Monday, July 6, 2009

How cap & trade will benefit Chicago... and Goldman Sachs

Posted By on 07.06.09 at 01:14 PM

Crain's has a rundown of the winners and losers in the new climate change bill that just passed the house. This part may be worth some digging into:

"The bill also would create a marketplace, likely in Chicago, for tens of billions of dollars’ worth of carbon emission allowances.

"The Chicago Climate Exchange runs a voluntary carbon trading system that includes participants such as Motorola Inc., Baxter International Inc. and the city of Chicago. CME Group Inc., parent of the Chicago Mercantile Exchange, recently announced plans to get into the carbon trading business."

This weekend I read Matt Taibbi's jaw-dropping broadside against Goldman Sachs in Rolling Stone - it's excerpted online, though I suggest buying a copy, even if you have to brown-bag it thanks to the Jonas Brothers cover. Anyway, the CME comes up, if briefly:

"And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits - a booming trillion-dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an 'environmental plan,' called cap-and-trade....

"If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won't even have to rig the game. It will be rigged in advance."

Taibbi explains how:

"The feature of this plan that has special appeal to speculators is that the 'cap' on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand-new commodities market where the main commodity to be traded is guaranteed to rise in price over time."

Not only has Goldman been lobbying for the bill, to the tune of $3.5 million last year, a process which begun when the current Treasury chief of staff was one of their lobbyists, Goldman Sachs owns 10% of the Chicago Climate Exchange.

Cap-and-trade sounds good, perhaps, but as Taibbi argues, you should be skeptical of the government setting up an essentially competition-free marketplace:

"'If it's going to be a tax, I would prefer that Washington set the tax and collect it,' says Michael Masters, the hedge-fund director who spoke out against oil-futures speculation. 'But we're saying that Wall Street can set the tax, and Wall Street can collect the tax. That's the last thing in the world I want. It's just asinine.'"

It's a vitriolic piece, but I can't help but think Be Very Afraid is a sensible reaction. Here's Felix Salmon, responding to Taibbi's piece:

"I can’t, off the top of my head, think of a single government regulation over the past couple of decades which has remotely harmed Goldman Sachs; by contrast, there are many which have done it a world of good. The chances that the Fed, or any other systemic risk regulator, will be able to rein in this powerful organization are probably slim. The best we can hope for, I think, is that Goldman will unilaterally decide to be a force for good in the world, rather than an inflator of bubbles and profiteer in busts."

Goldman Sachs forcefully responded to Taibbi via Salmon, and Taibbi responded in kind.

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