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How Goldman Cost $5 Billion Manipulating Aluminum Inventories (and Copper is Up Next)

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What sexual favors were exchanged so that the New York Times blunted the impact of an important, detailed investigative story on Goldman profiteering, this time in the aluminum market, by releasing it on a heat-addled summer Saturday?

On a high level, the story sets forth a simple and damning case. Not all that long ago, banks were prohibited from being in operating businesses. But the Federal Reserve and Congress have loosened those rules and big financial players have gone full bore backward integrating from commodities trading into owning major components of the delivery and inventorying systems. This doesn’t just give them a big information advantage by having better access to underlying buying and selling activity. It allows them to manipulate inventories, and thus, prices. And Goldman’s aluminum henanigans increased prices all across the market, not just for the customers who chose to use them for warehousing and delivery.

The article A Shuffle of Aluminum, but to Banks, Pure Gold by David Kocieniewski, tells us that the newly-permissive rules allowed Goldman to buy Metro International Trade Services, a concern in Detroit with 27 warehouses that handles a bit over 25% of the aluminum available for delivery. And here’s where the fun and games begin:

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…

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 Times’s sources estimate the price impact across the market at 6 cents per pound, which adds $12 to the price of a typical car. Goldman piously claims it obey all the rules, but obeying the rules is far from operating in a fair or pro-customer manner. Metro’s inventories ballooned from 50,000 tons in 2008 to 850,000 tons in 2010. By 2011, Coca Cola complained to the London Metals Exchange, which attempted to address the situation by increasing the amount that warehouses must ship daily from 1,500 tons to 3,000 tons. But all that appears to have taken place is that Goldman simply shuffles more inventory among the 27 Metro warehouses while thumbing its nose at the LME (its inventories have almost doubled again from the 2010 levels, standing at 1.5 million tons).

The article goes into considerable detail as to how Goldman and its speculator allies manipulate prices (remember that holding inventories off the market results in higher prices, this is supply-demand 101):

Industry analysts and company insiders say that the vast majority of the aluminum being moved around Metro’s warehouses is owned not by manufacturers or wholesalers, but by banks, hedge funds and traders. They buy caches of aluminum in financing deals. Once those deals end and their metal makes it through the queue, the owners can choose to renew them, a process known as rewarranting.

To encourage aluminum speculators to renew their leases, Metro offers some clients incentives of up to $230 a ton, and usually moves their metal from one warehouse to another, according to industry analysts and current and former company employees.

To metal owners, the incentives mean cash upfront and the chance to make more profit if the premiums increase…metal analysts, like Mr. Vazquez at Harbor Aluminum Intelligence, estimate that 90 percent or more of the metal moved at Metro each day goes to another warehouse to play the same game. That figure was confirmed by current and former employees familiar with Metro’s books, who spoke on condition of anonymity because of company policy…

Despite the persistent backlogs, many Metro warehouses operate only one shift and usually sit idle 12 or more hours a day. In a town like Detroit, where factories routinely operate round the clock when necessary, warehouse workers say that low-key pace is uncommon.

When they do work, forklift drivers say, there is much more urgency moving aluminum into, and among, the warehouses than shipping it out. Mr. Clay, the forklift driver, who worked at the Mount Clemens warehouse until February, said that while aluminum was delivered in huge loads by rail car, it left in a relative trickle by truck.

“They’d keep loading up the warehouses and every now and then, when one was totally full they’d shut it down and send the drivers over here to try and fill another one up,” said Mr. Clay, 23.

Because much of the aluminum is simply moved from one Metro facility to another, warehouse workers said they routinely saw the same truck drivers making three or more round trips each day.

There is plenty more damning material in this excellent and important piece, which I strongly urge you to read in full. This is simply another form of looting. And the Times highlights, as we warned, that JP Morgan is running the same trick in copper, and Goldman will join the party:

In 2010, JPMorgan quietly embarked on a huge buying spree in the copper market. Within weeks — by the time it had been identified as the mystery buyer — the bank had amassed $1.5 billion in copper, more than half of the available amount held in all of the warehouses on the exchange. Copper prices spiked in response.

At the same time, JPMorgan began seeking approval of a plan that would ultimately allow it, Goldman Sachs and BlackRock, a large money management firm, to buy 80 percent of the copper available on the market on behalf of investors and hold it in warehouses. The firms assert that these stockpiles, which would be used to back new copper exchange-traded funds, will not affect copper prices. But manufacturers and copper wholesalers warned that the arrangement would squeeze the market and send prices soaring. They asked the S.E.C. to reject the proposal.

After an intensive lobbying campaign by the banks, Mary L. Schapiro, the S.E.C.’s chairwoman, approved the new copper funds last December, during her final days in office. S.E.C. officials said they believed the funds would track the price of copper, not propel it, and concurred with the firms’ contention — disputed by some economists — that reducing the amount of copper on the market would not drive up prices.

Others now fear that Goldman and JPMorgan, which also controls metals warehouses, will repeat the tactics that have run up prices in the aluminum market. Such an outcome, they caution, would ripple through the economy. Consumers would end up paying more for goods as varied as home plumbing equipment, autos, cellphones and flat-screen televisions.

There is a long-shot hope:

All of this could come to an end if the Federal Reserve Board declines to extend the exemptions that allowed Goldman and Morgan Stanley to make major investments in nonfinancial businesses — although there are indications in Washington that the Fed will let the arrangement stand.

The Fed chairmanship is up as of January. The nomination and approval process provides an opportunity for Fed policies to be subjected to scrutiny and debate. Contact your Senators, as well as Elizabeth Warren, and tell them the Fed needs to stop allowing Wall Street to manipulate the prices of critical commodities by getting into the shipping and storage game. And circulate it to friends and colleagues who will would understand the cost and damage done by inflating metals and other commodity prices. The more noise, the better.

Update: And before you think the call for action at the end is quixotic, the lead article at Bloomberg is Fed Reviews Rule on Big Banks’ Commodity Trades After Complaints by Bob Ivry. Some key bits:

When the Federal Reserve gave JPMorgan (JPM) Chase & Co. approval in 2005 for hands-on involvement in commodity markets, it prohibited the bank from expanding into the storage business because of the risk.

While the Fed has never explained why it let that happen, the central bank announced July 19 that it’s reviewing a 2003 precedent that let deposit-taking banks trade physical commodities. Reversing that policy would mark the Fed’s biggest ejection of banks from a market since Congress lifted the Depression-era law against them running securities firms in 1999…

On June 27, four Democratic members of Congress wrote a letter asking Fed Chairman Ben S. Bernanke, among other things, how Fed examiners would account for possible bank runs caused by a bank-owned tanker spilling oil, and how the Fed would resolve a systemically important financial institution’s commodities activities if it were to collapse.

The Senate has hearings on this topic scheduled for July 23, so this media attention is timely.

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103 comments

  1. killben

    Will it help?

    From what we can make out in the last five years is that as long as it is something that goes against Wall Street, you are simply wasting your time.

    1. Anon

      Just to play the devil’s advocate: exactly how does Goldman profit from aluminium warehouses?

      Yes, they can drive up prices temporarily, by hoarding – but doing that they have amassed inventory risk: over a million tons of aluminium worth two billion dollars.

      So how do they loot? They don’t actually sell much aluminium, so they don’t realize profits on price increases.

      The profit from price increases paid by consumers/manufacturing does not go to GS, it goes to aluminium producers. It’s not like GS owns the supply chain.

      1. reprobate

        Are you serious???

        Did you miss that Goldman is a commodities trader?

        First, it can take positions in indexes.

        Second, it can write OTC deriviatives.

        1 + 2 are ways to get levered returns. That’s just for starters. The article, if you bothered to read it, also says GS profits from running the warehouse (more inventories = higher storage charges) but that looks to be secondary.

        The usual part that it is hard to prove in these discussions is “to manipulate price, you need to show inventory effects (hoarding) somewhere”. Here we’ve got cut and dried evidence and you are trying to muddy the water?

        1. rcyran

          agreed, but what are the relative size of these markets – are the derivatives bigger than the underlying? Is this similar to what happened in MBS (where I believe the distortions were mainly in the synthetic market) or is the tail actually wagging the dog?
          I know very little about commodity markets, so it would be interesting to hear from someone who can provide some more details.

          1. rcyran

            My point being, if the tail is bigger than the dog, then that’s really bad for society. The real economy becomes a plaything for paper gambling.

            If the underlying aluminimum market is larger, then the story is more the big risk that GS is taking. There are still pricing distortions, or course. But I wonder if they are picking up nickels in front of a steamroller by holding such a large amounts of a commodity that could plummet.

            1. Anon

              Both index funds and derivatives are bets GS makes with other commodities speculators, so they primarily loot other speculators.

              Since they seem to buy and don’t sell, they cannot possibly take/loot money from consumers and manufacturers.

              1. reprobate

                Can’t you read the post or the NYT story?

                Goldman isn’t just playing against “speculators” it’s playing against real economy users. Didn’t you get that the people who are unhappy about Goldman’s machinations are folks like Coca Cola, who’ve been swawking like mad? Or that the folks who are in this with Goldman (the other users of its warehouse) are other speculators? This looks to a big degree to be the money types screwing the real economy types.

                1. Anon

                  Coca Cola does not pay Goldman: GS only buys aluminium and hoards it – read the NYT article on how Coca Cola avoids the GS warehouses. GS does not own the supply chain.

                  Coca Cola pays aluminium producers .

                  The extra money Goldman extracts is from other speculators (metal futures and derivatives counterparties) – not the “real economy”.

                  The effect on the real economy is that Coca Cola gives more money to aluminium producers, to manufacture one way, environment polluting aluminium cans. (In that limited sense the higher price might even be considered a public service.)

                  It’s all in the NYT article, please go read it.

                  1. PaulArt

                    This argument by anon is similar to the argument that the TBTFs do not gain anything by playing in the CFTC Oil market. Think about it, the people who pay more for gas are paying Exxon not GS and JPM so there is no problem with GS and JPM playing the oil market. Q.E.D

                  2. Nathanael

                    Basically, Goldman is extracting a large amount of aluminum from the market and putting into warehouse hoarding, raising the price of aluminum.

                    Now, *this is a textbook bubble* — eventually the bubble will burst, aluminmum prices will crash, and Goldman will be left sitting on *cheap* aluminum.

                    But it’s very bad for society. Goldman is increasing the *volatility* of aluminum prices, increasing them today (by hoarding), decreasing them in a year or two (when the warehouse stocks all get dumped on the market).

                    Meanwhile, the London Metals Exchange makes money off the “rent” costs at the warehouses. Quite illegally.

                    1. reprobate

                      This is close but you are missing the real beauty of this scheme.

                      The normal way people squeeze markets is by taking a large position. Then they are at risk as to how they unwind without losing money.

                      What everyone here is missing is GOLDMAN IS CREATING A HUGE INVENTORY OVERHANG WITH OTHER PEOPLE”S INVENTORIES! It’s just too fucking brilliant and evil.

                      And they control when and how much they withhold and when they are gonna start bleeding more into the market, and they can position themselves in front of it.

                      I don’t get why this is so hard to understand. It’s just brilliantly terrible.

                    2. Nathanael

                      The profit is all off of fees.

                      Despite this, Goldman is going to end up holding the bag. When the banks designed the Mortgage-Backed Securities, they thought they’d shifted the risk to someone else, and it ended up rebounding on them; same thing will happen.

                      But here’s the problem. The main profit stream is the fees from the storage of the metals. The result is, nastily, that the time to delivery has gone way up.

                      This is the reason that this is going to destroy the metals exchange. The industrial buyers would tolerate price increases, but delivery delays *REALLY* mess up the logistics. The fact that Goldman and LME are cavalier enough to create DELIVERY delays is what’s going to drive aluminum trades off the “open market”.

                    3. Anon

                      The NYT article claims that Coca Cola avoids the GS warehouses entirely – and probably so do other manufacturers. So how can there be delays for Coca Cola?

                      The NYT also fails to mention an important fact: that the U.S. is a net aluminium exporter. Aluminium price increases thus are a net win to the U.S. “real economy” – just like oil price increases generally benefit OPEC producers.

                      All in one, my point still stands: GS probably fleeces other speculators (via price manipulation through artificially inflated delivery times, plus excess fees), not the “real economy”.

                      It is also unclear what exact role storage fees play: are they a method to inflate “costs” of metal derivatives, with kickbacks to index fund managers who elect to store at GS facilities? Or are they a vehicle to exploit the LME’s price calculation formula?

                    4. Yves Smith Post author

                      Can you not READ THE ARTICLE???? It is all explained very clearly there.

                      Coca Cola is not facing delays. The inventory overhang created by Goldman moves prices up FOR EVERYONE IN THE MARKET due to the way LME spot prices are determined. That is why Coca Cola et al are so ripshit. They are hurt whether or not they do business with Goldman.

                    5. Nathanael

                      The scam is actually pretty complicated. Reading the article, I counted three different sources of profiteering.

                      I do wonder how long it’s going to take before the big aluminum buyers refuse to accept LME prices as benchmark. That’s the only way the *big* buyers are getting screwed, is through the manipulation of the LME prices.

                      Little aluminum buyers are getting screwed in multiple ways, including the delivery delays. This is actually more economically destructive.

      2. profoundlogic

        “It’s difficult to get a man to understand something, when his salary depends upon his not understanding it!”

      3. Jim Haygood

        Anon points out inventory risk. That’s what got the Hunt Brothers when they tried to corner silver. It’s what dooms nearly every attempt to corner a physical commodity.

        Sure, Goldman Sachs is evil. I’m less concerned about their operating businesses than the fact that they are allowed to masquerade as a ‘commercial bank’ when they aren’t. GS is an investment bank, and should be rudely yanked off the Federal Reserve sugar tit this freaking instant.

        Having said that, the economic merits of the activity described in the NYT article make no sense. It contains statements such as ‘aluminum industry analysts say’ and ‘a complaint filed by a consortium of beer brewers.’ Why no links to that complaint? Why no links to the LME’s delivery regulations?

        Frankly, I don’t get it. All I see here is a slightly stinky dog’s breakfast of vague and somewhat anonymous allegations. There are better ways to nail the GS evil empire than these crude stabs in the dark.

        1. spiny

          They are making money by charging rent on the storage. And then they can manipulate prices directly by increasing storage time. According to the article, the metal being stored is owned mostly by other investors. The odds of GS holding the bag when the bubble bursts is probably slim to none.

          1. Sue

            I would add that even if Goldman is left holding the bag, individual traders and speculators would have already made lots of money off of these deals, and only the shareholders would have to make up for the loss. IF Goldman is left holding the bag….the financial crisis should have informed us that employees and even managers of these firms are quite amenable to letting the company take the hit if they are raking in the cash beforehand….

            1. Nathanael

              Yep. Goldman Sachs (the company) probably will be left holding the bag when aluminum prices crash…

              …but all the individual executives and traders at Goldman Sachs will have walked off with their millions in ill-gotten profits by then, so what do they care? This is the same attitude which Nozillo had at Countrywide — they don’t care if the company goes under, they got theirs.

        2. LizinOregon

          The New York Times doesn’t do links in news pieces. This is the lead on the front page of my west coast version today. The only place you find links is in blog posts.

      4. digi_owl

        The banksters always have and always will be about arbitrage.

        They skim a fee on every transaction, be it via HFT computer systems, or shipping commodities between warehouses.

        This results in a price difference between the initial sale and the eventual buy to use.

      5. anon2

        By colluding with aluminum makers, Rio tinto and Alcoa. I am willing to bet, these companies forge their production and sale report and in collusion with market maker.

    2. sleeper

      Most likely Goldman doesn’t actally “own” the commodity but rather controls the market through manipulation.

      And fully expect that other markets are manipulated – gold, oil,etc.

      These are sham markets which sooner or later will unwind with speed.

      Expect government bailout version II.

  2. Chris Rogers

    Its all ‘God’s Work’ Yves, so must be a most honourable endeavour, whether its legal or not!!!!!!

  3. profoundlogic

    Great article, and rather timely. The Grey Lady earns a bit of redemption with this one, but only a bit. Interesting that the article suggests that copper is up next while not even mentioning gold and silver. Surely the author understands that these markets have also been “wildly lucrative” for the banks as well.

    LBMA just extended delivery conditions from 2 to 5 days to buy more time as physical inventories are running very low. Bernanke says gold prices are “puzzling”, and that the “gold price going down is not necessarily a bad thing” as it “suggests people have more confidence.”

    More things that make you go hmmm. Sounds like both the Fed and the banks have been caught in yet another credibility trap. Quite comical when you think about it, as the outcome was inevitable. These phDs in economics tried to rationalize putting criminals in charge of our most precious commodity markets and hoped for a positive outcome. Completely laughable. These same morons were laughing and joking a few years ago as we stared into the abyss of one of the biggest crashes in U.S. history, completely oblivious until it hit them in the face.

    Are you feeling more confident?

    1. digi_owl

      Gold and silver matters less because they are not used as much in commodity production. Notice the mention of Coca-Cola, that is because of soda cans. And copper finds its way into anything electric, from wires onwards.

  4. Conscience of a Conservative

    What’s most troubling about Goldman and JP Morgan’s (among other large banks) role in commodity warehousing is how integrated they are. Not only are they ware-housing, but they also obtain the cheapest of all financing as Fed banks, but they are also key hedgers, market makers and counter-parties on all hedge instruments including opaque swap contracts. One again we see that banks are not adding to the economy but subtracting from it by raising transactions costs to end users.

  5. Schofield

    How ironic that Neo-Conservatism’s or Neo-Liberalism’s supposed support of the marketplace was all about the exercise of choice. Today the corruption of government by the above ideologues increasingly reveals the real mission to be support of choice for the few at the expense of the many. A failing paradigm!

    1. Ron

      But they would argue, quite reasonably, that the corruption of government is made possible by the fact that the government has been allowed powers over the marketplace that it should not have. Take the government’s talons out of the market and there is nothing to corrupt. Not only has the finance industry become largely self regulating via the revolving door, but the taxpayers get to replace all the money they will have looted out of the system when it goes unstable. If you think this is a good structure for an economy, God help us.

  6. middle seaman

    Admitting ignorance in finances, my question is: Is it even possible in 21st century’s economy to stop or at least hinder money from making piles of added money?

    Understanding human transaction and the nature of negotiations, my intuition tells provides a negative answer.

    1. Carla

      I think the real question here is: Is it possible to stop or least hinder criminals from committing crimes?

      And the answer is, only if you try.

      RICO, RICO, RICO.

      Tough when the lawmakers and the Justice Dept. are all part of the syndicate.

  7. sublimejah

    On burying the story – the Detroit story was put out with the trash on Friday. The media is not objective in any way it’s all propaganda. Why would they want people to know how much control the banks and corps have over nearly every aspect of our economy? There is nothing to be gained by truth telling, in fact all would be lost if the mask dropped and the real face of finance were seen. They would be seen for the sadisitic obsessive class of arrogant elites they have become. Not a pretty picture and the media serve them well.

    1. Carla

      Actually, this story “A Shuffle of Aluminum” was on the front page of the print edition of the Sunday Times, above the fold. I don’t know how you get more prominent than that.

      1. Nathanael

        A lot of people read the Sunday NYT who don’t read the weekday NYT.

        So this actually was timed for maximum impact.

  8. jerry

    This article is simply nauseating.. the vampire squids strike again. I guess it shows you how much balls the banks really have and how little they are concerned about any regulatory/political backlash. If you just write all of the laws, you’ll never have to worry about breaking them!

    1. petridish

      Which is why use of the words “perfectly legal” has become meaningless, as has the tired old flag-waving saw “a nation of laws.”

        1. digi_owl

          I guess the word looked for is ethical. Sure, it may be legal. But can it be claimed to be ethical?

    1. Anon

      That’s a common misconception: QE does not give banks any money they did not have before – QE swaps (highly liquid) US bonds for (just as liquid) dollars – with virtually no effect on a bank’s balance sheet and assets.

      1. Z

        You don’t know what the hell you are talking about. QE also buys … and inflates … “assets” such as MBSs, which puts caah into banks’ hands that they otherwise would not have. It creates liquidity in in MBS markets … and, again, infates the value of those securities … allowing banks to spend on things like buying aluminim storage facilities that they otherwise wouldn’t have cash on their balance sheets to do.

        Here, why don’t you read a little bit before you start defending the banks … but maybe all you are paid to do is spew pro-banker bullshit.

        http://www.washingtonpost.com/blogs/wonkblog/wp/2012/09/13/qe3-what-is-quantitative-easing-and-will-it-help-the-economy/

        Z

        1. Nathanael

          Yep. QE is actually buying stuff which *isn’t* liquid from the banks. You might think it would be liquid, but it’s not.

        2. jayray

          Quantitative Easing increases the banks’ reserves, however, they can’t loan out these reserves but to other banks. Other banks too have excess reserves so there isn’t really a market. Apart from relieving banks of potentially over-valued assets (and paying them a small amount for these reserves) QE really has no impact on the banks (or the economy).

          It makes for good blogging arguments though.

          1. Z

            To another member of the wall street apologist crew:

            This is irrelevant to the discussion. The point is that the banks can use cash that they wouldn’t otherwise have without QE to buy things like aluminum storage businesses.

            “QE really has no impact on the banks …”

            No, taking damn near valueless securities off of their hands at highly inflated prices that they and the fed deem as fair market value has no impact on the banks. Ha ha ha ha.

            The wall street apologist crew is big on arrogance and obfuscation but rather small on the facts and logic. In other words, they are full of shit, but what do you expect off of paid propagandists.

            Z

            1. jayray

              Geez man! You need to find another outlet for your anger, frustration, whatever.

              I ain’t an apologist for wall street and my response was certainly not irrelevant. I’m telling you that the banks cannot use reserves to buy things. They can’t do anything but sell them to other banks. You may have a point about the “valueless securities”, but I already mentioned that.

              1. F. Beard

                Reserves are pretty much stuck in the banking system since physical cash is not very convenient* but that does not mean that reserves can’t be used for purchases, especially excess reserves.

                *Which is why we need a Postal Savings System that makes no loans to break the banks’ government subsidized monopoly on risk-free fiat storage and transactions.

                1. jayray

                  Maybe it would have been clearer had I written that the excess reserves must remain within the interbank market and that internal demand is low since banks are flooded with excess reserves. QE has little effect on the economy. Investors’ response to QE is a different matter, just like gold-bugs and the price of gold.

  9. F. Beard

    Speculators speculate using credit, no?

    So why do we have a government-privileged credit cartel? To shoot ourselves in the foot?

  10. Teejay

    Months ago I caught the middle of a BBC report of Goldman Sachs hoarding copper in warehouses in China waiting for prices to climb. Hard as I tried I never found a transcript to fill in the details.

  11. diptherio

    At the same time, JPMorgan began seeking approval of a plan that would ultimately allow it, Goldman Sachs and BlackRock, a large money management firm, to buy 80 percent of the copper available on the market on behalf of investors and hold it in warehouses. The firms assert that these stockpiles…will not affect copper prices. But manufacturers and copper wholesalers warned that the arrangement would squeeze the market and send prices soaring…

    …S.E.C. officials said they believed the funds would track the price of copper, not propel it, and concurred with the firms’ contention — disputed by some economists — that reducing the amount of copper on the market would not drive up prices.

    AAARRRGGGHHH!!!! What the what, man! Only some economists think that pulling 80% of copper out of circulation will drive up prices?!? Where are the ones that don’t? Are they willing to go on the record and publicly deny the basics of supply and demand that they endlessly spout in their classrooms?

    How blatant does the official sophistry have to be before we just call it what it is: a bunch of patently ridiculous BS?

    And to all those who think it’s no big deal because of inventory risk (or whatever), please note that they’ve already made $5B off the scheme and even if it does end up biting them in the ass (’cause what, we’re gonna go back to using glass bottles?…or maybe we’ll start making airplanes and cars out of cast iron?) they can always depend on a bailout from the gov’t. Of course, that probably doesn’t bug you if you’re invested in the fund…

      1. Yves Smith Post author

        The Senate hearings on this issue just happen to be this week.

        If you control a lot of inventories, you can more prices both up and down. And if they are mainly other people’s inventories you are able to manipulate (as you are an agent or as in the Goldman case can play delivery games so as to manipulate the inventory) as a trader you can front run prices both by increasing and decreasing inventories.

        If I were JPM, particularly since Josh Rosner, who has written a devastating compilation of JPM’s regulatory violations, is testifying, I’d cool off any activity that people might point to for a bit.

    1. DCM

      Not sure, but another poster pointed out that the 5 billion figure is the supposed amount by which aluminum prices have been inflated. Don’t know what Goldman’s cut of this has been.

  12. Susan the other

    People hoard metals to offset inflation. Seems like that one has been turned on its head since the whole world is spiraling into a manufacturing depression and prolly nobody needs much aluminum. The commodity trust is doing a good job keeping the prices high. Even as they also managed to vanquish gold. As Taibbi says, the whole system is rigged. GS doing the hoarding creates just more monopoly capitalism. Like commoditizing housing and setting up a warehouse named MERS. Nevermind breaking all the securitization rules; the SEC wont mind. And the entire concept of property is up for grabs. Are there any commodity trading rules yet? Are we there yet?

    1. F. Beard

      Et tu, Susan?

      Gold vanquished itself since it is overpriced wrt its uses as a commodity.

      Why? Because idiots think and fascists hope we’ll return to a gold standard.

      1. Susan the other

        You are right, as usual, Beard. Gold has crashed because it has no discernible value. But is it odd that GS and JPM can continue to play away with commodities like aluminum and copper and attempt to make a little something on every derivative. Is this the new model for the world? Derivativism. And if so where is my share?

        1. profoundlogic

          “Gold has crashed because it has no discernible value”

          Another incredible display of ignorance. I believe it was just last year that China was trading gold for Iranian oil. Just because it doesn’t have an identity or mark-to-imagination number stamped on it, doesn’t mean it has no discernible value.

          1. F. Beard

            And Manhattan was bought with trinkets.

            Btw, Napoleon was a hard-money kinda guy and lost to the English who weren’t, except to trick the primitives, a game which continues to this day.

          2. Nathanael

            Gold is useful for computers and jewelry.

            Those are uses, but they aren’t major uses. Most of the gold market is speculative.

  13. backwardsevolution

    I keep reading words such as “the Fed was oblivious” or “Shapiro doesn’t understand”.

    Come on! These people are academics. THEY KNOW EXACTLY WHAT’S GOING ON.

    This is a looting operation(much like De Beers with diamonds). Buying and selling back and forth to themselves, to each other – it’s all been done before. As for risk of price declines – come on! These guys control everything – look at high frequency trading, etc., etc., etc.

    Mafia in suits.

  14. down2long

    Today, elsewhere in the Times is an article on how Obeyme and AG Eric “Place” Holder are going after LEAKERS. Of course, not important if the leakers reveal illegal guvmint activity. Roll everybody up. As Yves says, the punishments will continue until morale improves (or the country collapses from the weight of its own perfidy.) The guy in charge of the leaker investigations comes from the US Navy where he said “It is important to hang an Admiral every once in a while” to teach blind obedience.

    And of course, the article mentions that Obomba has gone after vastly more leakers than “W,” who the Time’s said “wouldn’t waste the political capital on it” because the liberals and the left would’ve caused an outcry. Now of course, “W” had the disinformation “A” team, something Obomba has simply not bothered with, and a quick peak at the “Weapons of Mass Destruction, Mushroom Cloud” campaign proves “W” didn’t need to go after leakers – he created his own very effective propaganda.

    The article alludes to the fact that while left would’ve never stood for this crap from “W,” it seems perfectly sanguine with Obeyme shredding the Constitution (He is an expert at it, obviously, having majored in it.)

    What I find most amazing, is the this is the one area the Repugs and Prez, always find common ground. That should be a clear signal to all that something is rotten in DC.

  15. wallstreetbulls

    the most startling thing to me when I read this is how willing Liberals and Pro Regulation types are accepting of the argument that the actions of a for profit company raises the cost of a product to the end consumer but do not accept that same argument in regards to burdensome and cumbersome government regulations. I wonder how much CAFE standards raise the cost of a US automobile to the purchaser. There is a simple answer to this and that will be allowing a free and open market in Aluminum allowing anyone from Warren Buffet or a group of elderly investors with a few extra dollars to own a share of the warehousing market and lift the regulations of speculators. Believe it or not speculation trading is the ‘Canary in the Coalmine’ for the free market. It is the alarm for these types of shenanigans in the overall fluctuation in price and demand. But Liberal and Conservative big Government types thinks it is much better to allow a bunch of politicians and their aides and political donors to write rules and regs and suddenly we are much better off. WOW.

  16. Dikaios Logos

    Yves,

    I would REALLY like to see an accessible write up on how this works from someone familiar with the microstructure issues in metals trading. While this sets off all sorts of alarm bells for me and you, upper-middlebrow opinion has largely fallen into the trap of “I don’t understand this and it doesn’t jive with my Econ 101-based understanding of the world, ergo it is bunk.” Witness this turd from Matt Yglessias: http://www.slate.com/blogs/moneybox/2013/07/21/goldman_sachs_commodities_scam_how_does_it_work.html

    A huge number of mega fortunes come from manipulating byzantine rules that most people don’t even know exist. This means that these types of reports are always met incredulity and often ridicule. But those same folks dismissing these reports have NEVER seen the contracts involved, both for the physical metal and the derivatives. I think if someone could explain, in great detail and plain English how this allows TBTF institutions to squeeze metal buyers–starting with an understanding of why banks are traditionally prohibited from owning operating companies and getting into how this particular puzzle fits together, piece by piece, it might help the hearings immensely.

    This is just the sort of thing economists, including Krugman, have serious trouble grasping. One of the most legendary LPs in VC once told me that making serious money came down to having “a transactional perspective”, really understanding who was getting what from a deal and seeing that there was much more texture there than almost anyone realizes.

    1. Yves Smith Post author

      Yglesias is a bank apologist moron.

      We had a long-running argument with Krugman in the late spring and summer of 2008 over whether oil prices were being manipulated. Krugman argued that the only way the price could be “too high” is if there were excess inventories, and he could find none, ergo there were none. We faithfully reproduced his chart in ECONNED (see in this post). Krugman has repeatedly discussed this issue and consistently contended you needed to “see” inventories somewhere (the problem is with oil there aren places to hide it that Krugman didn’t incorporate, even when those were pointed out, starting with in the ground, as in simply dialing back production).

      http://www.nakedcapitalism.com/2011/02/krugman-commodity-prices-and-speculators.html

      The New York Times has now identified a ton of excess inventories. For that to produce higher prices is the textbook result, per the chart in the post.

      /Users/susan/Desktop/Screen shot 2013-07-22 at 1.57.58 AM.png

  17. Adrian Haiwei

    So at what point do we definitively cross the “red lines” into certain doom?

    The assholes have clearly taken over every sphere of our economy and politics, captured every legislative body, regulatory body, and court, their sense of entitlement is boundless, their propaganda arms are effective, and they won’t stop until they’ve slurped every last drop of blood from our veins.

    1. Nathanael

      We’re well past. It’s just a question of timing now. After doom comes something else. When?

  18. casino implosion

    They’re allocating capital to its most efficient uses, don’t'cha know. Er, ok, maybe not in this case, but they were driven to it by too much REGULATION!

  19. sd

    Another side of aluminum is that it is heavily subsidized industry because of its energy use.

    Iceland provides Alcoa with massive support for its smelting plants while it also employs a small number of people and pays almost no taxes. Alcoa also has gotten discounted power form New York State to the tune of $5 billion.

  20. Banger

    Really, this is kind of funny, isn’t it? I hope we see the humor in it. This is where we live comrades and there’s really very little we can do about it. Oh, maybe this one will get rolled back and the money people will find some new place to play.

    As long as we believe money is the ultimate arbiter of value this will happen. If you wan’t something else then build new institutions–reform of the current ones is not worth the effort because the values that breed these sorts of actions remain.

  21. GeoH

    This is the kind of inefficiency that ultimately despoils the environment. Fleets of trucks don’t run on air – those are fossil fuels and tons of CO2. The Tar Sands are, no doubt, Gods way of sending a message to GS as to what God wants them to do. Go froth and posture.

  22. allcoppedout

    Banks were into warehouse hoarding in the 18th century and I doubt any of the modern scams are any cleverer. It’s like the over-charging general store in Dodge City. As usual, the law, authorities and sheriff are all bought off. That companies with advanced procurement can’t beat this says a lot. And how would this hoarding fit with just-in-time? This must be just another first use of cheap money theft. Our regulators look increasingly like the people, often French, who write lovely constitutions for third world despots.
    It may be time to take out the professional formulation of laws and take the banksters directly to a court of public scrutiny they can’t pre-buy or load.

  23. Nathanael

    I think it’s important to explain the bigger picture here.

    The aluminum hoarding scheme run by Goldman Sachs and the London Metals Exchange just *destroyed the aluminum spot market*.

    Industrial buyers are going to switch to direct contracts with aluminum producers now — as they already have. They will also start setting up their own stockpiles to avoid “just-in-time” risk.

    Now, they are competing with Goldman Sachs for aluminum, so the price will stay high. But as *all* the industrial buyers *leave the commodities market* because it is manipulated, and switch to direct contracts with producers, this will become the *norm*. The producers will start having to negotiate prices with each buyer; all the contracts will be secret. Really big buyers will buy the aluminum manufacturers to gain vertical integration.

    The “open market” in aluminum will DIE. There will be no quoted price for aluminum any more; there will only be the prices you can negotiated with individual refiners.

    This sort of manipulation in stock markets led to more and more companies going private, and the same damn thing is going to happen to commodities markets. When the banks make the market nonfunctional, the end-users close the market and switch to something other than a market.

    These banks are quite literally destroying the commodities markets. There probably won’t be a “metals exchange” in 10 years.

  24. allcoppedout

    It’s very hard to keep price deals secret and the business of production and stock-holding is complex. Banks like Barings tried to monopolise commodities in the 18th century by buying and hoarding all supplies.

    You’d think some smelter would be in offering Coke a strategic deal. The scary thing is banks using money derived from QE in shady deals like this and not lending for productive gain. This was not what they were given the money for and thus have obtained a pecuniary advantage by deception – or our governments lied to us about investing on Main Street. Both likely guilty.

  25. Tom Maguire

    In my experience, when the Times writes articles about s topic with which I am deeply knowledgeable their effort is shot through with errors, oversimplifications and misunderstandings. Consequently I am always very skeptical when they tackle something beyond pubishing and women’s fashion. OK, men’s fashion too.

    FWIW, other articles indicate that the aluminum queues (and queues in other metals) are a worldwide issue, that warehouses controlled by non-Goldman companies in Vlissingen (Europe) also have long delays, and that the “hoarding” seems to be a post-crash phenomenon where producers kept producing metal and speculators “hoarded” it rather than selling it low prices in a time of extremely limited demand.

    I would be surprised if the Times “Goldman is Evil” coverage is not simplistic.

    1. Yves Smith Post author

      It appears you did not read the post or the actual Times article.

      Goldman is running aluminum around on trucks among its warehouses and has attenuated delivery times to IIRC 16 months. Drivers at the warehouses confirm that Goldman is prioritizing shipments ÅMONG its warehouses way way over shipments in and out of its warehouses in toto. This is to meet the LME delivery requirements, apparently. That this behavior is hard to justify is confirmed by comments by industry experts.

      The onus is on you to deal with the specific claims and evidence in the NYT piece. All you’ve done is handwave and said, “The Times has gotten some stuff wrong before, ergo this is wrong.” Sorry, that’s ad hominem. The Times has also done some good financial reporting (I can point to a lot of stories on the housing beat, which I covered extensively when it was hot).

    2. Nathanael

      Um, Tom, the increased delivery time delays say you’re wrong and the NYT is right.

      1. Tom Maguire

        “It appears you did not read the post or the actual Times article. ”

        Appearance deceive. It also appears that is the only article on this topic you have read.

        “The onus is on you to deal with the specific claims and evidence in the NYT piece. ”

        Hmm. I think the onus is on all of us to bring a bit of skepticism to “the sky is falling” reporting. Or go long grains of salt, which seem to be underutilized and undervalued.

        As an example – the Times theme seems to be that even though customers are screaming for their aluminum Goldman’s drivers interrupt their cigarette breaks only to shuffle a few tons from one warehouse to another.

        And no one finds that hard to believe? No one is intrigued to learn that the same thing is happening at other warehouse complexes not controlled by Goldman and in other metals not affected by US de-regulation? No one wonders why that is only happening now, post financial apocalypse and post commodity price collapse, rather than at some previous point in the long history of the LME?

        Ah, well, says the Times sagely, it is all a matter of deregulation. We are asked to believe that any warehouse operator could have skimmed hundreds of millions by shuffling aluminum held hostage but no one ever thought of it until Evil Goldman did.

        My guess is that speculators have started using the LME warehouses to proivide long-term physical storage during the price collapse (aluminum went from $1.40 to $0.60 from summer 2008 to summer 2009), so that inventory on hand has ballooned. The shuffling has just been to comply with an LME reg; as the Times said, it is all legal, and I remain unconvinced that people who actually want physical delivery of their aluminum are consistently unable to get it. I also suspect that the Times has used the classic populist ploy of blaming speculators for price increases. I wouldn’t be surprised to learn that spot aluminum prices would be lower today if the physical metal were dumped rather than stored, and I wouldn’t be surprised to learn that end-users like ower prices, but that doesn’t mean storage to smooth demand over time is a bad thing.

        That said, I am hardly an expert in the subtleties of the commodity markets. Nor is the typical Times reporter, nor, since we speak of appearances, are the people commenting here. And Sunday is not my best day for heavy researching. But time will tell.

        As a bonus, here is a excerpt from a Bloomberg article from July 1, 2013. FWIW, this topic has been kicked around for several years:

        “LME users have said long waits for withdrawals helped to lift premiums for metals from aluminum to copper. The Beer Institute, representing members including MillerCoors LLC, last month urged the exchange to act to reduce waiting times. Sites with lengthy waits include Johor in Malaysia, the biggest LME copper repository, according to Societe Generale SA.

        “If enacted, it will help address the issue, though it will be a gradual process,” said Leon Westgate, an analyst at Standard Bank Plc in London. “The main thing is it looks like it may improve competition in terms of other warehouse locations outside Antwerp, Vlissingen, Johor, New Orleans and Detroit.”

        The LME has a network of 765 warehouses in 36 locations worldwide, the exchange’s website shows. There are only five sites where consumers must wait for withdrawals, according to Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd., which owns the LME.
        Detroit, Antwerp

        Detroit, New Orleans, the Belgian city of Antwerp and Vlissingen in the Netherlands are the other locations with long waits for metal, according to Societe Generale.

        The LME delisted 83 warehouses and other storage facilities this year as more metal was being drawn to fewer locations. Vlissingen and Detroit account for 64 percent of aluminum inventories tracked by the exchange, and copper stocks in Johor, New Orleans and Antwerp come to 89 percent of the global total, figures compiled by Bloomberg show.”

        1. Yves Smith Post author

          You have still not dealt with the specific evidence in the article. Your response isn’t even close to on target. You are still giving generalizations v. a very specific fact set, INCLUDING excuses made by Goldman for slow deliveries which multiple people who have worked in the warehouse rebut.

          Moreover, since the Goldman operations account of 1/4 of the aluminum deliveries, the delays referenced in aluminum in the BBerg article could well be SOLELY the result of the Goldman practices. The NYT article clearly states producers (who need the metal on a timely basis) have diverted their orders away from Goldman out of their frustration with the delays in its warehouse. That’s a strong indication that the delays are indeed specific to Goldman since the users want and are finding much faster delivery elsewhere.

        2. Nathanael

          It appears that producers are actually bypassing the LME entirely, as much as they possibly can.

          The LME seems to be in on the scam with Goldman, according to the NYT article.

  26. Fabricio

    I have a brilliant idea, lets create a justice system where people that commit crimes, be it against people or with money they are due processed by their crimes and when found guilty they go to a specific location where they are deprived of their liberty for some time, where the time depends on the crime they have done. What do you think of it?
    Oh wait, how stupid of me, we have that already, but people continue to commit crimes. The only logical conclusion is that this system is not working properly. Maybe it has something to do with the fact that people are not being accountable for their crimes.
    Anyway, what do I know, I am just someone that works honestly to pay for my living, I am sure I know nothing compared to all these big brains that make these “schemas” to make money.

  27. fatcat

    So, is there a law against hoarding things? People do it with Gold all the time. The federal government is guilty of hoarding gold, then. G&S is doing it with aluminum.

    Sound like the government should allow more aluminum manufacturing plants to be build. This type of hoarding and manipulation results when government will not let the free market work. The government (EPA) is not letting many new manufacturing plants of any kind to be built.

    1. Tom Maguire

      “Sound like the government should allow more aluminum manufacturing plants to be build.”

      Not necessarily. Global demand collapsed in 2009. In response, aluminum producers could have (1) stopped (or reduced) extracting ore, (2) stopped smelting ore into aluminum, or (3) stored newly-smelted aluminum rather than selling it (at glut prices) to the few end-users still buying.

      In a proper market, choice (3) ought to be on the table, at least for a metal (The Saudis simply pump less oil when prices collapse, but storing crude or refined oil in huge quantities is problematic.)

      So producers kept people working at the mines and smelters and Evil Speculators bought and held the output against the day, presumably well in the future, when prices would recover. This smoothing of prices over fluctuations in supply and demand is why we have these markets.

      Yet now we hear from the end-users that would profit from lower spot prices that this is hoarding and price manipulation. Please. The Twilight Struggle between end-users and speculators never ocurred in aluminum or copper before Goldman arrived in 2010. Really?

      I do love this, from the post:

      “And before you think the call for action at the end is quixotic…”

      Actually, I think this NY Times story is a recycled press release from the Democratic chairman holding a hearing this Tuesday. You say quixotical, I say cynical…

      1. Nathanael

        Stop making shit up, liar. Do you work for Goldman, for the LME, or for one of the hedge funds which Goldman and the LME are using as stooges? Obviously it’s one of them.

  28. Tom Maguire

    They told me there would be no math…

    From early in the story:

    “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.”

    And later:

    “The result is an additional cost of about $2 for the 35 pounds of aluminum used to manufacture 1,000 beverage cans, investment analysts say…”

    $2 per 1000 cans is two-tenths of a cent per can, not one tenth. Oh, my – maybe Goldman et all have made off with $10 billion?

    Maybe! Or maybe not. A bit of poking at the US Geological Survey website reveals that the total value of aluminum consumed in the US in 2012 was about $10 billion dollars. From 2010 to 2012, the total value is roughly $26 billion.

    So maybe Goldman’s little dodge ramped prices up by one-third. Even the $5 billion claimed by the Times would be 20% of total value of consumption.

    But that Times figure turns out to be BS. Aluminum (again per the USGS) was roughly a dollar a pound in 2012. So 2 dollars per 35 pounds to make 1000 cans is 2 dollars out of 35, or about 6% of the gross cost, not 20%. That would jibe with the notion (reported elsewhere) that the storage premium has doubled from about 6 cents per pound to about 12 cents per pound.

    Well. $1.7 billion of additional costs to the consumer is not chump change, although (contra the headline here) it is not profit to Goldman, either.

    1. Yves Smith Post author

      You apparently missed wholesale costs v. markups through the supply chain. Even in simple wholesale v. retail is a 2-3X markup in a lot of products. They said “cost consumer” when they referenced the $5 billion, so this would be the effect of higher wholesale costs on final consumer prices.

      The Times does not make up numbers. I’ve been through fact checking with them on op-eds. They don’t do their own extrapolation on this. Everything of this nature would come from analysts or other sources.

      1. Tom Maguire

        From the article:

        “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. ”

        Or a bit later:

        “The delays are so acute that Coca-Cola and many other manufacturers avoid buying aluminum stored here. Nonetheless, they still pay the higher price. ”

        So if most of the metal does not pass through a Goldman warehouse most of that “$5 billion”, or whatever the figure, doesn’t go to Goldman.

        So Goldman is running this scam to benefit producers?

        “You apparently missed wholesale costs v. markups through the supply chain.”

        I apparently missed it in the story as well. Or are we just making stuff up and (dare I say it) hand-waving to pretend the Times story is accurate?

        “Everything of this nature would come from analysts or other sources.”

        Well, per a Bloomberg story the Beer Institute claims that the inflated premium is costing people $3 billion per year. No word on whether that is globally or in the US. But if is in the US, that is $3 billion on a $10 billion market – yikes! In any case, your thoughts as to which side of the debate the Beer Institute is on and whether they might shade their cost estimate to the high side? Or is Goldman alone in experiencing and acting on its greed?

        From the post:

        “The Times’s sources estimate the price impact across the market at 6 cents per pound, which adds $12 to the price of a typical car.”

        Is “6 cents per pound” in the article, because I don’t see it explicitly. Whatever, we both did the math.

        We agree that the premium is increased by 6%. On a $10 billion dollar/year US market, that is $600 million, most of which goes to producers rather than warehouse operators.

        1. Nathanael

          You really are not paying attention. Probably working for LME or Goldman or something.

          For the peanut gallery:
          (1) LME is owned by warehousers. LME is increasing the delays in delivery in order to increase warehouse fees — which its owners get — with Goldman Sachs assisting in the design of the scam.
          (2) Hedge funds & similar, with the aid of Goldman Sachs, are storing their speculative aluminum purchases in these warehouses. Goldman Sachs profits from fees paid by these funds.
          (3) The effect is to make the LME an unsafe place to buy aluminum, because you can’t get timely delivery. The result is that the major buyers are going directly to the aluminum refineries.
          (4) The aluminum refineries are pegging their prices to the LME prices, thus causing a (small) increase in price even for buyers like Coca-Cola who avoid the LME. This is what Coca-Cola is complaining about. It is strictly a side-effect, however.
          (5) The real profit is being made by extracting warehousing fees from small aluminum buyers (forced to use the LME) and from the speculative hedge funds, and by Goldman extracting fees from the hedge funds for designing the whole scam.
          (6) The disaster is that, as a side effect, they have destroyed the delivery system for aluminum, as I described in an earlier comment.
          (7) Goldman thinks that it’s saddled the hedge funds etc. with all the losses for the aluminum. But I’ll lay bets another division of Goldman has been stupid enough to invest in the very same funds — that’s what happened with the fraudulent mortgage-backed securities. One division doesn’t tell the other divisions when it’s setting up a fraud.

  29. Willy Billy

    I enjoyed reading REPROBATE’S comments and observations: the many sided evil brilliance that GS has used. However, REPROBATE would probably gain more by not using derogatory words, phrases, and clauses in his replies to those who do not understand the OTC, derivatives, warehousing, corruption between the big banks, the Fed and Congressmen, and more. BTW: you misspelled the word “squawking”.
    Be humble, my man, with your insight. I believe that one goal of a contemporary critic should be how to inform those who the media have disinformed and misinformed (e.g., TV, radio, and other “privately” owned media).

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