Global Policy Forum

Two Federal Agencies Are Culpable in Oil Price Manipulations

By Pam Martens *

If you want to flush out market manipulation, don't turn to the sleuths in Congress. They've been probing trading of the oil markets for two years and completely missed a company at the center of the action. During that period, a barrel of crude oil has risen from $50 to $140, leaving a wide swatch of Americans facing a choice this coming winter of buying food or paying their heating bill.

The company that Congress overlooked should have been an easy suspect. It launched the oil trading career of the infamous fugitive, Marc Rich, pardoned by President Clinton in the final hours of his presidency. It was at one time the largest oil and metals trader in the world. In the late 90s it bought up 129 million ounces of silver for legendary investor Warren Buffet's company, Berkshire Hathaway, in London's unregulated over-the-counter market. In 1990, it was one of the first entrants into an ill-fated Russian oil venture called White Nights. In 2005, while part of Citigroup, the largest U.S. banking conglomerate perpetually scolded for obscene executive pay, it handed its chief and top oil trader, Andrew J. Hall, $125 Million for one year's work. According to the Wall Street Journal, that was five times the pay package for Chuck Prince, CEO of the entire Citigroup conglomerate that year and $55 Million more than the CEO of Exxon-Mobil.

Given this storied history and two years of congressional testimony on oil trading skullduggery, one would expect to find volumes of current information available about this oil trading juggernaut. Instead, this company's activities are so secret that its web site (www.phibro.com) is a one page affair and lists only the addresses, phone and fax numbers of its offices in the U.S., London, Geneva, and Singapore. No officers' names, no bios, no history, no press releases. And while the Wall Street firms of Goldman Sachs and Morgan Stanley have been fingered by Congressman Bart Stupak (D-Mich) for gaming the system, Phibro has completely escaped scrutiny during a seven year period when crude oil has risen an astonishing 697%.

Phibro is the old Philipp Brothers trading firm that has resided secretly and quietly on Nyala Farms Road in Westport, Connecticut as a subsidiary of the banking/brokerage behemoth, Citigroup, since the merger of Traveler's Group and Citicorp (parent of Citibank) in 1998. Traveler's Group owned Phibro at the time of the merger. Despite the fact that Phibro has provided Citigroup with $2 billion in revenue over the past three years, the 205-page annual report for Citigroup in 2007 carries only the following one-sentence footnote on commodity income that acknowledges the existence of this company. "Primarily includes the results of Phibro Inc., which trades crude oil, refined oil products, natural gas, and other commodities."

Combing through government archives, the first noteworthy appearance of Phibro occurs on April 6, 2001, when the Wall Street law firm of Sullivan & Cromwell sent a letter to the Commodity Futures Trading Commission (CFTC), the Federal regulator of oil and other commodity trading, acknowledging that it was representing "the Energy Group." The letter was noteworthy because it delineated just who had teamed up to grease the oil rigging in Washington: namely, two investment banks (Goldman Sachs and Morgan Stanley); a house of cards that would later collapse (Enron); a proprietary trading firm inside a Frankenbank (Phibro inside Citigroup); and two real energy firms (BP Amoco and Koch Industries).

What the Energy Group had long lobbied for and finally received from its Federal regulator was the breathtaking ability to trade oil contracts and oil derivatives secretly in the over- the-counter (OTC) market, thus avoiding the scrutiny of regulated commodity exchanges, their CFTC regulator, and Congress. The April 6, 2001 letter was essentially to say thanks and interpret the new rules as favorably as possible for the Energy Group.

The change in the law occurred via the Commodity Futures Modernization Act of 2000 (CFMA) and is called the Enron Loophole. (Since Enron's trading room went belly up along with the company, and Phibro is still trading oil secretly all over the world, it should perhaps now be called the Phibro Loophole.)

What the CFTC also granted the big Wall Street trading firms was a license to sneak under the radar by using computer terminals located in the U.S. while trading oil on foreign exchanges like the Intercontinental Exchange (ICE) located in London but owned by an Atlanta, Georgia outfit that was funded and launched by Wall Street firms and big oil.

On June 3 of this year, Dr. Mark Cooper, Director of Research for the Consumer Federation of America, correctly outlined the problem to the Senate Committee on Commerce, Science and Transportation: "The speculative bubble in petroleum markets has cost the economy well over half a trillion dollars in the two years since the Senate [hearings] first called attention to this problem…Public policies have made these markets the playgrounds of the idle rich, while consumers suffer the burden of rising prices for the necessities of daily life. We have made it so easy to play in the financial markets that investment in productive long term assets are unattractive…The most blatant mistake occurred when Congress allowed the Commodity Futures Trading Commission to forego regulation of over the counter trading in energy futures…Because there is no regulation of this huge swatch of activity, regulators have little insight into what is going on in energy commodity markets…Large traders who trade in commodities in the U.S. ought to be required to register and report their entire positions in those commodities here in the U.S. and abroad…If traders are unwilling to report all their positions, they should not be allowed to trade in U.S. markets. If they violate this provision, they should go to jail. Fines are not enough to dissuade abuse in these commodity markets because there is just too much money to be made."

The only correction I would make to the otherwise flawless argument above is that Wall Street is far from the playground of the "idle" rich. Wall Street executives spend every waking minute (and I've heard even dream about) how they can separate us from our money, our homes and a voice in Washington. How appropriate that Citigroup's slogan is "the Citi never sleeps."

Let's say the CFTC was not a compromised regulator, was not an audition stage and revolving door for million dollar jobs in the industry it regulates. Let's say it genuinely wanted to report back to Congress on just how big a player Citigroup is in the oil markets. According to a February 22, 2008 filing with the Securities and Exchange Commission (SEC), Citigroup has over 2,000 principal subsidiaries (meaning it really has more but it's not naming them). Of these, a significant number are secret offshore entities where records are unavailable to regulators. (For a mind boggling look at this sprawling octopus click here: http://www.sec.gov/ )

So the CFTC can't get its hands on all records and even in jurisdictions where it can, it first has to know under what names, out of a possible 2,000, Citigroup is trading oil and then aggregate the positions.

On May 6 of this year, Tyson Slocum, Director of the Energy Program at the nonprofit watchdog, Public Citizen, testified before Congress on yet another roadblock preventing a meaningful investigation of oil price manipulation:
"Thanks to the Commodity Futures Modernization Act, participants in these newly-deregulated energy trading markets are not required to file so-called Large Trader Reports…These Large Trader Reports, together with the price and volume data, are the primary tools of the CFTC's regulatory regime…So the deregulation of OTC markets, by allowing traders to escape such basic information reporting, leave federal regulators with no tools to routinely determine whether market manipulation is occurring in energy trading markets…The ability of federal regulators to investigate market manipulation allegations even on the lightly-regulated exchanges like NYMEX [New York Mercantile Exchange] is difficult, let alone the unregulated OTC market."

Next comes what can only be described as an act of insanity on the part of the Federal Reserve. After allowing for the repeal in 1999 of the depression era investor protection legislation known as the Glass-Steagall Act in order to let Citigroup house retail bank deposits, investment banking, insurance, stock brokerage and speculative proprietary trading under one roof (the perfect storm that intensified the Great Depression) the Federal Reserve decided on October 2, 2003 that Citi wasn't scary enough. It needed to allow this company that had already been named in hundreds of lawsuits for securities frauds and manipulations and could not remotely manage itself as a financial firm to ramp up its oil trading business by allowing it to take possession of crude oil on tankers because it would "reasonably be expected to produce benefits to the public." Here are excerpts from the Fed's release suggesting the expansive plans Citi had in the oil storage and transport business:
"…Citigroup has indicated that it will adopt additional standards for Commodity Trading Activities that involve environmentally sensitive products, such as oil or natural gas. For example, Citigroup will require that the owner of every vessel that carries oil on behalf of Citigroup be a member of a protection and indemnity club and carry the maximum insurance for oil pollution available from the club. Citigroup also will require every such vessel to carry substantial amounts of additional oil pollution insurance from creditworthy insurance companies. Furthermore, Citigroup will place age limitations on vessels and will require vessels to be approved by a major international oil company and have appropriate oil spill response plans and equipment. Moreover, Citigroup will have a comprehensive backup plan in the event any vessel owner fails to respond adequately to an oil spill and will hire inspectors to monitor the loading and discharging of vessels. Citigroup also has represented that it will have in place specific policies and procedures for the storage of oil… The Board believes that Citigroup has the managerial expertise and internal control framework to manage the risks of taking and making delivery of physical commodities… For these reasons, and based on Citigroup's policies and procedures for monitoring and controlling the risks of Commodity Trading Activities, the Board concludes that consummation of the proposal does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally and can reasonably be expected to produce benefits to the public that outweigh any potential adverse effects."

Voting in favor of this unprecedented action was then Federal Reserve Chairman Alan Greenspan as well as current Chairman, Ben Bernanke.

Could the Fed have been more wrong about Citigroup having "the expertise and internal controls to integrate effectively the risk management…?" Two years later, in March 2005, the bipolar Fed had this to say about Citigroup: "Given the size, scope and complexity of Citigroup's global operations, successfully addressing the deficiencies in compliance risk management that have given rise to a series of adverse compliance events in recent years will require significant attention…." Today, the situation is as follows: Citigroup has taken $42 billion in credit losses and writedowns in the past year, just announced that more writedowns are coming, and the Fed has an intravenous money feeding tube hooked up between its vault and this banking/brokerage/subprime mortgage lending/oil trading mad scientist experiment.

In addition to the secretive Phibro oil trading unit, Citi has formed Citigroup Energy and moved it to Houston. In a help wanted ad placed in Canada it described itself as follows: "Citigroup Energy is a global energy trading, marketing and risk management company based in Houston with offices in Calgary, New York, London, and Singapore. Our goal is to become the premier global energy commodities marketing and trading organization. Currently our capabilities include trading and marketing derivatives/structured products in power, natural gas, crude and crude products."

Enron also called itself the "premier" energy trading organization. Apparently impressed with that model, Citigroup Energy has hired a significant number of former Enron traders.

About the Author: Pam Martens worked on Wall Street for 21 years. She has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .