For the next two days, two Goldman Sachs executives will be testifying on Capitol Hill about the bank’s role in commodity markets, specifically in metals like aluminium and uranium.
Legislators will try to understand whether Goldman took over the distribution of these commodities to such an extent that it was able to lengthen the time the metals sat in warehouses, thus increasing demand in price.
These are the alleged “merry-go-round” deals that sent goods on a winding path to somewhere… but slowly.
This is what Senators John McCain (R-AZ) and Senator Carl Levin (D-MI) found over the course of a two year investigation into all of Wall Street’s involvement in commodities markets. During the financial crisis, bank businesses were bought, sold and rescued in a way that complicated previous regulation on banks and the commodities they could hold.
Now politicians fear that Wall Street controls too much of the market — Greg Agran, global co-head of Commodities Trading, and Jacques Gabillon, global head of the Global Commodities Principal Investment Group, will be answering for that (read their testimonies here).
In Goldman’s “merry-go-round” case, Senators allege that the bank struck deals with commodities firms, like Glencore, and bought key warehouses.
Here’s how the Senators wrote it out in their statement. This particular release focuses on a warehouse Goldman bought in Detroit called metro Trade Services International(emphasis ours):
Since Goldman bought Metro in 2010, Metro warehouses have accumulated up to 85 per cent of the U.S. LME [London Metals Exchange] aluminium storage market…
Since Goldman took over the warehouses, the wait to withdraw LME-warranted metal has increased from about 40 days to more than 600 days, reducing aluminium availability and tripling the regional premium for storage and delivery costs…
The investigation revealed a number of previously unknown details about these deals: that Goldman’s warehouse company paid metal owners to engage in “merry-go-round” deals that shuttled metal from building to building without actually shipping aluminium out of Metro’s system; that the deals were approved by Metro’s board, which consisted entirely of Goldman employees; and that a Metro executive raised concerns internally about the appropriateness of such “queue management.”…
The Metro system for transporting metal that was part of a merry-go-round deal produced some unusual metal movements. For example, on October 2, 2013, several trucks were loaded with aluminium at a Metro warehouse on Lafayette Street in Mount Clemens, Michigan, destined for another Metro warehouse about twelve miles away. That same day, several trucks were loaded with aluminium at a third Metro warehouse in New Baltimore, Michigan, and shipped to the Lafayette Street warehouse.
The next day, the Lafayette Street warehouse again shipped out several truckloads of aluminium only to be on the receiving end of metal shipments the day after that.1239 In short, over the space of two days, the Lafayette Street warehouse saw truckloads of virtually identical aluminium shipments depart, arrive, depart, and arrive again…
On another occasion, in November, 2013 Metro loaded aluminium out of one warehouse and moved it into another warehouse about 200 feet away across a parking lot. Goldman told the Subcommittee that warehouse personnel didn’t know whether the metal was moved across the parking lot on the property to the second warehouse, or instead was driven around the block on public streets. In any event, multiple trucks trundled tons of aluminium from one warehouse location to the other just a few feet away…
On another three-day period in December 2013, pursuant to a merry-go-round deal, trucks carrying tons of aluminium transported that aluminium to and from the exact same warehouses in a circular pattern at odds with rational warehouse activity. The trucks loaded the aluminium from the first warehouse, unloaded it at the second, picked up different lots of aluminium from the second warehouse, and drove it to the first where it was unloaded. Those trucks bearing similar loads of aluminium did not transport the metal for free, but imposed substantial costs on Metro to carry out the transactions.”
Goldman counters that its role in the market is normal (not outsized) and that of a market maker. It also says that prices haven’t really been impacted as much as the Senators (and some big companies that use the commodities) maintain.
But the price of the commodities isn’t the only problem Senators see here. The other problem is the risk these banks take in owning commodities. That is why regulation existed about what physical commodities banks could hold existed in the first place.
Levin and McCain point out that if one of these banks had, say, a BP-sized oil spill, they wouldn’t be able to cover their damages with their existing capital. Specifically, their committee found that Goldman was holding commodities worth 12% of their Tier 1 capital.
In other words, if something happened Goldman might need rescuing.
That’s a nasty flashback.