Goldman Talking To Bidders About Controversial Metals Warehouse

Goldman Sachs

Goldman Sachs Group Inc (NYSE:GS) is exiting the controversial metals warehousing operation amidst regulatory concerns and a political battle with large US beverage manufacturers.

Goldman exiting metals warehousing business

After four years in the business, the Wall Street bank is contacting potential buyers for its Detroit-based Metro International Trade Services, Reuters is reporting. While the bank is looking to exit the metals warehousing business it will remain in the metals trading business, retaining the J Aron trading division that is one of Wall Street’s largest commodity trading firms.

Beverage manufacturers had charged that the metals warehouses were artificially driving up the price of aluminum. They claim the warehouses drive up the price by increasing the waiting period to extract aluminum from the warehouse. The longer the wait the higher the cost.  Metro’s Detroit warehouse had a 683 day waiting time to withdraw aluminum, the second longest waiting time, according to the report.  The next longest waiting time was 44 days.

CFTC investigation request stymied

A class-action lawsuit orchestrated by the powerful beverage manufacturers had accused Goldman Sachs Group Inc (NYSE:GS), JPMorgan and the London Metal Exchange of conspiring to manipulate the metals market.  The US Department of Justice and the Commodity Futures Trading Commission had been investigating manipulation of metals pricing but the CFTC was stymied.  This past fall, former CFTC Commissioner Bart Chilton said he requested data regarding metals ownership by the largest banks, but the US Federal Reserve would not provide needed information to commodity regulators.

Banks trade metals and control supply chain

The banks had been accused of manipulating the supply chain by influencing critical aspects, from trading to warehousing, far afield from “traditional” banking activities. The lucrative practice for the banks extends to other commodities such as oil, copper and grains as well as aluminum.

JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS) are exiting all or part of their physical commodities business, the report noted, as the Fed is now taking a “dim view” on large banks trading and controlling the supply chain. Extraction effort has been difficult because, as the report noted, as the practices of controlling the warehousing was “a cash cow for the bank amid soaring global metal inventories but a business that has more recently become the focus of lawsuits, regulatory scrutiny and public outrage.”

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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