidence to to suggest that causality. In the short term of course investor flows can affect futures prices, but in the long run you've got to look at underlying fundamentals."
The interview is available on youtube here: CNBC BLYTHE MASTERS. Around the same timeframe as this interview, JP Morgan was secretly massively buying copper, a commodity. Here is a story from the Telegraph:
JP Morgan revealed as mystery trader that bought £1bn-worth of copper on LME Louise Armitstead and Rowena Mason, Dec 4 2010, The Telegraph (UK)
"This pushed up the price for the immediate delivery of copper to $8,700 – its highest level since the financial crisis in October 2008. . . . Traders noted that there was no physical shortage of copper in the markets . . . Last month metal traders wrote to the Financial Services Authority (FSA) claiming that licensing the funds, which are also likely to be launched by BlackRock, Goldman Sachs and Deutsche Bank, may amount to "approving the next financial bubble"
Many big banks, including JP Morgan, wound up buying warehouses, purposely to store mass amounts of metal. Other traders alleged this was for purposes of market manipulation, as described in this story:
Resource Storage Gives Lenders Profits in Tough Times, but Some Clients Complain of Bottlenecks By Carolyn Cui and Tatyana Shumsky, The Wall Street Journal, Tuesday, July 5, 2011
In her C-SPAN interview, Leah McGrath Goodman called Blythe and Daniel Masters a 'commodities family'. I am wondering if it wouldn't also be accurate to also call the Masters a 'derivatives family'? NYMEX, in fact, was trading 'oil futures', which are basically, derivatives. Daniel Masters talked about his hedge fund trading metals and energy derivatives. Did he and Blythe never discuss this over the dinner table? Did they not give each other an insider education into how the various businesses worked?
Isn't the relationship between commodities and derivatives inextricably linked together in the modern world? What is the difference between an "investor" (Blythe Master's word) and a "speculator" (Pisani's word)? What is the difference between 'hedging' and 'gambling'? What is the difference between 'trading' and 'manipulation'?
Is it strange to wish for media inquiries into this amazing couple and their story? Wouldn't they be more interesting to cover than the people on the reality TV shows... since this couple have been leaders in the financial industries that touch every aspect of our daily lives? By understanding them, could it perhaps help uncover some of the mysteries of the modern economy? What is it like to live in a world where you are excoriated as a failure for 'only' making your company 189 million dollars in a year, as described in this Wall Street Journal article: J.P. Morgan Commodities Chief Takes the Heat, By Dan Fitzpatrick And Carolyn Cui, October 9, 2010?
Goodman points out in her book that the government banned NYMEX from trading in potatos, because of the awful consequences for the ordinary consumer and the potato farmers. That, in fact, is how NYMEX got involved in oil - it was looking for something else to trade after the ban. But today, it would appear, the government will not ban the trading of anything. In fact, it pays money to institutions who would otherwise go bankrupt by their bad trades - taking taxpayer money and giving it away to them. As anthropologist David Graeber alludes to in a recent interview posted on nakedcapitalism.com, it is an interesting contrast with the 'Jubilee' notion of ancient cultures. Debt, being a sort of entity created in the mind, can be wiped away - but in our modern case, we only wiped away the debt of huge institutions, banks, and massively wealthy people, while everyone else was saddled with more and more of it. The Masters must surely be only one example of people who number in the thousands or more involved in the top echelon of these industires over the past 20+ years. Couldn't the story of their lives and emotions unlock the mystery of how this 'reverse Jubilee' happened, and why it happened when it did?
After Words with Leah McGrath Goodman, Jerry A DiColo, interviewer, about McGrath-Goodman's book, The Asylum.