Comparing Goldman Sach's statement on Aluminum stockpile and New York Times article (with JP Morgan oil trades as well)
New York Times article on Goldman Sach's aluminum trades and ownership
http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=all&_r=2&
Goldman Sach's statement
http://www.goldmansachs.com/media-relations/in-the-news/current/goldman-sachs-physical-commodities-7-23-13.html
JP Morgan and oil trades
http://www.reuters.com/article/2013/07/25/jpmorgan-commodities-powerdeals-idUSL1N0FV0GL20130725
Saudi Arabia and Oil (produce more or less) link link
FROM NYT
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.
FROM NYT on JP Morgan and other commodities
The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone. In the last year, federal authorities have accused three banks, including JPMorgan, of rigging electricity prices, and last week JPMorgan was trying to reach a settlement that could cost it $500 million.
Using special exemptions granted by the Federal Reserve Bank and relaxed regulations approved by Congress, the banks have bought huge swaths of infrastructure used to store commodities and deliver them to consumers — from pipelines and refineries in Oklahoma, Louisiana and Texas; to fleets of more than 100 double-hulled oil tankers at sea around the globe; to companies that control operations at major ports like Oakland, Calif., and Seattle.
Before Goldman bought Metro International three years ago, warehouse customers used to wait an average of six weeks for their purchases to be located, retrieved by forklift and delivered to factories. But now that Goldman owns the company, the wait has grown more than 20-fold — to more than 16 months, according to industry records.
Longer waits might be written off as an aggravation, but they also make aluminum more expensive nearly everywhere in the country because of the arcane formula used to determine the cost of the metal on the spot market. The delays are so acute that Coca-Cola and many other manufacturers avoid buying aluminum stored here. Nonetheless, they still pay the higher price.
***the same argument is made about Keystone XL---OPEC sets global prices---and domestic production will not lower prices that have other factors associated with it.
***of course this is part of the problem---its all legal
Goldman Sachs says it complies with all industry standards, which are set by the London Metal Exchange, and there is no suggestion that these activities violate any laws or regulations.
***of course a 16 month wait could be BOTH issues
Metro International, which declined to comment for this article, in the past has attributed the delays to logistical problems, including a shortage of trucks and forklift drivers, and the administrative complications of tracking so much metal. But interviews with several current and former Metro employees, as well as someone with direct knowledge of the company’s business plan, suggest the longer waiting times are part of the company’s strategy and help Goldman increase its profits from the warehouses.
Metro International holds nearly 1.5 million tons of aluminum in its Detroit facilities, but industry rules require that all that metal cannot simply sit in a warehouse forever. At least 3,000 tons of that metal must be moved out each day. But nearly all of the metal that Metro moves is not delivered to customers, according to the interviews. Instead, it is shuttled from one warehouse to another.
Because Metro International charges rent each day for the stored metal, the long queues caused by shifting aluminum among its facilities means larger profits for Goldman. And because storage cost is a major component of the “premium” added to the price of all aluminum sold on the spot market, the delays mean higher prices for nearly everyone, even though most of the metal never passes through one of Goldman’s warehouses.
again 40% lower means nothing without a comparison, this was a report about the last few years, and they are making 1/10th of one cent on each soda can---they are affecting entire price by holding this small amount---1/48 of all aluminum in reserves
FROM SEEKING ALPHA July 25, 2013
'Too Big To Fail' Banks
Defend Commodity Manipulation Accusations And Carry On
The so-called "Too Big to Fail"
(TBTF) Banks - Goldman Sachs (
GS),
Morgan Stanley (
MS)
and JPMorgan Chase (
JPM)
generated an estimated $4 billion in commodity revenues last year and
now face growing pressure from a number of investigations into their
operations, and as the
Federal
Reserve yesterday reviewed Wall Street's right to operate in
the Commodity markets.
Several experts told a Senate subcommittee Tuesday that allowing
financial holding companies to have increasing control over physical
commodities such as aluminum and oil could give them too much power
over producers and manufacturers. Lawmakers took the opportunity to
criticize the Federal Reserve for allowing banks to expand their
commodity trading activities, and once again questioned the wisdom of
scrapping the Glass-Steagall law that separated corporate and
investment banking, a decision that helped open the door to commodity
dealing. The Financial Institutions and Consumer Protections
subcommittee hearing addressed a recent investigation by
The
New York Times regarding ownership of aluminum
warehouses by Goldman Sachs. Goldman says it is not deliberately
creating aluminum shortages and that all accusations about it are
nothing but sheer rampant confusion. The banks are using various
strategies in order to convince the Federal Reserve that they should
be allowed to retain the metal warehouses, pipelines and oil tankers
that they have purchased over the past seven years. Big aluminum
buyers represented by MillerCoors, the second largest brewer in the
U.S., told the packed hearing that the banks' control of metal
warehouses that are part of the London Metal Exchange network drove
up their costs by as much as $3 billion last year by distorting
supplies. JPMorgan and Goldman Sachs, which bought LME warehouses in
2010, "have created a bottleneck which limits the supply of
aluminum," Tim Weiner, global risk manager for the brewer, the
combined U.S. operations of Molson Coors and SABMiller, told the U.S.
Senate banking committee. The banks were not present at the hearing,
but as it got underway Goldman Sachs issued its first public rebuttal
of mounting criticism of its metals warehousing unit, denying that
Metro International Trade Services has deliberately caused aluminum
shortages and inflated prices.
Here is what Goldman had to
say:
As
part of our activities as a market maker, or intermediary between
buyers or sellers, in commodities and commodity futures and
derivatives, Goldman Sachs, like a number of other financial
institutions, holds physical commodities in inventory.
We hold an inventory
position in a particular physical commodity for the purposes of
meeting the needs of our clients or as a hedge for positions in
commodity futures or derivatives we assume as a market maker.
And, to fulfill this
market making role, we sometimes take delivery of physical
commodities just as we do government bonds and stocks in financial
markets.
We
also hold other physical commodity operations as investments. This
includes Metro International Trade Services, a metal warehousing
company we bought in 2010, and which operates under the regulations
of the London Metals Exchange (LME).
During the financial
crisis, warehouse companies played the important role of allowing
metal producers, who are often unable to adjust immediately to
changes in demand, to store excess metal in the face of weak
consumer demand. In fact, LME aluminum inventories more than tripled
from 1.2 million tonnes pre-crisis to more than 4.5 million tonnes
by the middle of 2009. As a result, large amounts of metal
accumulated at some locations.
Recent
news reports have inaccurately accused Metro of deliberately creating
aluminum shortages and incorrectly asserted that Metro moves aluminum
from one warehouse to another in order to earn more rent fees.
In fact, it is the
owners of the metal who direct warehouse operators to dispose of
stored metal or transport metal from LME-approved warehouses to
warehouses outside the LME system to meet their own needs or
objectives.
Some
additional key facts about global aluminum markets and the LME
system:
Aluminum stored in
Metro warehouses amounts to approximately 1.5 million tonnes,
compared with global aluminum production in 2012 of about 48 million
tonnes.
Approximately 95
percent of the aluminum that is used in manufacturing is sourced
from producers and dealers outside of the LME warehouse system.
The LME warehouse
companies do not own the metal in their facilities. They merely
store it on behalf of the ultimate owners.
In fact, LME
warehouses are strictly prohibited from trading all LME products.
Trading affiliates of a warehouse operator do not have any
information regarding warehouse operations as such trading is
separated by LME-mandated information barriers, the integrity of
which is verified through regular independent audits.
Delivered aluminum
prices are nearly 40 percent lower than they were in 2006. The
warehousing system is not driving up the price of aluminum.
Certain facilities
owned by non-bank holding companies have queues, while certain
facilities owned by bank holding companies do not have queues. The
queues that exist in various warehouses are a function of market
structure and LME rules.
At any time, a
company can buy aluminum from a producer. In fact, in recent years
there has been more production than consumption. The more immediate
sourcing of aluminum from the LME system would be a last resort for
a corporate end user given that it always takes a certain amount of
time to get inventory out of a warehouse.
Goldman Sachs, Morgan Stanley and JPMorgan Chase are using several
legal means to maintain their multibillion-dollar commodity
franchises, including a longstanding rule allowing banks to invest in
commercial enterprises and an exemption they carved out of
legislation 15 years ago. The 1996 change meant "Congress
finally tore down the wall. Over the next six years, the rules became
looser and looser. The so-called holding companies' control is
raising prices for producers such as MillerCoors (
TAP),
Coca-Cola (
KO)
and car manufacturers. These bank holding companies are slowing the
load-out of physical aluminum from [warehouses] to ensure that they
receive increased rent for an extended period of time. But as per
latest market reports, these financial companies are not just
controlling aluminum warehouses. Copper, oil, energy, solar power and
energy warehouses are also largely controlled by these big banks.
While a 1956 law constrained banks to "banking activities"
and restrained banks from owning physical commodities, a 1999 law
allowed banks to extend their reach into loosely defined "financial
activities."
Commodity Trading Woes:
JPMorgan is reportedly close to a more than $400 million
settlement with the
Federal
Energy Regulatory Commission (FERC), as the
bank tries to put to rest allegations that its traders manipulated
power markets in the Midwest and California. JPMorgan's alleged
activity in those markets was linked to its control over real power
plants and energy supplies, a fact likely to sharpen questions over
the rules for ownership. The hearing was the first to address the
oversight of banks in physical commodity markets since a Reuters
report last year revealed that Goldman and Morgan Stanley were still
awaiting a Fed decision on whether they can still own physical assets
after becoming bank holding companies in 2008. Commercial banks are
prohibited from owning trading assets, but the two former investment
banks argued that their commodity activities are permitted under a
"grandfathering" clause in a 1997 law that effectively
scrapped much of the Glass-Steagall act separating the commercial and
investment banks.
Goldman Sachs and Morgan Stanley converted to Bank Holding Company
status in 2008 and gained access to the Fed's discount lending
window, which also gave the freedom and flexibility as unregulated
investment banks that included largely unfettered commodity trading
activities. The 1999 Gramm-Leach-Bliley act modified key parts of the
BHC Act, effectively ending the separation of commercial and
investment banking. Within that amendment was a clause that said any
bank converting to holding company status "may continue to
engage in, or directly or indirectly own or control shares of a
company engaged in, activities related to the trading, sale, or
investment in commodities and underlying physical properties that
were not permissible for bank holding companies to conduct in the
United States as of September 30, 1997." In other words, if you
traded and invested in commodities before 1997, you should still be
allowed to do so if the bank was engaged in "any of such
activities" before then and so long as it does not exceed 5 per
cent of the bank's total assets. The question the Fed has grappled
with is: If a company traded one type of a commodity before 1997, say
gasoline, should it be allowed to trade ethanol, for example, or own
a crude oil pipeline?
Separately, JPMorgan - which as a commercial bank has never been
allowed to own assets - is believed to have reconfigured its Henry
Bath metal warehousing business in order seek qualification as a
"merchant banking" investment with the Fed. When Royal Bank
of Scotland (
RBS)
purchased Sempra Commodities in 2008 - including its Henry Bath
warehouse operation, the Fed ordered it to sell the warehousing unit
within two years, which RBS ultimately sold Henry Bath and most of
the Sempra business to JPMorgan for $1.7 billion - a deal that closed
in July 2010. JPMorgan changed the composition of the Henry Bath
board last year in an effort to gain approval from the Fed to retain
the business as a merchant banking operation, sources have said. It
is unclear whether that effort was successful. More recently it has
floated a possible sale of Henry Bath.
The Gramm-Leach-Bliley (GLB) act that swept aside Glass-Steagell
rules also gave financial holding companies far more leeway to invest
in non-financial corporate enterprises - so long as those investments
meet certain criteria to qualify for "merchant banking"
status, an issue that is key for JPMorgan and possibly Goldman Sachs.
After 1999, major U.S. commercial banks were quick to register under
the new heading of "Financial Holding Companies", allowing
them to compete with then-investment banks like Goldman and Morgan to
make direct investments into the commercial world.
The issue of whether banks are allowed to trade in physical
commodity markets - taking title to a cargo of crude oil or a
container of coffee beans - is separate from the question of whether
they should be able to own infrastructure or assets. As of last
Friday, the question of commodity trading is also in doubt as the Fed
announced a "review" of a key 2003 ruling. Historically
investment banks had no material restrictions on what they could
trade. While Fed-regulated commercial banks have long been allowed to
trade commodity derivatives, it wasn't until a 2003 Fed order that
they were allowed to participate more deeply in the physical
marketplace.
Commodity Trading and Warehousing Permissions:
The Federal Reserve, in 2005, allowed JPMorgan Chase to purchase
physical commodities business, relaxing the limitations of "financial
activity. When Citigroup (
C)
bought Travelers Group in 1998, it sought the Fed's permission to
trade in oil markets in order to retain a small but lucrative
Westport, Connecticut-based trading firm called Phibro, a vaunted
commodity merchant with a century-old history and a focus on trading
physical crude oil benchmarks worldwide. Citi argued that it was
inhibited from trading effectively in derivative markets because
counterparties knew that they would not be able to take physical
delivery. The Fed agreed with Citi, saying that trading in real
commodities would allow the banks to "transact more efficiently
with customers". It said the trading must be "complimentary"
to their main activities, contribute to the public good and should
not pose a "substantial risk" to the bank. It said banks
must take precautions by frequently inspecting stockpiles, place age
limits on the tankers they use and carry substantial pollution
insurance, among other things. Importantly it also added the
stipulation that the banks could only trade in commodities for which
there was an equivalent commodity derivative contract already
regulated by the Commodity Futures Trading Commission (CFTC). That
decision, which came at the start of a decade-long boom in commodity
trading, opened the door to a dozen more applications from global
giants like Deutsche Bank (
DB)
and domestic players like Wells Fargo. With many of the permits, the
Fed gave greater and greater leeway in what and how they could trade.
After converting to holding companies, Goldman Sachs and Morgan
Stanley faced greater limitations in which commodities they could
trade. Goldman has approached the Fed several times over the past
year to seek permission to trade in iron ore, but has been rebuffed
since no such U.S. futures contract exists.
Commodity assets and activities "raises potentially serious
public policy concerns," Saule Omarova, (associate professor of
law at University of North Carolina Chapel Hill) said, advocating for
greater disclosure from banks. "This has been going on a long
time that banks have engaged in various levels of physical commodity
dealing," said Pennsylvania Republican Sen. Pat Toomey, adding
that the profitability of commodity handling "might actually
diminish risks rather than enhance risks." While senators
acknowledge that bank ownership of commodities might have some
positive effects on consumer prices, they questioned how Congress and
the Fed should balance regulations on large banks moving forward.
"These institutions are so complex, dense and opaque that they
are impossible to fully understand -
the six largest US. bank
holding companies have 14,420 subsidiaries, only 19 of which are
traditional banks," Ohio Democratic Sen. Sherrod Brown,
chairman of the subcommittee. said. "We've have created a tangle
and it takes time to undo that," said Senator Elizabeth Warren
of Massachusetts, a Democrat. She said her recently introduced "21st
century Glass Steagall" bill would help to "disentangle
what has become a mess that is both hard to regulate and is creating
additional risk." Sherrod Brown said. "After the hearing,
the Senate Banking Committee will ask the banks and the Fed to give
testimony at another hearing in September."
