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Making lots of money out of Hot Air
Just what motivates Goldman Sachs' interest in Climate Change?
The American private bank and market maker, dealer and broker, Goldman Sachs & Co., is more than simply a very big private investment bank playing the world's financial markets with a large range of speculative and fantastically complex financial instruments. The bank dates back to 1869 and is closely linked to governments and financial authorities in many countries. It supplies prestigious and high-paid consultants and advisers to many big corporations, and governments around the world. Recent US Treasury Secretaries, including Henry Paulson (under G W Bush) were employees of Goldman Sachs, several finance ministers in other countries are former employees and present US Treasury Secretary, Tim Geithner, is closely linked to Goldman Sachs.
The bank has been many times charged with criminal misdoing, but has always managed to escape full punishment, and maintain its "ikon status" for speculators and players on world financial markets. News of the fraud charge against Goldman Sachs led to an immediate wave of panic on equities markets - and on commodity markets. The price of oil, for example, dropped about 2.5% on April 16, and even the daily traded price of a ton of CO2 emission credits dropped.
| Too Big for its Booty | ||
| Goldman Sachs was formally accused of fraud by the US Securities and Exchange Commission (SEC) on April 16, 2010. The SEC charges concern about US$ 1 billion of money lost by European banks and speculative investors, as well as American speculators. Goldman Sachs is accused of deliberately not warning investors about the risks from buying complex financial instruments that Goldman Sachs promoted and sold on behalf of a major US hedge fund called Paulson & Co. The tradable financial instruments sold by Goldman Sachs included CDOs (collateralized debt notes). | ||
| The collateral or backing was the flimsiest possible paper assets, tied to mortgage payments on loan contracts for home buying at unrealistic low rates the first year, and very high interest rates later on, which came to be known as "subprime mortages". Everybody has heard about the US "subprime crisis", which built up through 2007 and 2008 and swept away several old rivals to Goldman Sachs in "creative financial engineering", such as Lehman Bros and Bear Stearns Co. The US "subprime crisis" is now recognized as the starting event in the sequence of American and European financial and bank crises, which generated the 2008-2009 global economic crisis. | ||
| The political leaders of affected countries rushed to the aid of certain selected "players", such as J P Morgan, Merrill Lynch and AIG in the USA, and RBS, Dexia Bank and Hypolandsbank in Europe, with hundreds of billions of US dollars in free gifts and low cost loans. Goldman Sachs was however and almost miraculously not affected, further raising its status of Too Big To Fail. |
Goldman Sachs, Commodities and Climate Finance
Goldman Sachs is not only a "market maker" for equities and financial products trading, but is heavily involved in manipulating and controlling world traded commodity prices, and prices or "value" in the complex, and very non-productive world of trading CO2 credits, Clean Development Mechanism (CDM) emissions offsets, and other "carbon finance" paper.
This is a very profitable line of business for Goldman Sachs and its partners (the SEC says partners in crime), able to both create, and then promote, market and trade financial products vaguely linked to reducing CO2 emissions or supposed "related and derived" activities such as planting trees or capturing carbon by using CO2 from power station chimneys to force out remaining oil or natural gas in declining wells. This activity is called "enhanced recovery and carbon capture". Futures and options linked to possible or potential projects for doing this, most of which never see the light of day, generate good business for Goldman Sachs.
Despite the US government refusing to sign the Kyoto Treaty but allowing a large "private and voluntary" carbon market to emerge, and in Europe despite the EU27 countries signing up to Kyoto, neither produce any cuts in CO2 emissions. In Europe the obligatory Emissions Trading Scheme (ETS) operating since 2005, exactly like private and voluntary emissions trading in the USA, on both of which Goldman Sachs is a major player, are now renowned for their lack of transparency, vast swings in day traded prices, and increasingly open corruption.
This most recently concerned Hungarian sales of "recycled", that is already paid, UN backed CDM offset credits applying in low income developing countries, and supposedly able to help these poorer countries reduce emissions and "fight" against climate change. The basic fact to be remembered is simple. Since the introduction of carbon finance, with a large and growing range of complex and speculative financial instruments, CO2 emissions have increased both in Europe and USA, and in low income countries. This of course has in no way affected the profits of Goldman Sachs. Goldman Sachs is also a lead player, that is speculator on commodity markets, providing a huge range of commodity trading services and linked financial instruments. This specially includes the S&P GSCI, or Standard & Poors Goldman Sachs Commodity Index.
Futures and options based on the S&P GSCI are of course also created and traded, based on the "underlying asset" of the Index, a so-called "long-only" or "buy only" physical-based index covering 24 commodities, specially including oil and natural gas. By creating a linked futures market, Goldman Sachs can increase volatility of prices for physical commodities, with its Index purchased and sold by the minute, by hour, or by the day. Very big buy-and-sell operations, coordinated by Goldman Sachs and its partners, or supposed competitors, move the S&P GSCI up and down by large amounts.
Daily prices for the futures and options contracts based on the index are also manipulated up and down, but in the opposite direction - for example if the physicalbased index is moving up, the futures contracts based on the index can be moved down. This volatility and fast movement, and unpredictability for players outside the charmed circle of market makers, increases profits for Goldman Sachs and its allies.
To be sure, GS and its defenders pretend the exact opposite. They say the S&P GSCI and its futures and options, and the small number of similar tradable commodity indexes and financial product offerings by other big operators, not competitors to GS but "objective allies", contribute to market transparency and true prices.
This argument or claim is constantly made by Goldman Sachs and similar manipulators of oil and other commodity prices. On April 16, 2010 the US SEC disagreed with this constant claim of transparency. The SEC accuses GS of fraud by deliberately falsifying information about the "true price" or value of the financial paper it sold for Paulson & Co. Financial and commodity markets around the world were quickly affected by this news, with big selling able to perhaps start a panic next week, showing that Goldman Sachs can even do harm when it is itself suffering !
Citation
An early version of this article draws on original research subject to copyright by Andrew McKillop and is reproduced here by arrangement with the author
