[Marxism] Academics Who Defend Wall St. Reap Reward

Louis Proyect lnp3 at panix.com
Sat Dec 28 06:53:22 MST 2013

Charles Ferguson scooped the NY Times 2 years ago:

December 27, 2013
Academics Who Defend Wall St. Reap Reward

Signs of the energy business are inescapable in and around Houston — the 
pipelines, refineries and tankers that crowd the harbor, and the 
gleaming office towers where oil companies and energy traders have 
transformed the skyline.

And in a squat glass building on the University of Houston campus, a 
measure of the industry’s pre-eminence can also be found in the person 
of Craig Pirrong, a professor of finance, who sits at the nexus of 
commerce and academia.

As energy companies and traders have reaped fortunes by buying and 
selling oil and other commodities during the recent boom in the 
commodity markets, Mr. Pirrong has positioned himself as the hard-nosed 
defender of financial speculators — the combative, occasionally acerbic 
academic authority to call upon when difficult questions arise in 
Congress and elsewhere about the multitrillion-dollar global commodities 

Do financial speculators and commodity index funds drive up prices of 
oil and other essentials, ultimately costing consumers? Since 2006, Mr. 
Pirrong has written a flurry of influential letters to federal agencies 
arguing that the answer to that question is an emphatic no. He has 
testified before Congress to that effect, hosted seminars with traders 
and government regulators, and given countless interviews for financial 
publications absolving Wall Street speculation of any appreciable role 
in the price spikes.

What Mr. Pirrong has routinely left out of most of his public 
pronouncements in favor of speculation is that he has reaped financial 
benefits from speculators and some of the largest players in the 
commodities business, The New York Times has found.

While his university’s financial ties to speculators have been the 
subject of scrutiny by the news media and others, it was not until last 
month, after repeated requests by The Times under the Freedom of 
Information Act, that the University of Houston, a public institution, 
insisted that Mr. Pirrong submit disclosure forms that shed some light 
on those financial ties.

Governments and regulatory agencies in the United States and Europe have 
been gradually moving to restrict speculation by major banks. The 
Federal Reserve, concerned about the risks, is reviewing whether it 
should tighten regulations and limit the activities of banks in the 
commodities world.

But interviews with dozens of academics and traders, and a review of 
hundreds of emails and other documents involving two highly visible 
professors in the commodities field — Mr. Pirrong and Professor Scott H. 
Irwin at the University of Illinois — show how major players on Wall 
Street and elsewhere have been aggressive in underwriting and promoting 
academic work.

The efforts by the financial players, the interviews show, are part of a 
sweeping campaign to beat back regulation and shape policies that affect 
the prices that people around the world pay for essentials like food, 
fuel and cotton.

Professors Pirrong and Irwin say that industry backing did not color 
their opinions.

Mr. Pirrong’s research was cited extensively by the plaintiffs in a 
lawsuit filed by Wall Street interests in 2011 that for two years has 
blocked the limits on speculation that had been approved by Congress as 
part of the Dodd-Frank financial reform law. During that same time 
period, Mr. Pirrong has worked as a paid research consultant for one of 
the lead plaintiffs in the case, the International Swaps and Derivatives 
Association, according to his disclosure form.

While he customarily identifies himself solely as an academic, Mr. 
Pirrong has been compensated in the last several years by the Chicago 
Mercantile Exchange, the commodities trading house Trafigura, the Royal 
Bank of Scotland, and a handful of companies that speculate in energy, 
according to the disclosure forms.

The disclosure forms do not require Mr. Pirrong to reveal how much money 
he made from his consulting work, and a university spokesman said that 
the university believed it was strengthened by the financial support it 
received from the business community. When asked about the financial 
benefits of his outside activities, Mr. Pirrong replied, “That’s between 
me and the I.R.S.”

Debating to a Stalemate

No one disputes that a substantial portion of price increases in oil and 
food over the last decade were caused by fundamental market factors: 
increased demand from China and other industrializing countries, extreme 
weather, currency fluctuations and the diversion of grain to biofuel.

But so much speculative money poured into markets — from $13 billion in 
2003 to $317 billion at a peak in 2008 — that many economists, and even 
some commodities traders and investment banks, say the flood became a 
factor of its own in distorting prices.

Others assert that commodities markets have historically gone through 
intermittent price bubbles and that the most recent gyrations were not 
caused by the influx of speculative money. Mr. Pirrong has also argued 
that the huge inflow of Wall Street money may actually lower costs by 
decreasing what commodities producers pay to manage their risk.

Mr. Pirrong and the University of Houston are not alone in publicly 
defending speculation while accepting financial help from speculators. 
Other researchers have received funding or paid consulting jobs courtesy 
of major commodities traders including AIG Financial Products, banks 
including the Bank of Canada or financial industry groups like the 
Futures Industry Association.

One of the most widely quoted defenders of speculation in agricultural 
markets, Mr. Irwin of the University of Illinois, Champaign-Urbana, 
consults for a business that serves hedge funds, investment banks and 
other commodities speculators, according to information received by The 
Times under the Freedom of Information Act. The business school at the 
University of Illinois has received more than a million dollars in 
donations from the Chicago Mercantile Exchange and several major 
commodities traders, to pay for scholarships and classes and to build a 
laboratory that resembles a trading floor at the commodities market.

Mr. Irwin, the University of Illinois and the Chicago exchange all say 
that his research is not related to the financial support.

Underwriting researchers and academic institutions is one part of Wall 
Street’s efforts to fend off regulation.

The industry has also spent millions on lobbyists and lawyers to promote 
its views in Congress and with government regulators. Major financial 
companies have also funded magazines and websites to promote academics 
with friendly points of view. When two studies commissioned by the 
Commodity Futures Trading Commission, the financial regulatory agency, 
raised questions about the possible drawbacks of speculation and of 
high-frequency trading, lawyers for the Chicago exchange wrote a letter 
of complaint, saying that its members’ proprietary trading information 
was at risk of disclosure, and the research program was shut down.

The result of the various Wall Street efforts has been a policy 
stalemate that has allowed intensive speculation in commodities to 
continue despite growing concern that it may harm consumers and, for 
example, worsen food shortages. After a two-year legal delay, the 
futures trading commission this month introduced plans for new limits on 
speculation. Some European banks have stopped speculating in food, 
fearing it might contribute to worldwide hunger.

Mr. Pirrong, Mr. Irwin and other scholars say that financial 
considerations have not influenced their work. In some cases they have 
gone against the industry’s interests. They also say that other 
researchers with no known financial ties to the industry have also 
raised doubts about any link involving speculation and soaring prices.

But ethics experts say that when academics fail to disclose financial 
ties, they do a disservice to the public and undermine the perception of 

“If those that are creating the culture around financial regulation also 
have a significant, if hidden, conflict of interest, our public is not 
likely to be well served,” said Gerald Epstein, an economics professor 
at the University of Massachusetts, Amherst, who in 2010 released a 
study about conflicts of interest among academics who advised the 
federal government after the financial crisis.

Speculation in the Market

Financial ties among professors promoting speculation and the banks and 
trading firms that profit from it date back to the beginning of the 
recent commodities boom, which got an intellectual kick-start from academia.

After Congress and the Clinton administration deregulated the 
commodities markets in 2000, and the Securities and Exchange Commission 
lowered capital requirements on investment banks in 2004, the financial 
giants began developing new funds to capitalize on the opportunity.

AIG Financial Products commissioned two highly respected Yale University 
professors in 2004 to analyze the performance of commodities markets 
over a half-century. The professors — who prominently acknowledged the 
financial support — concluded that commodities markets “work well when 
they are needed most,” namely when the stock and bond markets falter.

Money flowed into the commodities markets, and although the markets have 
cooled in the last two years, the price of oil is now four times what it 
was a decade ago, and corn, wheat and soybeans are all more than twice 
as expensive.

A public uproar about the rising prices became heated in the spring of 
2008, as oil soared and gas prices became an issue in the presidential 
campaign. Congress scheduled public hearings to explore whether 
speculation had become so excessive it was distorting prices.

Financial speculators are investors who bet on price swings without any 
intention of taking delivery of the physical commodity. They can help 
smooth the volatility of the market by adding capital, spreading risk 
and offering buyers and sellers a kind of price insurance. But an 
assortment of studies by academics, congressional committees and 
consumer advocate groups had found evidence suggesting that the wave of 
speculation that accelerated in 2003 had at times overwhelmed the market.

Financial speculators accounted for 30 percent of commodities markets in 
2002, and 70 percent in 2008. As gasoline topped $4 a gallon in the 
summer of 2008, Congress tried to soothe angry motorists by pushing for 
restrictions on oil speculation.

Mr. Pirrong jumped into the fray. He wrote papers, blog posts and 
opinion pieces for publications like The Wall Street Journal, calling 
the concern about speculation “a witch hunt.”

Mr. Pirrong also testified before the House of Representatives in 2008 
and, identifying himself as an academic who had worked for commodities 
exchanges a decade earlier, he warned that congressional plans to rein 
in speculators would only make matters worse.

“Indeed, such policies are likely to harm U.S. consumers and producers,” 
he said. When oil company executives, traders and investment banks cited 
speculation as a major cause of surging prices which, by some estimates, 
was costing American consumers more than $300 billion a year, Mr. 
Pirrong dutifully contradicted them.

Mr. Pirrong’s profile grew as he sat on advisory panels and hosted 
conferences with senior executives from the trading world as well as top 
federal regulators. Last year, Blythe Masters, head of commodity trading 
at JPMorgan Chase, approached him to write a report for a global bank 
lobbying group, the Global Financial Markets Association.

The report was completed in July 2012, but the association declined to 
release it. Mr. Pirrong said it was because he had reached the 
conclusion that banks should be regulated more heavily than other 
commodity traders. “I wouldn’t change the call, so they sat on the 
report,” he wrote on his blog, The Streetwise Professor.

What Mr. Pirrong did not reveal in his public statements about the 
report is that he had financial ties to both sides of that debate: the 
commodities traders as well as the banks. Ms. Masters declined to 
comment. Over the years, Mr. Pirrong has resisted releasing details of 
his own financial dealings with speculators, and when The Times first 
requested his disclosure forms in March, the University of Houston said 
that none were required of him. The disclosure forms Mr. Pirrong 
ultimately filed in November indicate that since 2011, he has been paid 
for outside work involving 11 different clients. Some fees are for his 
work as an expert witness, testifying in court cases on behalf of the 
Chicago Mercantile Exchange and a bank and a company that makes 
futures-trading software. The commodities firm Trafigura contracted him 
to conduct a research project.

Mr. Pirrong is also a member of the advisory board for TruMarx Partners, 
a company that sells software to energy traders, a position that 
entitles him to a stock option package.

It was reported in The Nation magazine in November that the University 
of Houston’s Global Energy Management Institute, where Mr. Pirrong 
serves as a director, has also received funding from the Chicago 
exchange, as well as financial institutions that profit from 
speculation, including Citibank and Bank of America.

On his blog, Mr. Pirrong has dismissed suggestions that his work for a 
school that trains future oil industry executives creates a conflict of 

“Uhm, no, dipstick,” he wrote in 2011, replying to a reader who had 
questioned his objectivity. “I call ’em like I see ’em.” In a telephone 
interview last week, Mr. Pirrong said that his consulting work gave him 
insight into the kind of real-world case studies that improve his 
research and teaching. “My compensation doesn’t depend on my 
conclusions,” he said.

When asked about Mr. Pirrong’s disclosure, Richard Bonnin, a university 
spokesman said only that all employees were given annual training on the 
school’s policy, which requires researchers to report paid outside 
consultant work.

Professors as Pitchmen

Concerns about academic conflicts of interest have become a major issue 
among business professors and economists since the financial crisis. In 
2010, the documentary “Inside Job” blasted a handful of prominent 
academic economists who did not reveal Wall Street’s financial backing 
of studies which, in some cases, extolled the virtues of financially 
unsound assets. Two years later, the American Economic Association 
adopted tougher disclosure rules.

Even with the guidelines, however, financial firms have been able to use 
the resources and credibility of academia to shape the political debate.

The Chicago Mercantile Exchange and the University of Illinois at 
Champaign-Urbana, for example, at times blur the line between research 
and public relations.

The exchange’s public relations staff has helped Mr. Irwin shop his 
pro-speculation essays to newspaper op-ed pages, according to emails 
reviewed by The Times. His studies, writings, videotaped speeches and 
interviews have been displayed on the exchange’s website and its online 

In June 2009, when a Senate subcommittee released a report about 
speculation in the wheat market that raised concerns about new 
regulations, executives at the Chicago exchange turned to Mr. Irwin and 
his University of Illinois colleagues to come up with a response.

Dr. Paul Ellinger, department head of agriculture and consumer 
economics, said, “The interactions that have occurred here are common 
among researchers.”

A spokesman for the exchange said that Mr. Irwin was just one of a 
“large and growing pool of esteemed academics, governmental editors and 
editors in the mainstream press” whose work it follows and posts on its 
various publications. While the C.M.E. has given more than $1.4 million 
to the University of Illinois since 2008, most has gone to the business 
school and none to the School of Agriculture and Consumer Economics, 
where Mr. Irwin teaches. And when Mr. Irwin asked the exchange’s 
foundation for $25,000 several years ago to sponsor a website he runs to 
inform farmers about agricultural conditions and regulations, his 
request was denied.

Still, some of Mr. Irwin’s recent research has been funded by major 
players in the commodities world. Last year, he was paid $50,000 as a 
consultant for Gresham Investment Management in Chicago, which manages 
$16 billion and runs its own commodities index fund. He noted Gresham’s 
sponsorship in the paper and on his disclosure form, and said it gave 
him the opportunity to use new data and test new hypotheses.

Mr. Irwin also works for a business called Yieldcast that caters to 
agricultural producers, investments banks and other speculators, selling 
them predictions of corn and soybean yields. Mr. Irwin has said he does 
not consider it a conflict because he works only with the mathematical 
forecasting models and never consults with clients.

“The debate about financialization is primarily about the large index 
funds, none of whom are clients,” he said.

Mr. Irwin declined to provide a list of his clients, and the university 
said its disclosure requirements did not compel him to do so.

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