Streetwise Professor

April 14, 2012

I Liked Him Better When He Was Just A Buffoon. Not Much, But Better.

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 8:50 pm

University of Maryland law professor Michael Greenberger is quoted often in the financial press on derivatives related matters. I have no idea why. He is a complete buffoon on these issues.

Perhaps it is his stint at the CFTC makes reporters think he’s credible. All the worse for the CFTC.

Personal anecdote. He and I were on the same panel when I testified on oil speculation before the House Ag Committee in July, 2008. He said something typically inane; I think it was about increases in Saudi oil output not driving prices down. I jumped on him, saying that he had overlooked the fact that Saudi crude was heavy and sour, and the market was short light, sweet crude. He was flustered, and responded by stammering “I’m not an economist” to which I responded: “That’s the first thing you’ve ever said that I agree with.”

And the last.

But Greenberger has crossed the line from buffoonery to mendacity with this interview:

Greenberger makes very serious allegations: criminal conspiracy to manipulate the prices of multiple commodities.

He says speculators are “working together.” “There is doubtless criminal conduct here.” He compares speculators to bank robbers and burglars. He asserts that the (alleged) huge profits of commodity speculators are due to their criminal conduct, and would not exist if prosecutors did their jobs; instead, they have “blindfolded themselves, stuffed their ears, held their noses” and let criminal conduct proceed uninvestigated, and of course unpunished.

He even gives this a political spin, saying that since higher gas prices are the only thing that can result in Obama’s defeat, the conspiracy could lead to the Republicans taking the White House, and racking up big gains in the House and the Senate.

Which obviously begs the question: then why wouldn’t an Obama DOJ be falling all over itself to investigate? An Obama CFTC? An Obama SEC? I mean, this part of the interview alone marks Greenberger as completely unhinged, as it makes no sense that a hyper-politicized administration would refuse to investigate rampant criminality that threatens its re-election.

Greenberger’s evidence for his lurid claims about a criminal conspiracy to manipulate prices?-zip. Really. Zip. His claim that speculators are driving up prices by trading futures is without solid empirical foundation, but is common enough. But to allege criminal conduct, and a vast conspiracy among major financial institutions, goes far beyond the pale. He says he won’t name names. Why not? If he has the evidence, why shouldn’t he? Truth is an absolute defense in libel and slander.

And recall what Judge Easterbrook wrote over 25 years ago: an undetected manipulation is an unsuccessful manipulation. If there is such a vast and successful effort to manipulate prices, the evidence would be there for all to see.

If Greenberger can back up what he says about criminal conduct, and a criminal conspiracy, he should do so. Now. Stat. If he can’t, he shouldn’t be making such lurid claims. It is beyond irresponsible. It is mendacious.

Print Friendly, PDF & Email


  1. Yeah, he’s been getting sadder and sadder. Some years back he put out tours de force of legal analysis. It was aggressive and there was much to disagree with, but it was tight and carried a strong narrative, plus footnotes up the wazoo. I remember some hearings years back he was basically threatening CFTC folks to adopt his analysis or he’d campaign to dismantle their present organization and have it replaced. He was wrong about a lot (eg, thought otc ag swaps were illegal and didn’t know the option situation) but still a powerful force.

    Market understanding was always a big weakness for him, kind of unfortunate. There were numerous howlers and he was long ago already happy to say things like the normal rise of the gas curve in winter was a visible sign of manipulation (in different words that didn’t sound as stupid).

    Seems after four years of having nothing he’s been advocating supported except by propaganda, he’s getting stir crazy. The speculation witch hunters really reeled him in.

    It’s pretty preposterous to say you know of specific illegal behavior but can’t disclose any info. Sounds tough, but of course it’s because it’s an empty claim that falls apart on examination. There’s tons of surveillance and investigation and he’s just burning credibility with folks who know what’s going on.

    Comment by Anon — April 15, 2012 @ 12:09 am

  2. My reading of this is that the alleged criminal conspiracy is not as much of a problem as is the probable political defeat. And if DOJ only demonstrated “seriousness” about populist witch-hunting, it might help reelection chances. I.e. Mr. Greenberger is loudly complaining that DOJ is not willing to sacrifice its mission and integrity to the greater good of political expediency. But that’s just my wild imagination in play, I’m sure.

    Comment by Ivan — April 15, 2012 @ 1:54 am

  3. I am new to Prof Greenberger’s work, having only recently been introduced to him via this paper … don’t quite know what to make if it:

    Comment by MDC — April 15, 2012 @ 7:23 am

  4. And these are the guys who just drove individual traders out of the ForEx market. Nice.

    Comment by MamaImp — April 15, 2012 @ 8:23 am

  5. Anyone with a knowledge of commodities trading knows that commodities markets go where they can do the most damage to the most traders. Assuming any large scale movement of commodities market is driven by any force other than the fact that unhedged positions need to be adjusted with greater and greater urgency is absurd.

    Manipulations certainly occur. However, as manipulations are incrementally successful, the market forces acting to correct the manipulation also incrementally gain power. Diamnon markets were manipulated by DeBeers, Opec manipulated crude oil markets and today China is attemption to control rare earth metals. We know the first two markets overcame the manipulation simply because the rewards for defeating the manipulation were greater than the rewards in perpetuating the manipulation. New entrants simply had more to gain by pushing against the manipulation than.

    The logistics of coordinating a large scale manipulation are prohibitive. With increasing incentives for traders to abandon the cartel and book profits so as to not be the last one holding the bag, cartel discipine is impossible to enforce (monopoly markets in drug wars are constantly facing inability to maintain cartel discipline).

    In short, while in theory a cartel manipulation seems attractive, human nature makes it difficult to perpetuate. Of all the original insiders at Microsoft or Apple, how many cashed out when $1 million deemed too much money to leave on the table? As people abandon the manipulation to seek financial safety, those left in have greater and greater difficulty fighting against the ever strengthening forces fighting against the manipulation.

    A manipulation is easy to to effect for a short time, but it isn’t a trade until the check clears the bank. Ggetting out of a global manipulation to cash out profits is near impossible.

    Comment by Charles — April 15, 2012 @ 8:53 am

  6. The only successful long term manipulation of a U.S. market I can think of is the manipulated inflation of the price of government services that has inflated government employee wages and benefits far above what a free labor market would provide. The only way this manipulation survives is that if consumers refuse to pay the price demanded, the government ultimately enforces the manipulation at the point of a gun.

    Comment by Charles — April 15, 2012 @ 9:00 am

  7. @charles – you are so right. The corollary to your argument concerning the only successful manipulation is that it takes a sovereign power (i..e. the power to use violence) to enforce such a mis-allocation of resources. It thus follows that should such a manipulation be in fact occurring within the US, it is being committed by or through use of the Federal Government, either in an active and or passive manner. I do not believe there is any conspiracy, but if there is, it is through the actions of the executive, that is Obama. It has been a stated goal of this administration to eliminate coal plants, and increase the cost of energy; this has been well documented through the 2007-2009 period, including the famous Biden “gaffe” (a gaffe in this administration is when someone accidentally tells the truth).

    Rather than an active conspiracy, let’s just say that what we have are chickens coming home to roost – the results of policy choices made within the environment they were made in. This guy is just another credentialed fool bloviating because it is blowing up in his chosen party’s face. Obamatards such as this can be described as two pronoun persons, the two pronouns being “Who,me?”

    Comment by sotos — April 15, 2012 @ 10:26 am

  8. I can remember the Hunt brothers trying to corner silver – they got busted.

    Greenberg uses the word “speculation” – apparently, he doesn’t like speculation, and I agree with the comments above that, apparently, Greenberg wants a mere DOJ “serious investigation” to put things right.

    Isn’t that the very nature of the commodities market – speculation?

    Farmers and ranchers themselves have learned to protect themselves by participating in the commodities market.

    There is another manipulation that I can think of – agricultural subsidies by the guvmint itself.

    For some reason, Alfred E. Newman’s face and the “what – me worry?” slogan keep popping up in my mind whenever I see anything related to Obummer.

    Comment by elmer — April 15, 2012 @ 11:08 am

  9. The interviewer is a dope, too.

    O’Reilly, Dobbs, Greenberger — the blood flow to their brains is one-tenth what it was when they made their chops.

    Comment by markets.aurelius — April 15, 2012 @ 1:43 pm

  10. Did he say anything as stupid and mendacious as The Streetwise Professor’s idol Andrei Illarionov:

    “One of the best known political prisoners is Mikhail Khodorkovsky who has been sentenced to 9 years in the Siberian camp Krasnokamensk on the basis of purely fabricated case against him and his oil company YUKOS.”

    No? Then lighten up on the poor guy.

    Comment by wanderer — April 15, 2012 @ 5:32 pm

  11. WTF is TRNN?

    Comment by DrD — April 15, 2012 @ 7:52 pm

  12. @DrD-It is something you just have to see for yourself. “The Real News Network (TRNN) is a daily video news and documentary service based in Washington DC with bureaus in Baltimore MD and Toronto, Canada.” Look at the “About Us” section-and take a trip down the rabbit hole.

    The ProfessorComment by The Professor — April 15, 2012 @ 8:58 pm

  13. monopoly markets in drug wars are constantly facing inability to maintain cartel discipline

    Ditto OPEC. The only member who can relied upon to not exceed the quota is Saudi Arabia, the rest are always getting a bollocking for cashing in when times are good but they’re supposed to be shutting in production.

    Comment by Tim Newman — April 16, 2012 @ 7:12 am

  14. @Charles & Tim & sotos-The allegations of manipulation that elevate prices generally for long periods of time are risible. Manipulation almost always has short-term impacts on one or two prices. For instance, in the BP propane squeeze in ’04, spreads blew up and then crashed in about 1 week. Sometimes the price of a deliverable/benchmark can be distorted for a long period, but we are still talking about months or weeks.

    The exception, of course is government intervention, e.g., in the US ag markets (through price support programs) and things like OPEC or the International Tin Council (which cartelized the tin market starting in 1947, until its catastrophic collapse in 1985, which almost brought the LME down with it).

    The allegations of collusion in this particular instance are, as both of you note, asinine.

    The ProfessorComment by The Professor — April 16, 2012 @ 10:37 am

  15. Charles/Tim/sotos. There have actually been attempts by “cliques” consisting of multiple traders to manipulate markets. All that I am aware of blew up due to the prisoners’ dilemma problem that you all note.

    The most famous example: the Fisk & Gould gold corner that culminated in Black Friday, 1869. At the very end, Fisk was buying heavily in an effort to keep the price up-and Gould was apparently selling right into that.

    Another example is the Harper wheat corner in Chicago in 1887 (how-and why-do I remember this sh*t?). When one clique member was buying heavily, another sold, resulting in a price collapse that one Cincinnati paper labeled “the greatest panic in wheat ever known in America.” The corner was backed by the Fidelity Bank of Cincinnati, and its failure resulted in the collapse of the bank. The bank president was convicted of embezzlement, and spent 6 years in the Ohio Penitentiary. He had been sentenced to 10, but was pardoned by President Harrison.

    The ProfessorComment by The Professor — April 16, 2012 @ 10:47 am

  16. You remember this sh*t because most things that appear as “new” in finance are often variations of what went before; anyone with a knowledge of history and the ability to define the functionality of an action or structure can usually find a parallel in the past, often with the dame consequences.

    Comment by sotos — April 16, 2012 @ 7:03 pm

  17. Let us not forget the most dangerous sentiment in the market” ? This time it is different”.

    Comment by sotos — April 16, 2012 @ 7:03 pm

  18. A further long-term manipulation by government is the volatility imparted to commodity futures markets by government-mandated position limits.

    The original pretext for having these at all was that the U.S. price of grain was too volatile, and this must be the work of witche— uuuuuuuh, sorry, speculators.

    As this was in 1917, I can easily think of a couple of things that might have made the U.S. price of grain volatile. There was the German capture of the Ukraine followed by the defeat and collapse of Tsarist Russia, of example. I wonder if that affected the wheat price at all? Then there was the German U-boat blockade of America’s east coast ports (read up on U-151 for how one small boat can cause disproportionate mayhem), and of the export routes into western Europe.

    The original assertion in support of position limits was that the manipulation might have been inadvertent, but it was still manipulation. In the same way, the volatility that position limits cause is also inadvertent, but governments must nonetheless be to blame.

    I’m undecided whether people like Chilton are evil or merely stupid. Any fool can see that limiting positions removes bids and offers from the market, which results in a wider bid/ask spread, which equals increased volatility. Do these people really not see this or do they see it perfectly well?

    It’s a bit like one of those mediaeval surgeons whose only idea was to bleed the patient. When this didn’t make the patient any better, they bled him some more. And so on.

    Comment by Green as Grass — April 17, 2012 @ 2:47 am

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress