Sunday, July 3, 2011

The Koch Brothers: Dark Lords of Derivatives

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By Yasha Levine

People don’t seem that interested in talking about Wall Street’s unpunished and ongoing rape of America anymore these days. And that’s too bad. Because Koch Industries has a lot more in common with Wall Street than most people realize.

Here’s a hint to how deeply the Kochs are involved in the same shady financial machinations we usually associate with Wall Street scammers: an investigation just released by the Center for Public Integrity reveals that the Kochs were major players in the fight against financial regulation in 2009 and 2010, bankrolling an army of lobbyists who swarmed Congress and shredded the fin-reg bill.

That’s right, we can thank the Kochs for the $400-600 trillion of so-called “over-the-counter derivatives,” essentially unregulated bets on everything from mortgages to oil prices to weather conditions, still being traded in the dark today, despite the fact that they were what sucked money out of the real economy, caused the meltdown of the world’s financial markets, precipitated the bank bailouts and are currently pumping up world food and energy prices:

[Koch Industries] spent heavily on lobbyists who worked to shape the 2010 Dodd-Frank Act and other vehicles for financial reform. The Koch lobbyists focused, in particular, on provisions aimed at regulating systemic risk in the financial markets, and the use of derivatives. … And in past Congresses, Koch lobbyists labored to preserve the exemption, known as the “Enron Loophole,” that excused energy commodity contracts from regulation.

But the Dodd-Frank law gave the Commodity Futures Trading Commission and the Securities and Exchange Commission the authority to craft new rules to subject traders in the energy industry to increased regulation and transparency, capital and margin requirements, and supervision by a derivatives clearing house. Koch lobbyists worked to favorably shape the bill, and have not stopped working since it was passed.

Within a few weeks after President Obama signed the legislation, Koch lobbyist Gregory Zerzan had secured a coveted meeting with SEC Commissioner Troy Paredes, a Bush appointee, and his counsel, Gena Lai, to discuss how the government would implement the law.

Everyone was focused on demonizing Goldman Sachs and friends, not realizing that the Kochs and other shadowy billionaire families were right there with them. A Bloomberg article from the summer of 2010 gives a bit more detail about intersection of Koch and Wall Street interests:

Industry groups backed by Koch Industries Inc. and Cargill Inc. are fighting a Senate bill that would reshape almost 30 years of policy that allowed the $605 trillion over-the-counter derivatives market to surge and helped trigger the financial crisis in 2008.

Legislation introduced by Senator Christopher Dodd, a Connecticut Democrat, would give the Commodity Futures Trading Commission authority over most of the U.S. market, the broadest expansion of its authority since becoming an independent agency in 1974.


At stake is control of one of Wall Street’s most lucrative businesses. Trading revenue in unregulated markets last year generated an estimated $28 billion for five U.S. dealers including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, according to company reports collected by the Federal Reserve and people familiar with banks’ income sources.

The over-the-counter derivatives market has escaped the commission’s reach since the first interest rate swap was traded in 1981. The transactions fell outside a law requiring that all futures be traded on regulated exchanges. Before swaps came along, risk-management trading outside of the exchanges was generally restricted to “forwards,” or bilateral trades that provided for physical delivery between commercial parties, such as a farmer and a grain elevator.

What has not been reported is that a big part of Koch Industries’ expansion over the past few decades has occurred in the dark realms of unregulated derivative trading. The Kochs weren’t just playing the market for themselves, but provided financial and risk management services to other companies. Now their clients include airlines, utilities, oil companies, pension funds, hedge funds and endowments.

It’s no secret. You can read all about in a brochure put out by the good folks at Koch Supply and Trading LP, one of the Koch Industries subsidiaries that provides financial services. The company trades in all sorts of derivatives, including crude oil, fuel, natural gas, electricity, emissions credits, metals, fertilizer, currency, municipal bonds, interest rates…the list goes on and on. Hell, they even trade in Leninist carbon credits and brag about being the first to offer clients weather derivatives—that’s when you place bets on the chance of rain.

But Koch Industries is not just a regular financial/risk management services provider. Because the company is a major producer and/or distributer of many of the commodities that it bets on, it not only has insider knowledge but physical control of market conditions. That gives it a whole lot of power to game and manipulate markets from both the speculative and physical ends—something that even the most powerful investment houses can’t do on their own. Best part is: only insiders know how much or how little manipulation exists because the derivatives are exempted from regulation.

Remember when Enron conspired to shutdown their power plants to jack up the price of electricity in California?

On one tape, an Enron official named Bill tells an employee called Rich at a Las Vegas power plant to take the plant offline on a confected excuse. The conversation took place on January 17 2001, in the last days of the Clinton administration, as blackouts were rolling across California, cutting off electricity to more than one million people, and after the energy secretary, Bill Richardson, had ordered generators across the west to direct their output to the troubled state.

“Ah, we want you guys to get a little creative, and come up with a reason to go down,” Bill says on the tape. “Anything you want to do over there? Any cleaning, anything like that?”

“OK, so we’re just comin’ down for some maintenance, like a forced outage type thing?” Rich replies, according to transcripts published yesterday. “I think that’s a good plan, Rich,” Bill says. “… I knew I could count on you.”

Is it so far fetched to think that the Kochs would do something similar with oil, ethanol, natural gas, fertilizer or any of the other commodities that they physically control? Of course they’re doing it. Why else would they fight to keep the “Enron Loophole” from being regulated out of existence?

As the Bloomberg article noted, the Kochs are not the only secretive multi-billionaires scamming America by gaming unregulated markets completely under the radar. So, if you’re a salaried journalist and want to dazzle your editors with a great story, you might want to look into the role that “family-owned” Cargill, Inc., the largest private company in America, has played in pumping up world food prices. That I’ll give out for free. Anything else will cost money.

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