One has been a stock market player for over 20 years. My investments may have been small but I feel I know more about the goings on behind the scenes than the man on the street. As any stock market veteran would tell you, never be guided by hearsay while deciding your stock calls and exercise due caution. Similarly one has learnt to be suspicious when anything goes up or down too fast or too soon. There is always some insider trying to manage some smart returns. SEBI and the like usually catch up with them but regrettably after a few months of investigations, during which time the gullible have been suckered and the crooks have stashed the ill-gotten wealth safely in some tax haven.
The financial sector in the US, by various estimates, lost between US $ 800 – 1200 billion in the sub-prime housing scandal that broke almost 15 months ago. The US Federal
Reserve tried their best to bail out the large financial powerhouses, by a series of rate cuts and other measures, obviously influenced by the social, financial and political clout of the big daddies of these corporations. Another fact to consider is that the US Presidential campaigns need a lot of money, which these financial giants control in large measure.
How do the shareholders of these loss-making corporations take it? They are expected to gun for the CEO since he is the captain of the ship that is sinking. To avoid large stakeholders baying for the CEOs blood at the next AGM, these losses must be wiped off the balance sheet and quickly at that. Or else the multi-million dollar bonuses, generous expense accounts, stay at swanky apartments, permanent suites at fancy boutique hotels and resorts, membership of by-invitation-only exclusive clubs, latest yachts and travel by private luxury jets would be a thing of the past.
The ominous coincidence of international crude prices rising alarmingly from around 70 dollars to around 150 dollars per barrel in a short period of less than a year was unexpected and unprecedented to say the least. OPEC was an easy target to pin the blame to. Some western news and current affairs analysts even labored to cloud rational thinking by creating scenarios of how part of oil gains by OPEC was finding its way in to the hands of Islamic fundamentalists and being used to finance terrorism, particularly against the West.
The real story may never get told since so many vested interests would be working overtime to zealously guard the guilty. The scenario that I present for consideration is simple. These financial superstars entered the oil futures markets buying up all oil on offer and placing more orders than could be delivered by traders, who normally hedge future deliveries against future purchases. It led to crude prices rising rapidly with no shortfall in supplies. To allay fears of a shortage OPEC did what could be expected, they announced periodic hikes in production. Bear in mind, that for the later part of 2007 and early 2008, Iran complained of no buyers for crude and the Arabian Gulf was choked with oil supertankers, loaded, ready and nowhere to go.
The financial wizards thought that after oil is pushed to dizzying heights, the various Governments would swing into action and buy large quantities to offer the comfort of oil security to their populace. An alternative scenario was a war in the middle east to ensure long term oil security. They planned to offload their positions and book billions of dollars of profit to square up the sub-prime losses. And the party would have continued.
Alas, the governments did things differently. They passed on the oil price increases to the consumers and the consumers cut back on car usage leading to a severe drop in oil consumption across the world. This led to oil supplies greatly improving. These financial institutions did not have more funds to pick up the additional oil that was now available to shore up the prices to have an iota of a chance to sell their positions for a profit. They had to square up positions since holding on to them would have meant even more losses.
So now you know, who to blame for oil prices spiking and why Merrill got lynched and why Lehman went broke.
The financial sector in the US, by various estimates, lost between US $ 800 – 1200 billion in the sub-prime housing scandal that broke almost 15 months ago. The US Federal
Reserve tried their best to bail out the large financial powerhouses, by a series of rate cuts and other measures, obviously influenced by the social, financial and political clout of the big daddies of these corporations. Another fact to consider is that the US Presidential campaigns need a lot of money, which these financial giants control in large measure.How do the shareholders of these loss-making corporations take it? They are expected to gun for the CEO since he is the captain of the ship that is sinking. To avoid large stakeholders baying for the CEOs blood at the next AGM, these losses must be wiped off the balance sheet and quickly at that. Or else the multi-million dollar bonuses, generous expense accounts, stay at swanky apartments, permanent suites at fancy boutique hotels and resorts, membership of by-invitation-only exclusive clubs, latest yachts and travel by private luxury jets would be a thing of the past.
The ominous coincidence of international crude prices rising alarmingly from around 70 dollars to around 150 dollars per barrel in a short period of less than a year was unexpected and unprecedented to say the least. OPEC was an easy target to pin the blame to. Some western news and current affairs analysts even labored to cloud rational thinking by creating scenarios of how part of oil gains by OPEC was finding its way in to the hands of Islamic fundamentalists and being used to finance terrorism, particularly against the West.
The real story may never get told since so many vested interests would be working overtime to zealously guard the guilty. The scenario that I present for consideration is simple. These financial superstars entered the oil futures markets buying up all oil on offer and placing more orders than could be delivered by traders, who normally hedge future deliveries against future purchases. It led to crude prices rising rapidly with no shortfall in supplies. To allay fears of a shortage OPEC did what could be expected, they announced periodic hikes in production. Bear in mind, that for the later part of 2007 and early 2008, Iran complained of no buyers for crude and the Arabian Gulf was choked with oil supertankers, loaded, ready and nowhere to go.
The financial wizards thought that after oil is pushed to dizzying heights, the various Governments would swing into action and buy large quantities to offer the comfort of oil security to their populace. An alternative scenario was a war in the middle east to ensure long term oil security. They planned to offload their positions and book billions of dollars of profit to square up the sub-prime losses. And the party would have continued.
Alas, the governments did things differently. They passed on the oil price increases to the consumers and the consumers cut back on car usage leading to a severe drop in oil consumption across the world. This led to oil supplies greatly improving. These financial institutions did not have more funds to pick up the additional oil that was now available to shore up the prices to have an iota of a chance to sell their positions for a profit. They had to square up positions since holding on to them would have meant even more losses.
So now you know, who to blame for oil prices spiking and why Merrill got lynched and why Lehman went broke.
First image courtesy http://www.clipartof.com/ and second image http://www.corbis.com/
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