In our last post, we documented how Barclays had been caught in the Libor scandal, manipulating a key interest rate that underpins hundreds of trillions of dollars in loans (one estimate was $800 trillion). In that post, we also explained the key role that Barclays played in the market collapse by rejecting the purchase of Lehman Brothers and how they booked a massive profit picking the bankrupt carcass clean. We also documented that Barclays helped create a technique to allow Sharia Compliant Funds (including Middle East Sovereign Wealth Funds) to sell short without violating Sharia. They did this right as the market was peaking. And, funds out of the Middle East were tied to the naked short selling orgy that brought down Lehman.
What is so interesting about Barclays' role is that some believe that they manipulated Libor in 2008 in order to appease two Middle East Sharia Compliant Sovereign Wealth Funds who would eventually end up with controlling interest. But, all of this relates to Phase Two of the three-phased attack we identified in our book, Secret Weapon. Phase Two involves the collapse of the stock market. Only recently some additional disturbing information has emerged that connects Barclays to Phase One as well. We identified Phase One as the manipulative "paper oil" trading that drove oil prices from $50/barrel in early 2007 to nearly $150/barrel in mid-2008. Never in history had oil prices increased so much in such a short time without a supply disruption. In fact, during that period global demand actually decreased slightly and supply actually increased. Absent other factors, the law of supply/demand would have argued for lower prices, not higher.
What actually happened was a tripling of oil prices in 18 months even as the world was entering recession and the housing bubble was bursting. Certainly higher energy prices only made things much, much worse. And, higher prices shifted hundreds of billions of dollars from Western consumers to Middle East nations. So, how was this accomplished?
We have argued, and been supported by many including the Chairman Emeritus of the MIT economics department (and others including oil traders) that the higher oil prices were caused by the trading of oil futures. Not everyone agrees with this view and we have had some lively debates. One of those was with a top energy trader for Mr. Pickens. He argued that oil prices could not be manipulated this way although he did acknowledge that the final push higher came from SemGroup's collapse in Oklahoma. SemGroup was a major energy trader that collapsed right as oil prices were peaking. The traditional view was that they made a bad bet on the market and this pushed prices unsustainably high. Regardless, however, the admission of the Pickens' investor that SemGroup was a distorting factor in the markets was significant. If he could attribute $10/barrel of manipulation to that event, why not $20? Or $40? The key is that he acknowledged that the market could be moved artificially.
Recent evidence, however, has now emerged that Barclays had a hand in SemGroup as well. As did Goldman Sachs (which we have covered in this blog as well), JP Morgan (covered also), and Bank of America. Here are some key quotes from a recent article in the Tulsa World featuring an interview with SemGroup co-founder Tom Kivisto:
Why did the creditors decide to cut SemGroup off in June 2008? Do you believe the theory that Barclays and others got access to your trading book and took opposite positions? That's basically saying that the all-time high of $147 per barrel was partially a result of SemGroup's short position.
"First, SemGroup's NYMEX book was not short the market, as was confirmed by the investigation of the U.S. Commodity Futures Trading Commission. The all-time high oil price was likely caused by speculative trading by the investment companies identified by the U.S. Commodity Futures Trading Commission – Goldman Sachs, Barclays, and Vitol – whose NYMEX trading volumes were 400 percent of SemGroup's in 2008.
"As to reports of companies trading ahead of SemGroup, Goldman Sachs, J. Aron, Bank of America and Barclays Bank had access to the details of the SemGroup trading program. They were provided the entire book of SemGroup's trades and positions under confidentiality agreements. If one of those banks chose to use SemGroup's trading book to improperly trade against SemGroup, they could have. A person who had access to SemGroup's trading book and who knew that SemGroup was required by bank covenants to end each trading day with a balanced trade book (one that was not net short or long) could easily make money by trading ahead of SemGroup. Doing that on even a modest scale could force the price of oil up.
"Forbes, Bloomberg, and now the SemGroup Litigation Trust have reported that there was trading ahead of SemGroup in 2008. This trading ahead would increase market volatility and raise margin requirements, and when those things went up, so did SemGroup's capital requirements. In other litigation, a former Goldman Sachs officer testified that Goldman was unable to buy the SemGroup "book" in July 2008 because of a conflict of interest. That could mean Goldman Sachs was on the other side of SemGroup trades.
Will the real SemGroup story ever get told? How would you pitch it at a publisher's meeting?
"More information comes to light every week about what was happening inside banks and investment banking companies in 2008 – manipulation of interest rates and markets, insider trading, and exploiting confidential information. It may take one or more years, but the extraordinary circumstances of 2008 will be explained, fact by fact.
"Truth is a difficult thing to suppress. If people want to find it, truth will be found."
Another article (also in the Tulsa World) notes how much money Barclays eventually pocketed from SemGroup's failure:
Barclays: The English banking firm is known as the beneficiary of SemGroup's desperation in the summer of 2008. Margin calls totaling more than $2.4 billion on the oil futures position forced SemGroup to sell its trading book to Barclays for a $143 million fee in July 2008. The move forced SemGroup to take that massive hit on its accounting books. Creditors dropped them, and bankruptcy followed. As fate would have it, oil prices reached an all-time high of $147 per barrel that month and then receded downward, turning Barclays' short position into a winner. The banking firm eventually profited by about $3 billion, according to reports.
This is an extraordinary revelation. It shows that Barclays, which has admitted to illegally manipulating Libor, may have had the opportunity to manipulate oil prices higher. Even those who have doubted that oil prices could be manipulated have admitted that SemGroup was an exception. Such a manipulation would have proven quite profitable to Barclays' Middle East investors. These are the same investors for whom they allegedly manipulated Libor to attract. As SemGroup co-founder Kivisto said, "Truth is a difficult thing to suppress. If people want to find it, truth will be found." We certainly hope people will be willing to find it.