Banks' hold on commodities under scrutiny
A tactic devised by Goldman Sachs and others that has inflated the price of aluminum - and ultimately cost consumers billions of dollars - is coming under federal scrutiny in the United States.
The Commodity Futures Trading Commission has taken the first step in an examination of warehouse operations controlled by Goldman Sachs, Glencore Xstrata, Noble Group and others, and used to store vast amounts of aluminum.
A Senate committee is preparing to open hearings this week on how Wall Street has extended its reach beyond banking and into global markets for essential commodities. The panel is expected to focus on how banks have taken advantage of loosened federal regulation to buy warehouses, pipelines, oil tankers and other infrastructure used to store basic goods and deliver them to consumers.
The question is whether banks should control the storage and shipment of commodities. 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 arm's length from their banking business, as required by regulators.
Goldman has exploited industry pricing regulations set by the London Metal Exchange by shuffling aluminium among the 27 warehouses it controls in the Detroit area. The manoeuvre lengthens storage times and generates millions a year in profit for Goldmans, which charges rent to store the metal for customers, the investigation found. The CFTC issued notices last week requiring the firms to retain internal documents and emails related to the businesses.
The delays at Goldman's Detroit-area warehouses, which are owned by a subsidiary, Metro International Trade Services, make aluminium more expensive because of a formula used to determine the cost of the metal on the spot market. The delays are so long that Coca-Cola and many other manufacturers avoid buying aluminium stored there. Nonetheless, they still pay the higher price.
A Goldman Sachs spokesman said the firm had arranged its ownership of Metro to be in complete compliance.
Wall Street's manoeuvrings in the commodities markets have added many billions to the coffers of investment banks such as Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more for petrol, electricity and a wide range of products, from cars to mobile phones. In the last year, federal authorities have accused three banks, including JPMorgan, of rigging electricity prices. On Monday, JPMorgan was working to reach a settlement that could cost it $US500 million ($540 million).
It is unclear if the big banks would be required to divest themselves of their commodities operations. Goldman Sachs and Morgan Stanley purchased some of these operations as part of their merchant banking units, and regulations give them 10 years from the date of purchase to sell them. Goldmans bought Metro International three years ago, meaning it could hold on to the warehouse company until at least 2020.