The woman credited with inventing credit default swaps (CDOs) is a key architect of the Carbon Emission Scheme, the future of which is being debated by world leaders in Copenhagen.
Blythe Masters, the JP Morgan employee who invented credit default swaps, is now heading JPM’s carbon trading efforts.
Masters, 40, oversees the New York bank’s environmental businesses as the firm’s global head of commodities.
Masters was part of JPMorgan’s team developing ideas for transferring risk to third parties and went on to manage credit risk for JPMorgan’s investment bank.
Among the credit derivatives that grew from the bank’s early efforts was the CDO.
As news circulates on the internet allegations that giant banks will make a killing on carbon trading, there are fears the scheme presents a high probability for fraud and insider trading. Attention is focusing on Masters’ role in inventing the CDS, which Warren Buffett described as financial “weapons of mass destruction”.
Yet Masters is now heading JPM’s carbon trading efforts. Critics fear the emissions scheme will involve poorly regulated credit default swaps, which led in part to the global financial crisis.
They claim the major banks are preparing to design and market derivatives contracts for carbon emissions that will help client companies hedge their price risk over the long term. They’re also ready to sell carbon-related financial products to outside investors.
Masters says banks must be allowed to lead the way if a mandatory carbon-trading system is going to help save the planet at the lowest possible cost. And derivatives related to carbon must be part of the mix, she says. Derivatives are securities whose value is derived from the value of an underlying commodity — in this case, CO2 and other greenhouse gases.
Now, Bloomberg claims, the carbon trading scheme will be centred on derivatives:
As a young London banker in the early 1990s, Masters was part of JPMorgan’s team developing ideas for transferring risk to third parties. She went on to manage credit risk for JPMorgan’s investment bank. Among the credit derivatives that grew from the bank’s early efforts was the credit-default swap.
Environmental critics also have attacked the “cap and trade” approach to emissions controls where companies gain incentives to cap — or cut — emissions or if they can’t trade or buy the right to continue.
Two EPA lawyers with more than 40 years of cumulative experience — including Allan Zabel, who was head of California’s cap and trade offset programs for more than 20 years, and Laurie William — both with the EPA’s San Francisco office claim the emissions scheme, based on “cap and trade” have released a long and detailed video now available on UTube where they claim the scheme is a scam that only benefits the financial players.
Specifically, they claim cap and trade was tried in Europe, but ended up raising energy prices, creating volatility, produced few greenhouse gas reductions, but made billions for the financial players, and carbon offsets — which are part of the cap and trade plan — increase pollution. They argue the plan will lead to more pollution as investors fight to keep toxic chemicals legal, so they can make more money from trading the offsets. The scheme has been compared with subprime mortgages and other creative financial instruments that brought us the economic crisis, saying carbon offsets lack integrity and don’t work.
Some in Congress are fighting against carbon or derivatives.
Last week Bloomberg outlined fears from a variety of sources from both sides of the political spectrum slamming the proposed use of derivatives regardless of “cap and trade” potential.
“People are going to be cutting up carbon futures, and we’ll be in trouble,” says Maria Cantwell, a Democratic senator from Washington state. “You can’t stay ahead of the next tool they’re going to create.”
Cantwell, 51, proposed in November that US state governments be given the right to ban unregulated financial products. “The derivatives market has done so much damage to our economy and is nothing more than a very-high-stakes casino — except that casinos have to abide by regulations.”
However, Bloomberg said, Congress may cave in to industry pressure to let carbon derivatives trade over-the-counter:
The House cap-and-trade bill bans OTC derivatives, requiring that all carbon trading be done on exchanges … The bankers say such a ban would be a mistake … The banks and companies may get their way on carbon derivatives in separate legislation now being worked out in Congress …
Financial experts are also opposed to cap and trade:
George Soros, the billionaire hedge-fund operator, says money managers would find ways to manipulate cap-and-trade markets. “The system can be gamed,” Soros, 79, told the London School of Economics in July. “That’s why financial types like me like it — because there are financial opportunities.”
Hedge fund manager Michael Masters, founder of Masters Capital Management LLC, based in St Croix, US Virgin Islands, says speculators will end up controlling US carbon prices, and their participation could trigger the same type of boom-and-bust cycles that have buffeted other commodities …
The hedge fund manager says that banks will attempt to inflate the carbon market by recruiting investors from hedge funds and pension funds.
“Wall Street is going to sell it as an investment product to people that have nothing to do with carbon,” he says. “Then suddenly investment managers are dominating the asset class, and nothing is related to actual supply and demand. We have seen this movie before.”
Other environmentalists are opposed to cap and trade as well including Michelle Chan, a senior policy analyst in San Francisco for Friends of the Earth.
“Should we really create a new $US2 trillion ($A2.2 trillion) market when we haven’t yet finished the job of revamping and testing new financial regulation?” she asks. Chan says that, given their recent history, the banks’ ability to turn climate change into a new commodities market should be curbed.
Estimates of the cost of the scheme range from $US300 billion to $US2 trillion and powerful banking interests are fighting for a slice of what will become a massive money maker.
“What we have just been woken up to in the credit crisis — to a jarring and shocking degree — is what happens in the real world,” Chan told Bloomberg.
She titled a March FOE report “Subprime Carbon?” In testimony on Capitol Hill, she warned, “Wall Street won’t just be brokering in plain carbon derivatives — they’ll get creative.”
Other critics say a poorly regulated carbon derivatives scheme run by major banks who were instrumental in the current financial crisis could destabilise the world economy and lead to another crash.
They fear the banks know that the government will bail them out but have strong incentives to sell them and to recreate huge levels of leverage. Indeed, the same dynamic that led to the S&L crisis also led to last year’s CDS crisis.
Bloomberg reported banks intend to become the intermediaries in the fledgling emissions market. Although US carbon legislation may not pass for a year or more, Wall Street has already spent hundreds of millions of dollars hiring lobbyists and making deals with companies that can supply them with “carbon offsets” to sell to clients.
JPMorgan, for instance, purchased ClimateCare in early 2008 for an undisclosed sum. This month, it paid $US210 million for Eco-Securities Group Plc, the biggest developer of projects used to generate credits offsetting government-regulated carbon emissions. Financial institutions have also been investing in alternative energy, such as wind and solar power, and lending to clean-technology entrepreneurs.
The banks are preparing to do with carbon what they’ve done before: design and market derivatives contracts that will help client companies hedge their price risk over the long term. They’re also ready to sell carbon-related financial products to outside investors.
Masters says banks must be allowed to lead the way if a mandatory carbon-trading system is going to help save the planet at the lowest possible cost. And derivatives related to carbon must be part of the mix, she says.
It is quite obvious that any carbon permit trading scheme involving Third World jurisdictions will be a governance nightmare, with the potential for an unholy alliance of carpetbaggers and corrupt Third World governments to create a situation worse than the GFC.
There has already been one scandal involving PNG and potentially $100 million of bogus carbon credits being packaged up for sale. The governance processes relating to international trade are still in their infancy, and it would be easy for unscrupulous conmen (including major banks) to take advantage of the situation.
One of the sources of carbon credits is third world countries forgoing development. How many times will these credits be sold to unsuspecting buyers? Taxing carbon use at source is easier to administer and the most difficult to rort. Why is it that the Australian government is going down the path which is easiest to manipulate? Politics? Taxing consumption at source remains within individual legal jurisdictions whereas internationally traded carbon credits will be subject to all of the misdemeanours associated with the GFC. I hang my head in despair.
It’s called ‘YouTube’.
“The Huge Mistake”, recorded by Laurie Williams and Allan Zabel
Laurie Williams and Allan Zabel are EPA enforcement attorneys.They state clearly that their views may not reflect those of the EPA. The video goes on to explain their thoughts on why the cap & trade plan endorsed by President Obama will not accomplish its goals,or effectively curb climate change.
http://www.youtube.com/watch?v=BA-QufQzuWU