Has Goldman Sachs rigged the commodities markets?


Goldman Sachs has tried to distance itself from the image of the “vampire squid” it developed during the financial crisis. The findings of a Senate investigation into the commodity market rigging are unlikely to help.

Wall Street banks may have manipulated commodity prices in recent years, increasing costs to consumers, according to the report. The investigation focused on the holdings and transactions of Goldman (SG), JPMorgan Chase (JPM) and Morgan stanley (MRS) in physical goods.

Banks have long been involved in the commodity trade, but they have recently become major players in the transportation and storage of commodities like aluminum, copper and uranium.

The report found that in some cases, banks “have used their physical commodity activities to influence or even manipulate commodity prices.”

Market jam: The investigation focused on Goldman’s links to aluminum, a key metal involved in everything from soda and beer cans to the manufacture of cars and airplanes.

Goldman has encouraged its customers to move aluminum from one warehouse to another, according to the report. The bank has even gone so far as to offer cash incentives to do so.

The transactions, referred to as “merry-go-round” transactions by the report, have contributed to the creation of unprecedented arrears. Some metal owners have to wait up to about two years to get their metal out of storage, according to the report.

Long queues pushed up prices and made it more difficult for aluminum buyers to hedge their price risks. Some industrial aluminum users have claimed the malfunction inflated aluminum costs by $ 3 billion, according to the report.

In testimony to the Senate panel Thursday, Chris Wibbelman, the warehouse operations manager of Goldman known as Metro International, said the transactions had been characterized “incorrectly.”

He said the warehouse company “does not benefit from the queues” and the queues were caused by the decisions of the metal owners, not by Metro.

Goldman noted that there is no shortage of aluminum and that prices have dropped significantly in recent years. While Goldman seeks to sell Metro, the bank is not completely pulling out of the physical commodities business.

Related: Six Banks Fined Over $ 4 Billion In Currency Investigation

Bailout Risk: As if possible manipulation weren’t bad enough, the Senate investigation found that the physical activities of these commodity banks put them at risk of needing another taxpayer-funded bailout.

This is because companies have failed to protect themselves against the risk of a catastrophic event like an oil spill or mine explosion that could expose them to serious liability, as has happened. with “toxic assets” during the 2008 financial crisis.

“More is needed to protect the US financial system and prevent taxpayers from being forced to bail out large financial institutions involved in physical commodities,” according to the report.

Related: 5 Ways Scammers Trick Investors

In testimony Thursday, Morgan Stanley said there were “real and significant” public benefits to allowing banks to be active in physical commodities.

JPMorgan executives told lawmakers the bank has already sold a large chunk of its physical commodities assets and business. He said that in the future, JPMorgan plans to focus on its financial derivatives business, not physical commodities.

CNNMoney (New York) First published on November 20, 2014: 2:16 p.m. ET


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