In the New York Times late last week there was a report how Goldman Sachs is manipulating aluminum commodities that is costing American consumer billions of dollars. This is how it works:
The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.
This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country. [..]
Only a tenth of a cent or so of an aluminum can’s purchase price can be traced back to the strategy. But multiply that amount by the 90 billion aluminum cans consumed in the United States each year – and add the tons of aluminum used in things like cars, electronics and house siding – and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years, say former industry executives, analysts and consultants.
All In host Chris Hayes spoke with Sen. Sherrod Brown (D-OH) about the newly revealed practice by Goldman Sachs to skirt price regulations on a product we use every day-aluminum-costing American consumers billions of dollars and it ain’t just aluminum.
U.S. Weighs Inquiry Into Big Banks’ Storage of Commodities
by Gretchen Morgenson and David Kocieniewski, New York Times
The overarching question is whether banks should control the storage and shipment of commodities, and whether such activities could pose a risk to the nation’s financial system.
But other crucial issues are expected to arise as well. Among them is how Wall Street’s push into these markets has affected the prices paid by manufacturers and ultimately consumers. Another is whether Goldman and Morgan Stanley have operated their storage facilities at arms’ length from their banking business, as required by regulators.
Goldman has exploited industry pricing regulations set by the London Metal Exchange by shuffling tons of aluminum each day among the 27 warehouses it controls in the Detroit area, The Times reported on Sunday. The maneuver lengthens the storage time and generates millions a year in profit for Goldman, which charges rent to store the metal for customers, the investigation found. The C.F.T.C. issued the notices late last week, and it was unclear on Monday whether the agency or other authorities would open a full-fledged investigation into banks’ activities.
Senate Scrutiny of Potential Risk in Markets for Commodities
by Edward Wyat, New York Times
The hearing, convened by the Senate Financial Institutions and Consumer Protection subcommittee, came as Goldman Sachs, JPMorgan Chase and others face growing scrutiny over their role in the commodities markets and the extent to which their activities can inflate prices paid by manufacturers and consumers. The Federal Reserve is reviewing the potential risks posed by the operations, which have generated many billions of dollars in profits for the banks. [..]
Several witnesses at Tuesday’s hearings warned that letting the country’s largest financial institutions own commodities units that store and ship vast quantities of metals, oil and the other basic building blocks of the economy could pose grave risks to the financial system. The ability of those bank subsidiaries to gather nonpublic information on commodities stores and shipping also could give the banks an unfair advantage in the markets and cost consumers billions of dollars, the witnesses said.
Goldman Sachs isn’t alone in this game.
Not Just Goldman Sachs: Koch Industries Hoards Commodities as a Trading Strategy
by Lee Fang, The Nation
Worth noting: Koch Industries, a company often inaccurately described as simply an oil or manufacturing concern, is highly active in the commodity speculation business akin to the big hedge funds and banks like Goldman Sachs.
As Fortune magazine reported, when oil prices dropped from a record high in July of 2008 to record lows in December of that year, Koch bought up the cheap oil to take it off of the market. Koch leased a number of giant oil tankers, including the 2-million-barrel-capacity Dubai Titan, to store the oil offshore. The decrease in supply increased the price for consumers that year, while Koch took advantage of selling the oil off later at higher prices.
Koch Industries’ executive David Chang later boasted, “The drop in crude oil prices from more than US$145 per barrel in July 2008 to less than US$35 per barrel in December 2008 has presented opportunities for companies such as ours. In the physical business, purchases of crude oil from producers and storing offshore in tankers allow us to benefit from the contango market where crude prices are higher for future delivery than for prompt delivery.”
The company took advantage when the prices were low, but they also gained when the prices were high. A leaked document I obtained shows Koch among the largest traders (including Goldman Sachs and Morgan Stanley) speculating on the price of oil in the summer of 2008.
Elizabeth Warren Wants To Take This Goldman Sachs Aluminum Story And Run Right Over Wall Street With It
by Linette Lopez, Business Insider
Back in 2003 the Federal Reserve decided to temporarily allow banks to purchase commodities directly. That means oil, power, copper, aluminium etc. This September, that temporary regulatory relaxation is set to expire, and if it does, a big chunk of Wall Street’s business will expire with it.
And now that the ruling is up for discussion, Congress gets to weigh in. Wall Street be warned, if this hearing was any indication, the Senate is coming down on the side of culling the commodities business.
Warren decried the idea that banks would use “other people’s money” in pension and retirement savings “to pave the way for big banks to be able to control an electric plant or an oil refinery.” [..]
The witnesses didn’t just talk about prices either, they talked monopolies. Since her rise to prominence as a regulator and then a Senator, Warren has been saying that banks are getting too big, too interconnected, and too complicated. (Joshua) Rosner’s testimony corroborated that idea, and added to it the specter of commodities
controlling, allencompassing banking behemoths backstopped by the government (too big too fail).
It is more than past time to break up these banks and for the Federal Reserve to be more transparent in how it regulates the banks.
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