Wall Street Hijacks Yet Another Commodities Market

Wall Street, with all its so-called genius and ingenuity, now has the ability to screw around with the price of your gasoline.

That’s not all. Loosely regulated commodities markets appear to be more and more the apple of Wall Street’s eye, even as the major stock market indices on Wednesday hit all time highs. Banks’ focus on commodities is particularly worrisome, as commodities are extremely volatile and can whipsaw and wipe out investors on the wrong side of a trade in the blink of an eye.

But with the stock market roaring, why are Wall Street banks more keenly focused than ever on commodities trades?

The banks lust after trading profits with commodities such as ethanol and aluminum because of tighter regulations in the wake of the financial crisis that curtail their ability to trade securities inside their own houses.

Remember, Wall Street banks buying and trading of toxic mortgage-backed securities was the leading cause of the 2008 financial crisis and collapse. Now, Wall Street is at it again, this time in a market that was designed during the George H.W. Bush administration to spur the development of cleaner fuel.

“It was supposed to help clean the air, reduce dependence on foreign oil and bolster agriculture,” Gretchen Morgenson and Robert Gebeloff write in The New York Times.

The government eight years ago required oil and gas refiners to mix ethanol into gasoline or buy credits.

And that’s when Wall Street stepped in, according to the Times.

“A few worried that Wall Street would set out to exploit this young market, fears the government dismissed,” according to the Times. “But many people believe that is what happened this year when the price of the ethanol credits skyrocketed 20-fold in just six months,” the Times said, citing analysis of industry documents and interviews with 40 industry executives, brokers and other participants.

Many in the industry rushed to tell the Times that the banks were not cornering the market at all. They were simply stocking up on the credits on behalf of clients who needed the ethanol credits to satisfy environmental regulators at the Environmental Protection Agency.

Others in the energy industry couldn’t disagree more. One veteran energy executive told the Times that banks and other institutions had been active sellers of the ethanol credits this year. The institutions had helped transform an environmental program into a profit machine, contributing to the market frenzy, according to Thomas D. O’Malley, chairman of PBF Energy in New Jersey.

Ethanol credits “were designed to monitor the inclusion of ethanol in the gasoline pool,” he said. “They weren’t designed to become a speculative item. For the life of me, I can’t see the justification for it.”

And of course, the higher cost of the ethanol credits, the more consumers pay at the pump for gas.
Wall Street’s latest practice of hoarding ethanol credits and other commodities may technically be legal but the ethics and morality of such business practices stink. This latest episode confirms the worst that Mom and Pop investors think about Wall Street, that the game is rigged for and by a chosen few.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.