After issuing a 400 page report on commodity market manipulation, the result of a two-year Senate investigation, a sometimes rancorous debate took place in Washington DC today.
Large banks and commodity manipulation
The issue of market manipulation has particularly rankled some of the largest beverage corporations, including MillerCoors LLC, the U.S. operations of Molson Coors Brewing Company (NYSE:TAP) and SABMiller plc (LON:SAB) (OTCMKTS:SBMRY), all of whom had accused metal warehouses of inflating the prices of aluminum. The large banks, many of whom own the warehouses and had trading operations that speculated on metal prices, disagreed with this assessment in testimony today.
Senator Carl Levin (D-MI) engaged in a sometimes withering attack on the topic, making the central claim that artificially influenced backlogs and the ability to delay shipments of the metal out of warehouses correlated to a higher metal prices, a charge supported by statistical analysis, he said. “If you like what Wall St did for the housing market, you’ll love what Wall St is doing for commodities,” Levin said.
Commodity manipulation: Aluminum stockpiles had a direct effect
In testimony, a clam and composed Jacques Gabillon from Goldman Sachs’s disputed Levin’s charges that long wait times for aluminum stockpiles had a direct effect on what companies and consumers pay for the metal. “When everything is said and done, you can say there is no correlation” between wait times and price, said Gabillon, head of the New York-based bank’s global commodities principal investments group. This statement directly contradicted Levin, who reacted angrily at times. “I want to get a straight answer from you if I can,” Levin said at one point, pointing to statisticians who he says confirm the correlation.
A key issue in the debate was the complex deals that were instituted on metals warehouse customers. Chris Wibbelman, president and CEO of Metro International Trade Services LLC, testified that he had never seen the complex deal structures until his company was purchased by Goldman. In prepared remarks, he said only a small percentage of aluminum stockpiles are subject to the kind of metal backlogs that Levin accused of causing a lack of availability of aluminum at times and increasing prices.
“If you can say there’s no correlation between premium and the length of the queue then you are in a very different mathematical world than most of the mathematicians that look at this,” said Levin, raising his voice and leading a discussion of what he called complex “Merry-Go-Round-Deals.”
When asked if these new warehousing deals allowed customers a choice, Wibbelman said they had a choice, they could break the contract. “Breaking the contract doesn’t seem like a choice to me,” Levin stated.
For its part, Goldman indicated that if it exits the commodity warehousing business it could sell to foreign interests, implying that the manipulation problem could grow worse.
