How Morgan Stanley Has Raked in Billions by Manipulating the Prices of Everyday Commodities
Photo Credit: Long Island Press
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The following is an excerpt from Jed Morey 's new book, The Great American Disconnect: Seven Fundamental Threats To Our Democracy (Long Island Press, 2013).
The easiest way to think about commodities is that they are things — physical things — that can be measured in size, quantity or volume. Fruit. Oil. Grains. Metals. Currency. All these have unique characteristics and trade against one another on commodities exchanges throughout the world.
It is a complicated system that’s not for the faint of heart. Only a select few traders on Wall Street have the acumen and desire to deal in this sector, an exchange that had been efficiently regulated by the CEA since 1936. To help understand the markets, in 2008 I interviewed Michael Greenberger, an outspoken critic and former employee of the CFTC, who described these as “backwater markets,” but ones that recently have become “as important to understand and regulate as the securities and debt markets are.”
Once upon a time, commodities traders were highly specialized in their fields and their discipline was so narrow that it was largely misunderstood. Because it represented such a small portion of the vast economic market of debt and equities, it existed in the shadows of the global marketplace.
In her book "The Futures," Emily Lambert, a senior writer for Forbes, offers incredible insight that takes readers beyond the world of Eddie Murphy and Dan Akroyd in "Trading Places" and places them into the murky and misunderstood world of Chicago commodities trading. One of the more insightful anecdotes is the story of Sam Siegel and Vincent Kosuga, an unlikely duo.
Siegel owned cold-storage facilities on the outskirts of Chicago, which held and distributed, among other things, onions delivered by farmers from around the country. Kosuga was a boisterous, larger-than-life farmer and amateur chef from the Catskills who grew onions that would find their way to Siegel’s warehouses. The man could cook just about anything as long as the recipe called for onions. Perhaps his greatest concoction, however, was the scheme he cooked up while trading onions on the floor of the Chicago Mercantile Exchange (the “Merc”) with his storage partner-turned accomplice, Sam Siegel.
Both men made good money hedging their onion farming and gathering operations by trading onion futures in the 1950s at the Merc. Like most of the men they traded alongside, Siegel and Kosuga possessed iron constitutions for risk. To outsiders theirs was a bizarre world filled with a ragtag bunch of gamblers who spoke furiously with their hands, called one another by their trading nicknames and kept mostly to themselves. It was an insular existence. Then one day Siegel and Kosuga’s activities drew an unwelcome light on the clandestine world of commodities trading and prompted Congress to blacklist onions from trading on the exchanges.
According to Lambert, here’s how it went down. Because Kosuga controlled a large portion of onion growth and both men had the capacity to store excess supply along with the financial wherewithal to purchase contracts for delivery from other onion growers, they effectively controlled the price when the product came to market. It was a classic “corner.” When the harvest came in 1956, they bet against the same growers they contracted with by placing sell orders in the Merc while simultaneously dumping their excess inventory, thereby flooding the market with onions and driving prices into the ground. In an instant, Siegel and Kosuga made millions while many farmers went broke, buyers were left bewildered and onions were rendered worthless.
Their plan worked so well that President Dwight D. Eisenhower signed the Onions Futures Act in 1958 to prevent the trading of onions forever. Onions, it seemed, were too important to allow unscrupulous speculators to monkey with.