Dave Kocieniewski’s corker in yesterday’s Times is just a gorgeous piece of work, as an investigation, a piece of writing, and as a window onto the sad state of our financialized economy and collapsed regulatory regime.
It’s, like, nice. [UPDATE: But not, like, first to the topic. See my note below.]
The piece has something for everyone suffering from Wall Street scandal deprivation—it’s been months since Libor—and those curious about what investment banks are doing these days now that the blood funnel has finished with lower-middle class homeowners. Here is a star-studded cast of conflicted self-regulators (check); round-heeled government regulators (take a bow, Federal Reserve), a goodbye present from Mary L. Schapiro, and Pinteresque comic relief from forklift operators whose job it was uselessly to shuffle aluminum from one Goldman warehouse to another.
As Kocieniewski reveals, ever since Goldman Sachs bought a Detroit area warehouse company, one of the country’s largest storers of aluminum three year ago, the waiting time for delivery of the metal has soared 20 fold, from six weeks to 16 months. The delays add a soupcon of extra cost—an estimated $5 billion total, to everything from cars to cans of Coke—while helping Goldman to boost materially its commodities profits. Storage cost, apparently, is a major component of the premium added to the price of all aluminum sold on the spot market, so, the Times says, the delays mean higher prices for nearly everyone. The delay also just adds rent that Goldman can charge companies, those that actually make something, including Coca-Cola itself, which duly complained to the industry’s conflicted self regulator, the London Metals Exchange, owned by members of the exchange, including, Citigroup, Barclays, and yes, Goldman itself. Adding an element of the surreal to this rentier’s dream, industry rules require at least 3,000 of the 1.5 million tons of the metal sitting in Goldman’s warehouse to be moved each day. But instead of moving it to customers, it’s moved back-and-forth between warehouses.
None of this is possible without government help. The Federal Reserve lifted a sensible ban on bank holding companies from owning physical commodity trading assets; then Securities and Exchange Commission chairwoman Mary Schapiro, on her way through the revolving door, granted the firm permission to start a similar business in copper.
The story has a source that confirmed that the slowdown in aluminum shipments is intentional and part of the business model.
Metro International, which declined to comment for this article, in the past has attributed the delays to logistical problems, including a shortage of trucks and forklift drivers, and the administrative complications of tracking so much metal. But 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.
There are other clues that suggest this is a direct hit by the Times against the bank.
First, the new owners of the exchange, which was sold last year, have already proposed new rules intended to reduce the bottlenecks at Metro. Second, even that round-heeled regulator, the Fed, says it is “reviewing” its 2003 finding that “certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.”
And third, despite having said in Securities and Exchange Commission filings it would do for copper what it did for aluminum, Goldman tells the Times it has now changed its mind, and did so on Saturday, the day before the story ran, and without offering any particular reason.
In filings with the SEC, Goldman has said it plans by early next year to store copper in the same Detroit-area warehouses where it now stockpiles aluminum. On Saturday, however, Michael DuVally, a Goldman spokesman, said the company had decided not to participate in the copper venture, though it had not disclosed that publicly. He declined to elaborate.
The supine Goldman response speaks volumes.