Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America

by Matt Taibbi

  While most of the country was talking about Reverend Wright and superdelegates, media coverage of the soaring gas prices was curiously nonspecific and unconvincing. The New York Times ran one of the first stories on high gas prices and specifically blamed the rise on “global oil demand,” which it called “the relentless driver behind higher prices.” That was at the end of February 2008, when oil hit what was then a record high of $100.88 a barrel.

  A CNN story back in March 2008 called “Gasoline Price Spike Has Only Just Begun” told us that the reason for the surge was, well, because this is what always happens in between winter and summer:

  The price of gasoline usually increases this time of year. Several factors contribute to the runup: Low refinery output due to maintenance, a switch from winter to pricier summer blends, and the looming high-demand summer driving season.

  Politicians blamed the high prices on a variety of factors—the most ridiculous perhaps being Kentucky senator Mitch McConnell blaming high prices on an automatic gas tax instituted by his electoral opponent, Bruce Lunsford, in the Kentucky state legislature thirty years before.

  By late spring and early summer the stories about the gas spike were more common, but quite often they seldom even mentioned a cause for the price disruptions. In most cases it was simply assumed that the high prices were caused by too much consumption, that Americans were going to have to change their habits if they wanted to survive the high costs.

  When gas soared to over four dollars a gallon in May, USA Today ran a story called “Gas Prices Rattle Americans” that talked about the sobering—perhaps even positive—effect the high prices had had on the national psyche:

  The $4 mark, compounded by a sagging economy, could be a tipping point that spurs people to make permanent lifestyle changes to reduce dependence on foreign oil and help the environment, says Steve Reich, a program director at the Center for Urban Transportation Research at the University of South Florida.

  “This is a more significant shift in behavior than I’ve seen through other fluctuations in gasoline prices,” he says. “People are starting to understand that this resource … is not something to be taken for granted or wasted.”

  There is nothing new about the political press in America getting a story wrong, especially a financial story. But what was unique about the gas spike story was that it was an issue that profoundly affected the lives of virtually everyone in the country, was talked about heatedly by both parties and by pundits in the midst of a presidential election year, and yet as far and as wide as you search, you simply will not find much of a mention anywhere about the influx of new commodity index money as a potential cause of this crisis.

  And you barely heard it on the Hill. Several different congressional committees decided to hold hearings on the high gas prices, including Joe Lieberman’s Homeland Security and Governmental Affairs Committee and the House Agriculture Subcommittee on General Farm Commodities and Risk Management. At these hearings there were some voices, like those of Mike Masters and Fadel Gheit, who tried to talk about the real causes of the crisis, but the headlines generally followed the pronouncements of the CFTC’s chief economist, Jeffrey Harris, who said that the whole problem stemmed from normal supply and demand issues.

  In written testimony before both committees in May 2008, Harris convincingly dismissed the notion that speculators played any role in the high prices.

  “All the data modeling and analysis we have done to date indicates there is little evidence to suggest that prices are being systematically driven by speculators in these markets,” he said. “Simply put, the economic data shows that overall commodity price levels … are being driven by powerful fundamental economic forces and the laws of supply and demand.” He cited, as evidence of “fundamentals,” the increased demand from emerging markets, decreased supply due to “weather or geopolitical events,” and a weakened dollar.

  The government’s chief economist on the matter blamed the oil spike on the weather!

  Even weirder was the fact that Harris was apparently so determined to keep any suggestion that speculation played a role in the problem out of the hearings, he even called up at least one witness to try to get him to change his mind.

  “This guy tried to shake me down!” says Gheit, still incredulous at the story. He recounts a bizarre phone call in which Harris called up the Oppenheimer analyst, put him on speakerphone so that another colleague could listen in, and proceeded to tell Gheit that he had no evidence that speculation played a role in the crisis and that maybe he should consider this before he testified.

  Gheit, who actually thought the call was coming from a staffer in Senator Carl Levin’s office at first, found himself wondering what the hell was going on. “I said, ‘Whose side are you on?’ ” As the phone call progressed, Gheit began to consider other possibilities. “I was sure it was someone from Goldman Sachs or Morgan Stanley. That’s how weird it was.”

  It would be a full year before the CFTC under the Obama administration would admit that Harris’s analysis was based on “deeply flawed data” and that speculators played a major role in the crisis.

  But by then it was too late to stop what happened in 2008. Oil shot up like a rocket, hitting an incredible high of $149 a barrel in July 2008, taking with it prices of all the other commodities on the various indices. Food prices soared along with energy prices. According to some estimates by international relief agencies—estimates that did not blame commodity speculation for the problem, incidentally—some 100 million people joined the ranks of the hungry that summer worldwide, because of rising food prices.

  Then it all went bust, as it had to, eventually. The bubble burst and oil prices plummeted along with the prices of other commodities. By December, oil was trading at $33.

  And then the process started all over again.

  The oil bubble, taking place as it did smack-dab in the middle of a feverish presidential campaign, was really a textbook example of how our national electoral politics and our media watchdogs are inadequate to address even the most glaring emergencies.

  When you have a system with an electorate divided up into two fiercely warring tribes, each determined to blame the country’s problems on the other, it will often be next to impossible to get anyone to even pay attention to a problem that is not the fault of one or the other group. Moreover it is incredibly easy to shift blame for the problem to one of those groups, or to both of them, if you know how to play things right—which happened over and over again in this case.

  Throughout the spike, America accepted almost without question the notion that our problems were self-inflicted, caused by our obscene consumption of oil. It was a storyline that appealed in different ways to the prejudices of both of the two main political demographics.

  It naturally appealed to the left, which for entirely logical reasons saw an evil in America’s piggish dependence upon petroleum and had just spent five long years protesting an invasion of Iraq seemingly driven by our political elite’s insatiable thirst for oil.

  Oil consumption for progressives was, in fact, at the heart of two of their core protest issues: America’s rapacious militarism and its environmental irresponsibility. America had bowed out of Kyoto. We had supported dictatorships in Saudi Arabia and Kuwait and (once upon a time) Iran in our hunger for oil and had toppled or tried to topple regimes in oil-rich countries like Iraq and Venezuela for seemingly the same reason.

  More to the point, America was the birthplace of the SUV—the evil symbol of American oil gluttony that in one conveniently boxy package tied together all of the symbolic frustrations of the American progressive. It had a vaguely militaristic symbolism (the domestic Hummer was a modified military vehicle). It was driven unashamedly by big-assed conservatives and their teeming white-trash families who openly thumbed their noses at environmental concerns—witness the bumper stickers often seen plastered to the hugest SUV brands, with messages like “I’ll Give Up My SUV When Al Gore Gives Up His Limo” and “Hy
brids Are for Pussies” and “My SUV Can Beat Up Your Prius.”

  The last sticker had a particular sting, given that just as driving a big gas-guzzling SUV was a mode of political expression for conservatives, driving hybrids was one of the easiest ways for progressives to “have an impact” on the causes they cared about. The San Francisco political activist Robert Lind in the early part of the decade had encouraged opponents of SUVs and people who drove energy-efficient vehicles to download bumper stickers that read, “I’m Changing the Climate! Ask Me How!” He was followed by the Evangelical Environmental Network, which started its “What Would Jesus Drive?” bumper sticker campaign in 2002, which prompted a 60 Minutes story about the anti-SUV backlash.

  In short, the idea that Americans consumed too much oil had enormous traction with American progressives, among other things because it happened to be true.

  So it wasn’t at all hard to sell Democratic voters on the notion that the oil spike was related to overconsumption. In fact, the whole consumption issue had enormous symbolic import for Democratic voters, and it wasn’t a surprise when presidential candidates started working vague references to overconsumption—divorced, of course, from specific policy proposals—into speeches that were supposedly addressing the gas price issue. When Obama went to Oregon in May 2008, right in the middle of the oil bubble, he specifically referenced SUVs, as I would hear him do over and over again that summer. “We can’t drive our SUVs and eat as much as we want and keep our homes on seventy-two degrees at all times” was one of his favorite lines.

  He consistently got cheers with that line, and to me it seemed obvious that these were angry cheers, cheers directed at the “other side,” who consumed as much as they wanted and thought the Prius was for fags.

  Meanwhile conservatives bought the supply-disruption storyline because it fit in seamlessly with the story of capitalist efficiency thwarted by regulators, tree-huggers, and OPEC. An oil spike caused by shortages justified the Iraq invasion and put the blame on environmentalists who blocked drilling in the Alaska National Wildlife Refuge and the outer continental shelf and those other dickwads who were always sacrificing American jobs on the altar of the spotted owl.

  Those same SUVs that had once been bedecked with bumper stickers justifying the vehicle itself were, in the summer of 2008, starting to be plastered with new stickers that saw their owners’ right to consume as a protest cause. “Drill Here, Drill Now!” was one sticker we saw a lot that summer.

  What made this important was the fact that the new Obama administration really changed very little when it came to the problem of index speculation. The public was never focused on it, not really. When Obama nominated the new CFTC chief, Gary Gensler, a former Goldman executive and lieutenant to Bob Rubin who had been partially responsible for deregulating the derivatives market in 2000, few people even blinked.

  This was news for specialists and experts in the industry, of course (Gheit compared putting Gensler in charge of the CFTC to “making a former legalization advocate the drug czar”), but America is no longer a country that cares about experts. In fact, it hates experts. If you can’t fit a story into the culture-war storyline in ten seconds or less, it dies.

  That’s what happened to the oil speculation problem. Although the CFTC would finally, in August 2008, admit that speculation was a serious issue, and Gensler himself would demonstrate what appears to be a real conversion on the core problems, the root causes remained basically unchanged—so much so that at this writing, oil prices are once again soaring, once again thanks to prodding from the same old cast of villains.

  In a weekly newsletter distributed to its own investors only, given to me by a source in the industry, Goldman Sachs in October 2009 repeated its classic “oil is going up because of the fundamentals” act.

  “We believe oil prices are poised to move higher, with the catalyst likely to be evidence of rebounding diesel demand,” the company wrote. “The normal Christmas retail seasonal effect suggests we should see a rebound in diesel demand in mid to late October to restock shelves.” The newsletter continued later: “Crude oil prices have been both volatile and range bound, but poised to break out.”

  That particular analysis memo was released on a Monday (October 19), just after oil had crept back above $70 a barrel for the first time in more than a year. By that Wednesday the price of crude had gone up seven whole dollars. By Friday, October 23, it was closing at $81.19 a barrel.

  What is interesting about this Goldman memo is not how obviously full of shit it is, but the disclaimer that is hidden in the very back of it.

  On the very last page of the newsletter, in tiny print, Goldman wrote, under the heading “General Disclosures,” the following:

  Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions reflected in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.

  We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy and sell, the securities or derivatives, if any, referred to in this research.

  Translated into English, Goldman can take your investment order and do anything they want with it, no matter how conflicted they might be. They might be recommending that you buy oil futures for “fundamental reasons,” like the holiday shopping season or some such bullshit, but in the fine print they admit that, “from time to time,” they might have long positions themselves as they make that recommendation.

  Here, in this one document, is laid bare the whole basic stratagem behind the oil bubble. The big investment banks convince the ordinary investor that oil prices are going up because of “fundamentals,” then they get all that money coming in, at which point their predictions about prices going up actually come true. Then they ride in with their own bets and make a fortune, front-running the massive flows of capital pouring into the market. Meanwhile, we all end up paying $4.50 a gallon for gas, just so these assholes can make a few bucks trading on what amounts to inside information.

  “The reality is that if Goldman is successful enough marketing commodity index swaps to institutional clients they can make their research self-fulfilling,” says one commodities trader. “Because those money flows that Goldman’s marketing efforts create can move prices by themselves.”

  This story is the ultimate example of America’s biggest political problem. We no longer have the attention span to deal with any twenty-first-century crisis. We live in an economy that is immensely complex and we are completely at the mercy of the small group of people who understand it—who incidentally often happen to be the same people who built these wildly complex economic systems. We have to trust these people to do the right thing, but we can’t, because, well, they’re scum. Which is kind of a big problem, when you think about it.

  And here’s the punch line: bubbles like the one we saw in 2008 are only one-half of the oil-price scam. Because taking your money through the indirect taxation of high energy and food prices, and reducing you to beggary as you struggle to pay for them, is only half of the job. What these clowns did with all that cash they siphoned from you and what they did to take advantage of your newfound desperation is the other end of the story.

  5

  The Outsourced Highway

  Wealth Funds

  IN THE SUMMER of 2009 I got a call from an acquaintance who worked in the Middle East. He was a young American who worked for something called a sovereign wealth fund, a giant state-owned pile of money that swims around the world in search of things to buy.

  Sovereign wealth funds, or SWFs, are huge in the Middle East. Most of the bigger oil-producing states have massive SWFs that act as cash repositories (wi
th holdings often kept in dollars) for the revenues generated by, for instance, state-owned oil companies. Unlike the central banks of most Western countries, whose main function is to accumulate reserves in an attempt to stabilize the domestic currency, most SWFs have a mission to invest aggressively and generate huge long-term returns. Imagine the biggest and most aggressive hedge fund on Wall Street, then imagine that that same fund is fifty or sixty times bigger and outside the reach of the SEC or any other major regulatory authority, and you’ve got a pretty good idea of what an SWF is.

  My buddy was a young guy who’d come up working on the derivatives desk of one of the more dastardly American investment banks. After a few years of that he decided to take a step up morally and flee to the Middle East to go to work advising a bunch of sheiks on how to spend their oil billions.

  Aside from the hot weather, it wasn’t such a bad gig. But on one of his trips home, we met in a restaurant and he mentioned that the work had gotten a little, well, weird.

  “I was in a meeting where a bunch of American investment bankers were trying to sell us the Pennsylvania Turnpike,” he said. “They even had a slide show. They were showing these Arabs what a nice highway we had for sale, what the toll booths looked like …”

  I dropped my fork. “The Pennsylvania Turnpike is for sale?”

  He nodded. “Yeah,” he said. “We didn’t do the deal, though. But, you know, there are some other deals that have gotten done. Or didn’t you know about this?”

  As it turns out, the Pennsylvania Turnpike deal almost went through, only to be killed by the state legislature, but there were others just like it that did go through, most notably the sale of all the parking meters in Chicago to a consortium that included the Abu Dhabi Investment Authority, from the United Arab Emirates.