I had a hunch that David Kocieniewski’s piece on Goldman Sachs’s metals maneuvers would stand up in the face of the severest scrutiny, and little in this Goldman press release on the ensuing contretemps suggests otherwise.
To be sure, the press release, “Goldman Sachs and Physical Commodities,” doesn’t mention the Times by name and is directed at the wider flap, including Senate hearings, that the piece provoked. But, still, let’s face it, this is a response to the Times.
And, for the sake of perspective, this rather mild dispute is nothing like the dramatic standoffs between the bank and the newspaper during the throes of the financial crisis when Goldman took issue with the Times’s reporting on its role and purported gain from the AIG bailout.
I assessed the claims at the time and sided with the Times—mostly.
Still, the recent Times piece makes some serious claims: namely that since Goldman bought a Detroit-area warehouse company three years ago, the pace of shipments out of the plant has slowed to crawl, increasing the amount of rent the Goldman unit can charge companies that use it and sending the price of aluminum higher generally for reasons discussed below. The story was illustrated with a memorable anecdote: warehouse workers moving the metal from one Goldman-owned warehouse to another for no apparent purpose other than to comply with industry regulations while doing nothing to alleviate the logjam. And while the unit has attributed the delays to logistical problems, including a shortage of trucks and forklift drivers, the Times says that “interviews with several current and former Metro employees, as well as someone with direct knowledge of the company’s business plan, suggest the longer waiting times are part of the company’s strategy and help Goldman increase its profits from the warehouses.”
Further, the story usefully relayed regulators’ all too critical role: how an exception allowed by Goldman’s regulator, the Federal Reserve, lifted a ban on bank holding companies from owning physical commodity trading assets; that then-outgoing Securities and Exchange Commission chairwoman Mary Schapiro granted the firm permission to start a similar business in copper; and that the warehouse company’s self-regulator, the London Metals Exchange, was actually owned by big banks, including Goldman.
In its dozen-point discussion of its commodities business, Goldman makes fair points, but essentially sidesteps nearly all of the Times’s assertions. Let’s take a look at a few.
One is that Goldman’s stake in the aluminum market is not really that big.
• Aluminum stored in Metro warehouses amounts to approximately 1.5 million tonnes, compared with global aluminum production in 2012 of about 48 million tonnes.
• Approximately 95 percent of the aluminum that is used in manufacturing is sourced from producers and dealers outside of the LME warehouse system.
The Times, though, says something different (my emphasis): “More than a quarter of the supply of aluminum available on the market is kept in the company’s Detroit-area warehouses.
The Times figure is a subset of the former. And though aluminum markets are murky, experts have chimed in that it’s far from out of question that the logjam at Goldman’s warehouse could have impacted the price.
Also from Goldman:
• Delivered aluminum prices are nearly 40 percent lower than they were in 2006. The warehousing system is not driving up the price of aluminum.
Well, for one thing, in 2006 we had a housing bubble followed by a Global Financial Crisis (which some observers, including governmental authorities, believe Goldman had something to do with: See, for example, Chapter VI: “Investment Bank Abuse: Case Study of Goldman Sachs and Deutsche Bank.”). The Times’s point is again different from the one Goldman is making: that Goldman’s activities are raising aluminum prices higher than they would normally be absent the problems in Detroit:
[B]ecause 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.
Business Insider quotes Jeffrey Carter, a former board member of the Chicago Mercantile exchange and writer of the blog, Points and Figures, who puts it this way: “They [Goldman] can influence the price heavily because they affect a price where the entire market pegs.”
Goldman also says this:
Recent news reports have inaccurately accused Metro of deliberately creating aluminum shortages and incorrectly asserted that Metro moves aluminum from one warehouse to another in order to earn more rent fees.
• In fact, it is the owners of the metal who direct warehouse operators to dispose of stored metal or transport metal from LME-approved warehouses to warehouses outside the LME system to meet their own needs or objectives.
The idea here is that at the behest of tenants, the company is moving the metal from the more expensive LME space to cheaper non-LME space, also owned by Goldman.
In an interview, Goldman spokesman Michael DuVally adds that the three forklift drivers quoted by name in the Times story discussing moving metal from warehouse to warehouse all worked for the company for less than two and half months, “so it’s possible that they didn’t understand what was going on.”
Now, the paper’s main point was about the shipping slowdown generally, that it was part of a deliberate strategy. But the Times does imply, even if it doesn’t state outright, that the metal shuffling was a way to hew to the strategy while narrowly complying with industry rules.
On the other hand, it’s possible that the workers knew quite well what was going on and that the Times’s unnamed sources confirming the general idea did, too. The possibility that the Goldman unit moved metal on its own, absent tenant orders, and that some made its way from one LME warehouse to another, is far from foreclosed.
As for what it was doing in the physical commodities business in the first place, the regulatory exceptions that allowed it, and the wider questions of the soundness and fairness of a financial institutions controlling the movement of a sizable share of a market in which it trades, the Goldman release is silent.
Strange your hunch flopped, but you carry on here as if it didn't. Even the points you call out don't pan out, and beyond that the article's strong narrative now seems an exercise in misdirection. It even obscures its sources by calling the piece a Times "investigation", so we can't really tell whose interests are being advanced, except what we might guess from a few quotes.
I guess you missed the factual point that the load out has increased, not "slowed to a crawl"? And we read LME is set to raise the minimum load out further, but perhaps not until next year.
The article implies Metro is shuffling aluminum between its own warehouses as a scheme, but responses indicate metal is shipped under the direction of the owner (which is never Metro) often to a cheaper warehouse. The Times should just concede the point that you call "far from forclosed" is in fact bogus unless they have more than innuendo in support.
The regulation point made in the article hardly seems like a clever connection that the author put together, rather it's clearly the point of view his sources are pushing to achieve some advantage. In that context, it might have made sense to point out that buying a warehouse operation, like office towers, etc, is a pretty ordinary merchant banking activity, and the banks with big commodity businesses have been in the space for a long time, not only recently due to looser rules.
The article is also written to confuse the dollar amounts, so that several publications' follow on pieces claimed GS earned $5B from the alleged schemes. Only further down we learn the whole operation was bought for $550M in 2010 and might now collect $250M rent annually, only some portion of which would be profit. We have to read other sources to learn Metro was apparently being shopped around in April, and we have to guess what might have been an acceptable sale price.
It does seem that LME is very clubby and metals storage in general is straining under market trends, with many end users unhappy about large stockpiles and long queues. But the piece tries to tell a villain story an invokes mysterious formulas that may not really exist in order to make a splash. In doing so, it is way too credulous about the huge suppliers and consumers in the market with dominating positions. It naively champions their pet political points while giving them anonymity and without pointing out any countervailing points. Overall not a good service to the public readership at all.
#1 Posted by Anonymous, CJR on Mon 29 Jul 2013 at 02:47 AM