Although the rent on the stored aluminum - Goldman isn't allowed to actually own the commodity - is just pennies a day, the vast amount of the metal it has stored in its 27 Detroit warehouses and the "warehouse shuffle" strategy that enables it to extend the rental period for months on end adds up.
Through the Metro International Trade Services subsidiary it bought in 2010, Goldman has accumulated 1.4 million tons of aluminum, which it stores at about 48 cents per ton per day. That's about $672,000 per day of revenue - nearly half a billion a year.
Experts say the warehouse shuffle game ultimately raises the price of aluminum to manufacturers - everything from beer and soda companies to automakers. That extra cost, about $5 billion over the past three years, is passed on to consumers - you and me.
"What Goldman is doing is a new twist on an old game, it's called daisy-chaining," said Money Morning Capital Wave Strategist Shah Gilani, who wrote on this topic himself on his Wall Street Insights and Indictments web site. "The story here is that Goldman is allowed, by the Fed and the SEC and Congress, to own these warehouses in order to get around rules governing storing metals to prevent price manipulation to manipulate the price of aluminum higher, which costs us all more."
And Gilani isn’t happy about it.
“Talk about redistribution policies, this is the same old game with a newer twist: Take from the middle class and give to the biggest, richest banks so they can pay their legal bills and settlement fines to keep the coffers of politicians full. It's sickening,” he said.
Anyone who watches the Big Banks of Wall Street will not be surprised to learn that Goldman isn't the only bank playing the game, and aluminum isn't the only commodity they play with...
How the Goldman Sachs Warehouse Shuffle Works
Although the banks can't own the commodities themselves, they can store commodities for others and charge rent.
That's why Goldman bought Metro International in 2010. That same year Swiss-based Glencore International bought Italy's Pacorini for the same reason. Glencore does the same warehouse shuffle at its facilities in the Netherlands.
Metro immediately started stockpiling aluminum, with its stores rising from 50,000 tons in 2008 to 850,000 in 2010 to 1.5 million now.
The entities that own the aluminum, like the beer and soda companies, pay companies like Metro to store their aluminum until they need it.
Before Goldman bought Metro, it only took about six months to get aluminum out of a Metro warehouse; since 2010 the wait has stretched to 16 months or more, with Goldman collecting rent all the while.
According to the London Metal Exchange, the rule-making body that oversees 719 metal commodity warehouses around the world, warehouse operators are required to move at least 3,000 tons of aluminum out every day.
At Metro, that means loading trucks with aluminum from one warehouse and moving it to another warehouse, then reloading the truck with different aluminum for transport back to the original warehouse.
The metal moves, as per the rule, but stays in Metro's control. Not only does this warehouse shuffle generate rental income for Goldman, but keeping large amounts of aluminum in storage has caused the spot price for the metal to double since 2010.
"It's a totally artificial cost," Jorge Vazquez, managing director at Harbor Aluminum Intelligence, a commodities consulting firm, told The New York Times. "It's a drag on the economy. Everyone pays for it."
Why Goldman Sachs Gets Away With It
While many have complained about the warehouse shuffle and its impact on aluminum prices, it's all completely legal. And Goldman has denied that it delays aluminum shipments on purpose.
But those who should be doing something about it have mostly stood by doing nothing.
The London Metal Exchange, which could create more stringent rules, until last year was controlled by its members -- you know, big banks like Goldman Sachs. What's more, the LME gets a 1% cut of all warehouse rents worldwide, so it has an incentive not to rock the boat.
The new owners of the LME have proposed some new rules to take effect in April 2014 that they say would curb the warehouse shuffle. But it may well turn out that the new regulations, like the rule requiring 3,000 tons move per day, will be just as easily dodged.
In the U.S., no government entity seems particularly interested in cracking down on Goldman's aluminum shenanigans.
Indeed, they allowed it to happen. The Federal Reserve and Congress loosened restrictions in the 1990s that previously prevented Big Banks from having anything to do with managing physical commodities.
The Commodity Futures Trading Commission, meanwhile, claims it has no jurisdiction over Goldman's activities because the actual trading occurs in London.
The Senate Banking Committee held a hearing Tuesday to gather information from several critics of the warehouse shuffle, but it's a Grand Canyon-sized gap from a hearing to enacting legislation.
Business as Usual for the Big Banks
The same rules that allow Goldman to play games with aluminum also allow the Big Banks to dabble in other commodities.
Experts have estimated that similar games with oil, where the Big Banks can own warehouses, tankers, pipelines and other infrastructure, cost consumers $200 billion a year.
"When Wall Street banks control the supply of both commodities and financial products, there's a potential for anti-competitive behavior and manipulation," Sen. Sherrod Brown, D-OH, a member of the Senate Banking Committee, told the Huffington Post. "It also exposes these megabanks -- and the entire financial system -- to undue risk."
Another expert, Joshua Rosner, managing director at independent research firm Graham Fisher & Co, has warned that letting Big Banks manage physical commodities encourages the sharing of inside information with their trading desks, who often make big bets on derivatives tied to commodities.
"If banks own storage, distribution, transmission or generating assets, they have the ability to manipulate prices for the benefit of their own balance sheet, to the disadvantage of the public interest, which is why they were prohibited from such activities after the Great Depression to the passage of Gramm-Leach-Bliley in 1999," said Rosner, who also testified at Tuesday's Senate hearing.
Despite the protests, it's likely that the Big Banks will continue to get more heavily involved in commodities.
In fact, they've already identified another industrial metal that could become far more lucrative than aluminum: copper.
But given what's happened with aluminum and the warehouse shuffle, investors should have learned a lesson - it's better to play along with the Big Banks than to fight them.
Related Articles and News:
- Money Morning:
Banks Caught Manipulating Electricity Trading Now Face Billions in Fines
- Money Morning:
Goldman Sachs Is Manipulating Gold Prices Right Before Your Eyes
- Money Morning:
The Dirty Secret Behind Goldman Sachs' Conviction Buy List
- Huffington Post:
Beer Brewers Blast Wall Street Banks Over Aluminum Business Amid Congressional Scrutiny
- The New York Times:
A Shuffle of Aluminum, but to Banks, Pure Gold
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.