by Tyler Durden
July 25, 2013
our initial uncovering of the manipulation
and monopolization of the metals warehousing business two years ago, the
last few days have seen the public's attention grabbed by
the reality of what the banks are actually doing.
Following this week's hearing, as the Fed
reconsiders banks roles in non-banking businesses (and the 'societal
benefit'), it seems the CFTC has woken up.
As the WSJ reports, the Department of Justice
has opened an initial probe into the metals warehousing industry and the
Commodity Futures Trading Commission has also sent letters to some firms
telling them to preserve documents, in what is likely the beginning stages
of an investigation.
The probe comes amid growing concern in
Washington over banks' ownership of metals warehouses and other
Banks that trade physical commodities have come under attack by
government officials, companies and consumer groups, who worry about the
ability of the financial sector to exert influence over markets for raw
Mr. Brown held a hearing on the subject this week at which some company
officials alleged banks are deliberately creating shortages of aluminum
and other raw materials for financial gain.
The Federal Reserve has said it
is reconsidering the permission it granted to banks over the past decade
to participate in physical commodity markets. The permission expires
later this year.
U.S. Opens Probe Into Metals Warehousing
by Devlin Barrett and
July 25, 2013
The Department of Justice
has opened an initial probe
into the metals warehousing industry
The Department of Justice has opened an initial
probe into the metals warehousing industry, according to a person familiar
with the matter.
The probe comes amid growing concern in Washington over banks' ownership of
metals warehouses and other commodity assets.
The Commodity Futures Trading Commission has also sent letters to
some firms telling them to preserve documents, in what is likely the
beginning stages of an investigation, according to other people briefed on
Banks that trade physical commodities have come under attack by government
officials, companies and consumer groups, who worry about the ability of the
financial sector to exert influence over markets for raw materials.
On Wednesday, Sen. Sherrod Brown (D., Ohio) said he will continue
pressing banks about their commodities holdings. Mr. Brown held a hearing on
the subject this week at which some company officials alleged banks are
deliberately creating shortages of aluminum and other raw materials for
Federal Reserve has said it is reconsidering the permission it
granted to banks over the past decade to participate in physical commodity
markets. The permission expires later this year.
Ahead of Tomorrow's Hearing on...
Goldman and JPM's Commodity Cartel
by Tyler Durden
July 22, 2013
Back in June 2011 we first reported how "Goldman,
JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De
Beers' Diamond Monopoly" in an article that explained, with great
detail, how Goldman et al engage in artificial commodity traffic
bottlenecking - thanks to owning all the key choke points in the commodity
logistics chain - in order to generate higher end prices, rental income and
numerous additional top and bottom-line externalities and have become the
defacto commodity warehouse monopolists.
Specifically, we compared this activity to
similar carteling practices used by other vertically integrated commodity
cartels such as De Beers:
"While the obvious purpose of "warehousing"
is nothing short of artificially bottlenecking primary supply, these
same warehouses have no problem with acquiring all the product created
by primary producers in real time, and not releasing it into general
circulation: once again, a tactic used by De Beers for decades to keep
the price of diamonds artificially high."
Over the weekend, with a 25 month delay,
the NYT "discovered" just this, reporting
that the abovementioned practice was nothing but "pure gold" to the banks.
It sure is, and will continue to be. And while
we are happy that the mainstream media finally woke up to this practice
which had been known to our readers for over two years, the question is why
The answer is simple - tomorrow, July 23, the
Senate Committee on Banking will hold a hearing titled "Should
Banks Control Power Plants, Warehouses, And Oil Refiners."
While congratulations are also due to the Senate
for finally waking up to this monopolistic travesty conducted by the big
banks, we can only assume that this is due to various key non-bank industry
participants (such as MillerCoors) crying foul so much that even the Fed is
now involved and is supposedly reviewing its own decision from 2003 that
allowed this activity in the first place.
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.
years later, JPMorgan bought one of the world’s biggest metal warehouse
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.
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.
“The Federal Reserve regularly monitors
the commodity activities of supervised firms and is reviewing the
2003 determination that certain commodity activities are
complementary to financial activities and thus permissible for bank
holding companies,” said Barbara Hagenbaugh, a Fed spokeswoman. She
declined to elaborate.
“When Wall Street banks control the
supply of both commodities and financial products, there’s a
potential for anti-competitive behavior and manipulation,” Brown
said in an e-mailed statement.
Goldman Sachs, Morgan Stanley and JPMorgan
are the biggest Wall Street players in physical commodities.
Of course, when one is a monopoly, the revenues
The trick, of course, is to keep Congress very
much unaware of said monopoly and let the good times roll.
The 10 largest banks generated about $6
billion in revenue from commodities, including dealings in physical
materials as well as related financial products, according to a Feb. 15
report from analytics company Coalition. Goldman Sachs ranked No. 1,
followed by JPMorgan.
While banks generally don’t specify their
earnings from physical materials, Goldman Sachs wrote in a quarterly
financial report that it held $7.7 billion of commodities at fair value
as of March 31. Morgan Stanley had $6.7 billion.
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.
Just because questions like these
finally had to be asked, one
has to laugh.
One person not laughing, tough, is Ben
Bernanke - the man whose Fed allowed bank commodity cartelization to
take place originally.
He is certainly not laughing now that he may be
forced to undo this permission, in the process impairing banks to the tune
of billions in revenue: as a reminder, the Fed works purely to benefit
America's banks and to provide them with whatever top-line amenities they
need and are confident they can pass by under the noses of dumb congressmen.
But at least the Fed promises it can "supervise"
all these TBTF banks.
Or can it?
“it is virtually impossible to glean
even a broad overall picture of Goldman Sachs’s, Morgan Stanley’s,
or JPMorgan’s physical commodities and energy activities from their
public filings with the Securities and Exchange Commission and
federal bank regulators,” Saule T. Omarova, a University of North
Carolina-Chapel Hill law professor, wrote in a November 2012
academic paper, 'The
Merchants of Wall Street - Banking, Commerce and Commodities.'
The added complexity makes the financial
system less stable and more difficult to supervise, she said in an
“It stretches regulatory capacity beyond
its limits,” said Omarova, who is slated to be a witness at the
“No regulator in the financial world can
realistically, effectively manage all the risks of an enterprise of
financial activities, but also the marketing of gas, oil,
electricity and metals. How can one banking regulator develop the
expertise to know what’s going on?”
Now that the entire world is looking, and not
just a select subset of Zero Hedge readers, the full extend of Goldman's
monopoly becomes apparent:
Goldman Sachs owns coal mines in Colombia, a
stake in the railroad that transports the coal to port, part of an oil
field off the coast of Angola and one of the largest metals warehouse
networks in the world, among other investments.
Morgan Stanley’s involvement includes
Denver-based TransMontaigne Inc. (TLP), a petroleum and chemical
transportation and storage company, and Heidmar Inc., based in Norwalk,
Connecticut, which manages more than 100 oil tankers, according to its
Mark Lake, a spokesman for New York-based
Morgan Stanley, referred to company regulatory filings that said the
bank didn’t expect to have to divest any of its activities after the
grace period ends. He declined to elaborate or to comment on the Fed’s
announced rule review.
Brian Marchiony, a spokesman for JPMorgan,
also declined to comment on the review, as did Michael DuVally, a
Goldman Sachs spokesman.
In February 2010, Goldman Sachs bought
Romulus, Michigan-based Metro International Trade Services LLC, which as
of July 11 operates 34 out of 39 storage facilities licensed by the
London Metal Exchange in the Detroit area, according to LME data.
Since then, aluminum stockpiles in
Detroit-area warehouses surged 66 percent and now account for 80 percent
of U.S. aluminum inventory monitored by the LME and 27 percent of total
LME aluminum stockpiles, exchange data from July 18 show.
Traders employed by the bank can steer metal owned by others into Metro
facilities, creating a stockpile, said Robert Bernstein, an attorney
with Eaton & Van Winkle LLC in New York.
He represents consumers who have complained
to the LME about what they call artificial shortages of the metal.
“The warehouse companies, which store
both LME and non-LME metals, do not own metal in their facilities,
but merely store it on behalf of the ultimate owners,” said DuVally,
the Goldman Sachs spokesman. “In fact, LME warehouses are actually
prohibited from trading all LME products.”
Right - Goldman is doing humanity a favor
and what not, just like when it was shorting RMBS, when Goldman was merely
"making markets." Or unmarkets
as the case may be.
In the meantime, aluminum prices are surging, as
we said would happen back in June 2011:
Buyers have to pay premiums over the LME
benchmark prices even with a glut of aluminum being produced.
Premiums in the U.S. surged to a record 12
cents to 13 cents a pound in June, almost doubling from 6.5 cents in
summer 2010, according to the most recent data available from Austin,
Texas-based researcher Harbor Intelligence.
Warehouses are creating logjams, said Chris
Thorne, a Beer Institute spokesman.
Naturally, the Vampire Squid is not
alone: JPM, whose commodity group is headed by
Blythe Masters currently under
investigation by FERC with a slap on the wrist settlement pending, is most
certainly involved as well.
JPMorgan, the biggest U.S. bank, inherited
electricity sales arrangements in California and the Midwestern U.S. in
2008 when it bought failing investment bank Bear Stearns Cos.
Its February 2010 purchase of RBS Sempra
Commodities LLP’s worldwide oil and metal investments and European power
and gas assets was also a distressed transaction.
The European Union ordered Royal Bank of
Scotland Group Plc to sell its controlling stake in the firm after a
In short: just like the repeal of Glass
Steagall allowed banks to mix deposit collecting and risk-taking divisions,
so the Fed's landmark 2003 decision allowed banks to commingle financial and
And while the US government, and broader public,
seem largely ignorant and without a care if they end up overpaying billions
more to Goldman's and JPM's employees, one country where commodities are
exceptionally fragmented in their use as both a financial (i.e. paper) and
physical commodity is China - maybe if the Fed will not move, then it will
be up to China to punish the three firms which are set to unleash the same
scheme described above with copper as they have with aluminum.
Because one (or three in this case:
Goldman, JPM and BlackRock)
amass 80% of the world's copper "on behalf of investors" for non-profit
While we don't expect anything new to develop
here, nor anywhere else, until the entire system comes crashing down and
forces a fundamental overhaul of modern finance at the grassroots level,
tomorrow's hearing will be webcast live and will have the following
Ms. Saule Omarova
Associate Professor of Law
University of North Carolina at Chapel Hill School of Law
Mr. Joshua Rosner
Graham Fisher & Company
Mr. Timothy Weiner
Global Risk Manager
Commodities/Metals, MillerCoors LLC
Mr. Randall D. Guynn
Head of Financial Institutions Group
We look forward to seeing how the Chairman, or
his successor, will deflect this one.
Natural History Museum NYC: Squid vs Whale
Goldman, JP Morgan have Now Become...
They Slowly Recreate De Beers' Diamond Monopoly
by Tyler Durden
June 16, 2011
About a month ago we reported on an
inquiry launched into JPM's
"anti-competitive" and "monopolistic" practices on the LME which have
resulted in artificially high prices for a series of commodities which had
been hoarded by the Too Big To Fail bank.
Today, the WSJ continues this investigation into
a practice that is not insular to JPM but also includes Goldman Sachs and
"other owners of large metals warehouses" which can simplistically be
characterized as a De Beers-like attempt to artificially keep prices high
for commodities such as aluminum, courtesy of warehousing massive excess
supply, artificially low market distribution of the final product, while
collecting exorbitant rents in the process.
"Goldman, through its Metro International
Trade Services unit, owns the biggest warehouse complex in the LME
system, a series of 19 buildings in Detroit that house about a quarter
of the aluminum stored in LME facilities.
Coca-Cola and other consumers say that Metro
in particular is allowing the minimum amount of aluminum allowed by the
LME - 1,500 metric tons a day - to leave its facilities, and that Metro
could remove much more, erasing supply bottlenecks and lowering premiums
for physical delivery in the process.
Coca-Cola, which has complained to the LME,
says it can take months to get the metal the company needs, even though
warehouses are allowing aluminum to come in much more quickly.
Warehouses, meantime, collect rent and other fees."
It is not only Goldman's Metro operations, but
includes JP Morgan's Henry Bath division, and naturally commodities behemoth
Glencore, all of which are taking advantage of the LME's guidelines and
rules which make the imposition of a pseudo-monopoly an easy task.
The primary driver of this anti-competitive
behavior is the fact that GS, JPM and Glencore now control virtually the
entire inventory bottlenecking pathways:
"In recent years, major investment banks
like Goldman and J.P. Morgan and commodities houses like Glencore have
been snapping up warehouses around the world, turning the industry from
a disperse grouping of independent operators into another arm of Wall
Street. The LME has licensed about 600 warehouses around the world.
transformation has raised questions about whether the investment banks,
which also have big commodity-trading arms, are able to use their
position as owners of warehouses to manipulate prices to their
And since the outcome of this anti-competitive
delayed tolling collusion ends up having quite an inflationary impact on end
prices, the respective administrations are more than happy to turn a blind
eye to this market dominant behavior which buffers the impact of deflation
on input costs.
We may have seen the end of the OPEC cartel.
Alas, it has been replaced with a far more vicious one - this one having
Goldman Sachs and JP Morgan as its two key members.
WSJ explains further:
The warehousing issue alarmed one trader
enough to seek government intervention. Anthony Lipmann, managing
director of metals trader Lipmann Walton & Co. Ltd., gave evidence to
the U.K. House of Commons Select Committee in May 2011, raising concern
about large banks and trading houses owning facilities that store other
The U.K.'s Office of Fair Trading dismissed
concerns that ownership of warehouses gives certain market players an
unfair advantage, saying on Tuesday that there were no "obvious
competition issues that would merit further investigation at this
Goldman's Detroit warehouse holds about 1.15
million tons out of a total 4.62 million tons in LME-approved
Since Goldman bought Metro early last year,
the wait time for aluminum delivery in Detroit has increased to about
Metro charges its customers 42 cents a day
for storing one metric ton of aluminum in Detroit, which is about the
industry average. At 900,000 tons in the warehouses, Goldman is earning
$378,000 a day on rental costs, or about $79 million in seven months.
"Warehouses are making a lot more money,"
said Jorge Vazquez, managing director of aluminum at Harbor Commodity
Research. Goldman is "really the winner clearly, because if you want to
take metal away from the location, you have to wait up to 10 months to
get your metal out, and in the meantime you're paying rent."
While the obvious purpose of "warehousing" is
nothing short of artificially bottlenecking primary supply, these same
warehouses have no problem with acquiring all the product created by primary
producers in real time, and not releasing it into general circulation: once
again, a tactic used by De Beers for decades to keep the price of diamonds
But unlike De Beers, Goldman also gets to charge
rental fees once demand delivery instructions are sent out.
The rent ends up being substantial due to the
firm's unwillingness to release handily available product to the market in
Metro, meantime, is taking in metal. Metro
also offers cash incentives to producers like Rio Tinto Alcan to store
their metal in Metro's sheds for contracted periods, sometimes as much
as $150 a ton, according to traders.
Once the metal is in the warehouse, the
producers sell ownership to this metal on the open market. The new owner
can't collect his metal for seven months because of the bottleneck. For
that period, the new owner is stuck paying rent to Metro.
"The system is set up like a funnel, so you
can dump large amounts of metal in the front end and only get a little
out at the back end," said David Wilson, director of metals research at
Société Générale SA. "It enables a situation where the rules of the
warehousing system are taken advantage of."
Another beneficiary of this monopoly behavior of
course are the actual metal producers, which benefit from this illegal and
conflicted "middleman" intervention:
Aside from warehouses, producers of the
metal are benefiting, because they are able to charge more for their
metal. Klaus Kleinfeld, chief executive of Alcoa Inc., said in an
interview that supply-and-demand factors are leading prices higher.
Yet it is not even Goldman or JPM's fault: after
all they are merely following the guidelines set up by the LME:
"You can't blame the warehouses," Mr.
U.S. aluminum sheet maker Novelis sent a
letter to the LME in May "expressing concerns" about the warehousing
situation, a company spokesman said.
The complaints led the LME to commission an
independent study into the issue last July. That study recommended a
sliding scale be adopted, rather than the fixed minimum of 1,500 tons a
day. That would result in larger warehouse complexes being required to
release more metal.
It effectively doubles the minimum amount
required to be relinquished by Metro each day.
The ruling would go into effect in April.
The LME board on Thursday, however, failed to reach a consensus on the
While warehousing used to be a last resort
market at inception, it has now become, courtesy of the economies of scale
of the middlemen, the "go-to" market, which makes any normal market clearing
Because should true market clearing be allowed,
the prices for everything from aluminum to copper would plunge immediately:
The situation is made more aggravating for
metal consumers because supply has far outweighed demand for most of the
last decade, and there is more than 4.5 million metric tons of surplus
metal stored in LME's warehouse system.
Alas as pointed out previously, with the
exchanges ultimately merely conforming to the bidding of their host ponzi
scheme governments, which will happily allow even further consolidation
of warehousing facilities by the trio in order to artificially boost
inflation ever higher, the final product is a vicious loop in which everyone
Everyone but the end consumer of course, who is
faced with an anti-competitive system controlled by a handful of Fed-funded
And with China unlikely to open up sales of its
own warehouses (especially since Chinese vendors are now well-known to use
physical copper in storage to write letters of credit against for
speculative purposes) to the market, the system will persevere until such
time as global inflationary powers are finally destroyed and there is a
scramble to dump inventories.
Like what happened in the fall of 2008. At that
point just as the status quo drives prices higher, so the unwind will result
in a massive undershoot of prices from fair values.
Which in turn will allow those insatiable
importers of commoditized product such as China to feel like your typical
mortgage-free living American at a K-mart blue light special.
But of course we don't have to worry about that,
because the central planners will never allow the system to implode like it
did in 2008. After all that would defeat the whole purpose of central
In the meantime, good luck to anyone who wishes
to break the cartel's monopoly in the aluminum, copper or any other