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.
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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.”