We’ve mentioned the role Goldman Sachs has played in energy prices last year. They have been accused of manipulating GSCI for trading gains, political advantage, etc. When Oil first dropped, I doubted there was any political manipulation until I could see a market mechanism. It turns out the GSCI was that mechanism.

Now, GS has decided to get rid of the index. From an S&P Press Release:

Standard & Poor’s will acquire the market leading Goldman Sachs Commodity Index (“GSCI”) and two equity index families from the Goldman Sachs, the two companies announced today. Terms of the transaction were not disclosed.

The GSCI, created in 1991, currently includes 24 commodities and is designed to provide investors with a reliable and publicly available benchmark for investment performance in the commodity markets.

The clear commodity index leader, the GSCI has an estimated $60 billion in institutional investor funds tracking it, the majority of that coming through over-the-counter derivatives transactions.

After a brief transition period, the index will be renamed the S&P GSCI Commodity Index. (emphasis added)

Hmmm, I wonder when the honchos over at GS decided "we no longer have a need for that index?" 

I guess Goldman Sachs naked attempts at manipulating commodity prices, indirectly the equity markets, and possibly even the mid-term elections is now past its "Sell-By" date. I cannot say there was much of a public relations backlash — a smallish NYTimes article, and the slings and arrows from a few outraged bloggers. But that was pretty much it.

The suspect timing of the unscheduled GSCI rebalancing last July left one to consider to possibilities: that GS is either a collective of naive dolts, or they were blatantly attempting to manipulate the outcome of the mid-term elections. The public clearly thought there was price manipulation going on; they weren’t fooled. And the appointment of their Chairman Hank Paulson to Treasury Secretary just before these changes must have been just one of those serendipitous coincidences. 

The changes in the GSCI led to a subsequent sell off in the gasoline futures market. After a 5 year run in energy prices, there was a 30% drop in the price of oil after their rebalancing — and during the 2 months prior to the election. Another lucky coincidence!

Another fortuitous coincidence: GS had a blockbuster quarter following the ramp of the markets.

~~~   

There were enough conflicts of interest in place that the markets — and maybe even GS itsef — are better off with the index in the hands of a more neutral 3rd party . . .

>

Update February 13, 2007 4:32pm

A friend notes that following article form 2005:

The Seats of Power
Goldman Sachs rules the Street with smarts and tough tactics. But has it gone too far with the Big Board deal?

>

Hat tip: Naked Shorts

>

Source:
Standard & Poor’s To Acquire Goldman Sachs’ GSCI
Press release Feb. 6 2007
http://www2.standardandpoors.com/spf/pdf/index/020607_GSCI.pdf

Category: Commodities, Corporate Management, Index/ETFs

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Goldman Sells GSCI to S&P”

  1. Anonymous says:

    Barry,

    I agree with all of the above, but I think the real question that hasn’t been answered is why they would give up that power.

  2. Craig says:

    Because it’s one thing to revisit the scene of your crime, it’s another thing entirely to OWN the scene of your crime.

  3. costa says:

    Because it’s one thing to revisit the scene of your crime, it’s another thing entirely to OWN the scene of your crime.

    Well put

  4. Why give it up? Perhaps they don’t need it anymore.

    Just to add fuel to the fire, this transition occurs as the US amasses a huge armada in the Persian Gulf. A third carrier group is en route.

    http://tinyurl.com/2ucvl8

    Hmmm, one wonders what the price of oil would do if there was an altercation with Iran…

  5. Lauriston says:

    Sell it before the murmurings become a crescendo…

  6. Brian says:

    Hmmm, one wonders what the price of oil would do if Iran decided to nuke Israel.

  7. Nova Law says:

    Touche’ Brian.

  8. wally says:

    Tough call here.
    Oil has stayed down and it is also likely that US demand has been dropping. Even the threat of such a drop – which we arguably have had – would have done it.
    I think there is more to it tha GS; that just isn’t enough.

  9. clint athey says:

    I was intrigued last fall when the GSCI story broke and found BR’s coverage essential. However, I still have some doubts as to the validity of the assertion that the rebalance would,ipso facto, “change” the oil price. If real consumer demand for oil/fuel didn’t change along with the future price, wouldn’t there be oil/feul shortages, ie lines at the pump? In other words, futures prices don’t exist outside the real markets for there products. I don’t doubt the intent of GS to influence the future market, at least in the short run, but I doubt that in the longer run that such a strategy would be effective.–And indeed it wasn’t, the GOP lost!! I would love informed comments to help my understanding. Thank you

  10. Jim Picerno says:

    Clearly, the reason for GS turning over the index to S&P is to avoid conflicts of interest. When GS launched the index all those years ago, publicly traded commodity funds didn’t exist. Now they’re big business, with roughly $100 billion in GSCI-linked funds alone. Another $40 billion sits in portfolios tied to the Dow Jones-AIG Commodity Index. And, of course, publicly traded commodity funds that are listed on stock exchanges fall under the oversight of the SEC.

    It’s no secret that Goldman Sachs manages money for clients and trades for its own accounts. The fact that it also maintains an index that supposedly passive has become a conflict of interest. That’s a no-no with the folks at the SEC. Quick digression: the SEC strongly prefers that ETFs track indices that are designed and maintained by an entity other than the company managing the ETF.

    That type of separation has been fading as GSCI has become the basis for mutual funds and ETFs. GS, like many investment banks, builds many indices. When those indices become the basis for popular, publicly traded funds, it’s time to transfer ownership. GS still publishes a myriad of indices, but none control billions in publicly traded funds. That’s the difference.

  11. wnsrfr says:

    Hmmmm, I wonder what the price of milk would do if every bonehead in the world believed that Iran had even the slightest capability or true desire to nuke Israel?

    The WMD scare tactics so popular over the last few years totally ignores the proven state guaranteed by MAD.

    Alfred E. Neuman was and will always be right.

  12. Clint

    There are approxiamtely $60B in institutional accounts that are tied to GSCI. These are primarily futures, which can leveraged up fairly easily.

    Over the course of each month of September and October, between $5-6 Billion worth of energy (gas, oil, etc.) Futures contracts hit the markets each month. Although these are liquid markets, that is still a very substantial amount of contracts.

    The results speak for themselves . . .

    See charts here
    http://bigpicture.typepad.com/comments/2006/09/why_is_oil_drop.html

  13. alexd says:

    There seem to be a few issues that arise out of this topic.

    The first is mistrust. If people believe that the government favors oil companies and firms like Goldman Sachs (which most people will not know of) then that leads to an infectious cynicism that will permeate (or already has) the society. This in turn encourages the “If others do it, why not me?” approach. This further encourages a degradation of the social contract. This in turn makes things like tax evasion and jaywalking less objectionable than in a society where people feel the government somewhat works in their interests.

    As far as I can tell historically the fast and massive grabs for power seem to result in the eventual hard downfall of those grabbing the power. There will be exceptions but I suspect that excess hubris is not good. Something about pride before the fall.

    I think that we have seen signs of excess pride in the current administration. The inability to admit that one was wrong might be equated with bad trading habits. Also lying about a situation whether a war, gas prices, or a trade seems to become the chink in the armor that leads to self deception.

    Why does King Lear come to mind?

    Oh if we launch a missle at Iran, arrange to make it look like they launched one (can you say Gulf of Tomkin?)or they really launch one, I will place oil at 89 dollars a barrel at the end of the day it happens.

    If Israel attacks then I suspect the affect on oil will be shorter but just as volatile, since the Arabs for the most part hate Israel anyway. We would be associated with such an action but that would be the expected reaction.

    Or something else that I cannot think of might happen…….

  14. donna says:

    Wow, the government doesn’t favor oil companies? Oh good, Exxon can pay that $5 billion they owe Alaska now!

    Come on already.

  15. yc32 says:

    One has to wonder how can manipulation drive oil price down by 30% and keep it below $60 for long period of time, assuming oil price was kept low by manipulation of GSCI. It certainly can be argued that the GSCI index just had two very well timed adjustment, which saved those funds that using the index a lot of money.

    Here is a link to Ticker Sense chart showing the index vs. oil price.

    http://tickersense.typepad.com/ticker_sense/2007/week3/index.html

  16. Nova Law says:

    Was Goldman manipulating oil in 1998 when the price went down to $10 a barrel?

  17. alexd says:

    Nova Law

    Dogs bark for different reasons. They will bark at the postman delivering a present or a thief in the night.

    People die all the time, some are murdered, if someone dies of natural causes does that negate all murders?

    Anyways if you were joking, nevermind…

  18. blam says:

    If some mutt holds up a seven-11 with a squirt gun, they’re hunted down like animals.

    If a wall street speculator bank steals billions by manipulating the price of oil, natural gas, metals nobody says diddly.

  19. Mark says:

    Hmmm, one wonders what the price of oil would do if Iran decided to nuke Israel.

    about $5/barrel, seeing as how iran and its clan of jawa inhabitants would no longer be a scourge on the earth

  20. paul says:

    > Clearly, the reason for GS turning over the index to S&P is to avoid conflicts of interest.

    If they could make $ off the conflict of interest, they would do that rather than follow the ethical path. They would deny there was a conflict and lobby the SEC to make sure there were no clear rules against what they were doing.

  21. MCH says:

    I’ve followed the GSCI theory on numerous blogs since oil started dropping but my dad recently mentioned an interview on a cable news station linking declining oil prices to Saudi Arabia. Basically the idea is that Saudi Arabia has a vested interest in defeating Iran and can do so by reducing Iran’s income from oil and reducing it’s ability to purchase energy in the form of gasoline. Saudi is able to do this by leveraging their reduced production cost, which are nine times less then Iran’s. Cheney is rumored to visit Saudi Arabia right before the price decline started to push this policy through. Sounds like a win/win/win situation. Saudi retains their power/Iran suffers economically(defeat?)/US gets lower gas prices.

    I’d like to know if you’ve heard anything along these lines?

    Here’s a link to one article mentioning in:

    http://news.goldseek.com/TacticalInvestor/1171393015.php

    “One of the main reasons behind the fast pull back in oil prices is that Saudi Arabia has flooded the market with oil at the behest of the United States…”

  22. Nova Law says:

    MCH, that’s precisely what happened in the mid-1980s as part of the Reagan Administration’s strategy of defeating the Soviet Union in the Cold War. Peter’s Schweitzer’s book “Victory” describes the Saudi role in detail. It would not surprise me at all if a similar strategy has been employed in dealing with Iran.