by Tyler Durden
July 25, 2013

from ZeroHedge Website

 

Following our initial uncovering of the manipulation and monopolization of the metals warehousing business two years ago, the last few days have seen the public's attention grabbed by the reality of what the banks are actually doing.

 

Following this week's hearing, as the Fed reconsiders banks roles in non-banking businesses (and the 'societal benefit'), it seems the CFTC has woken up.

 

As the WSJ reports, the Department of Justice has opened an initial probe into the metals warehousing industry and the Commodity Futures Trading Commission has also sent letters to some firms telling them to preserve documents, in what is likely the beginning stages of an investigation.

Via WSJ,

The probe comes amid growing concern in Washington over banks' ownership of metals warehouses and other commodity assets.

...

Banks that trade physical commodities have come under attack by government officials, companies and consumer groups, who worry about the ability of the financial sector to exert influence over markets for raw materials.

 

...

Mr. Brown held a hearing on the subject this week at which some company officials alleged banks are deliberately creating shortages of aluminum and other raw materials for financial gain.

 

The Federal Reserve has said it is reconsidering the permission it granted to banks over the past decade to participate in physical commodity markets. The permission expires later this year.

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Opens Probe Into Metals Warehousing
by Devlin Barrett and Deborah Solomon

July 25, 2013

from OnLineWSJ Website

 

The Department of Justice

has opened an initial probe

into the metals warehousing industry
 

WASHINGTON

The Department of Justice has opened an initial probe into the metals warehousing industry, according to a person familiar with the matter.

The probe comes amid growing concern in Washington over banks' ownership of metals warehouses and other commodity assets.

The Commodity Futures Trading Commission has also sent letters to some firms telling them to preserve documents, in what is likely the beginning stages of an investigation, according to other people briefed on the matter.

Banks that trade physical commodities have come under attack by government officials, companies and consumer groups, who worry about the ability of the financial sector to exert influence over markets for raw materials.

On Wednesday, Sen. Sherrod Brown (D., Ohio) said he will continue pressing banks about their commodities holdings. Mr. Brown held a hearing on the subject this week at which some company officials alleged banks are deliberately creating shortages of aluminum and other raw materials for financial gain.

The Federal Reserve has said it is reconsidering the permission it granted to banks over the past decade to participate in physical commodity markets. The permission expires later this year.

 

 

 

 

 

 

 

 

 

 

Ahead of Tomorrow's Hearing on...

Goldman and JPM's Commodity Cartel
by Tyler Durden
July 22, 2013

from ZeroHedge Website

 

 

Back in June 2011 we first reported how "Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly" in an article that explained, with great detail, how Goldman et al engage in artificial commodity traffic bottlenecking - thanks to owning all the key choke points in the commodity logistics chain - in order to generate higher end prices, rental income and numerous additional top and bottom-line externalities and have become the defacto commodity warehouse monopolists.

 

Specifically, we compared this activity to similar carteling practices used by other vertically integrated commodity cartels such as De Beers:

"While the obvious purpose of "warehousing" is nothing short of artificially bottlenecking primary supply, these same warehouses have no problem with acquiring all the product created by primary producers in real time, and not releasing it into general circulation: once again, a tactic used by De Beers for decades to keep the price of diamonds artificially high."

Over the weekend, with a 25 month delay, the NYT "discovered" just this, reporting that the abovementioned practice was nothing but "pure gold" to the banks.

 

It sure is, and will continue to be. And while we are happy that the mainstream media finally woke up to this practice which had been known to our readers for over two years, the question is why now?

 

The answer is simple - tomorrow, July 23, the Senate Committee on Banking will hold a hearing titled "Should Banks Control Power Plants, Warehouses, And Oil Refiners."

 

While congratulations are also due to the Senate for finally waking up to this monopolistic travesty conducted by the big banks, we can only assume that this is due to various key non-bank industry participants (such as MillerCoors) crying foul so much that even the Fed is now involved and is supposedly reviewing its own decision from 2003 that allowed this activity in the first place.

 

Bloomberg explains:

When the Federal Reserve gave JPMorgan (JPM) Chase & Co. approval in 2005 for hands-on involvement in commodity markets, it prohibited the bank from expanding into the storage business because of the risk. 

 

Five years later, JPMorgan bought one of the world’s biggest metal warehouse companies.

 

While the Fed has never explained why it let that happen, the central bank announced July 19 that it’s reviewing a 2003 precedent that let deposit-taking banks trade physical commodities.

 

Reversing that policy would mark the Fed’s biggest ejection of banks from a market since Congress lifted the Depression-era law against them running securities firms in 1999.

“The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” said Barbara Hagenbaugh, a Fed spokeswoman. She declined to elaborate.

 

“When Wall Street banks control the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation,” Brown said in an e-mailed statement.

Goldman Sachs, Morgan Stanley and JPMorgan are the biggest Wall Street players in physical commodities.

Of course, when one is a monopoly, the revenues follow easily.

 

The trick, of course, is to keep Congress very much unaware of said monopoly and let the good times roll.

The 10 largest banks generated about $6 billion in revenue from commodities, including dealings in physical materials as well as related financial products, according to a Feb. 15 report from analytics company Coalition. Goldman Sachs ranked No. 1, followed by JPMorgan.

 

While banks generally don’t specify their earnings from physical materials, Goldman Sachs wrote in a quarterly financial report that it held $7.7 billion of commodities at fair value as of March 31. Morgan Stanley had $6.7 billion.

 

On June 27, four Democratic members of Congress wrote a letter asking Fed Chairman Ben S. Bernanke, among other things, how Fed examiners would account for possible bank runs caused by a bank-owned tanker spilling oil, and how the Fed would resolve a systemically important financial institution’s commodities activities if it were to collapse.

Just because questions like these finally had to be asked, one has to laugh.

 

One person not laughing, tough, is Ben Bernanke - the man whose Fed allowed bank commodity cartelization to take place originally.

 

He is certainly not laughing now that he may be forced to undo this permission, in the process impairing banks to the tune of billions in revenue: as a reminder, the Fed works purely to benefit America's banks and to provide them with whatever top-line amenities they need and are confident they can pass by under the noses of dumb congressmen.

 

But at least the Fed promises it can "supervise" all these TBTF banks.

 

Or can it?

Now,

“it is virtually impossible to glean even a broad overall picture of Goldman Sachs’s, Morgan Stanley’s, or JPMorgan’s physical commodities and energy activities from their public filings with the Securities and Exchange Commission and federal bank regulators,” Saule T. Omarova, a University of North Carolina-Chapel Hill law professor, wrote in a November 2012 academic paper, 'The Merchants of Wall Street - Banking, Commerce and Commodities.'

The added complexity makes the financial system less stable and more difficult to supervise, she said in an interview.

“It stretches regulatory capacity beyond its limits,” said Omarova, who is slated to be a witness at the Senate hearing.

 

“No regulator in the financial world can realistically, effectively manage all the risks of an enterprise of financial activities, but also the marketing of gas, oil, electricity and metals. How can one banking regulator develop the expertise to know what’s going on?”

Now that the entire world is looking, and not just a select subset of Zero Hedge readers, the full extend of Goldman's monopoly becomes apparent:

Goldman Sachs owns coal mines in Colombia, a stake in the railroad that transports the coal to port, part of an oil field off the coast of Angola and one of the largest metals warehouse networks in the world, among other investments.

 

Morgan Stanley’s involvement includes Denver-based TransMontaigne Inc. (TLP), a petroleum and chemical transportation and storage company, and Heidmar Inc., based in Norwalk, Connecticut, which manages more than 100 oil tankers, according to its website.

 

Mark Lake, a spokesman for New York-based Morgan Stanley, referred to company regulatory filings that said the bank didn’t expect to have to divest any of its activities after the grace period ends. He declined to elaborate or to comment on the Fed’s announced rule review.

 

Brian Marchiony, a spokesman for JPMorgan, also declined to comment on the review, as did Michael DuVally, a Goldman Sachs spokesman.

 

...

 

In February 2010, Goldman Sachs bought Romulus, Michigan-based Metro International Trade Services LLC, which as of July 11 operates 34 out of 39 storage facilities licensed by the London Metal Exchange in the Detroit area, according to LME data.

 

Since then, aluminum stockpiles in Detroit-area warehouses surged 66 percent and now account for 80 percent of U.S. aluminum inventory monitored by the LME and 27 percent of total LME aluminum stockpiles, exchange data from July 18 show.

 

Traders employed by the bank can steer metal owned by others into Metro facilities, creating a stockpile, said Robert Bernstein, an attorney with Eaton & Van Winkle LLC in New York.

 

He represents consumers who have complained to the LME about what they call artificial shortages of the metal.

“The warehouse companies, which store both LME and non-LME metals, do not own metal in their facilities, but merely store it on behalf of the ultimate owners,” said DuVally, the Goldman Sachs spokesman. “In fact, LME warehouses are actually prohibited from trading all LME products.”

Right - Goldman is doing humanity a favor and what not, just like when it was shorting RMBS, when Goldman was merely "making markets." Or unmarkets as the case may be.

 

In the meantime, aluminum prices are surging, as we said would happen back in June 2011:

Buyers have to pay premiums over the LME benchmark prices even with a glut of aluminum being produced.

 

Premiums in the U.S. surged to a record 12 cents to 13 cents a pound in June, almost doubling from 6.5 cents in summer 2010, according to the most recent data available from Austin, Texas-based researcher Harbor Intelligence.

 

Warehouses are creating logjams, said Chris Thorne, a Beer Institute spokesman.

Naturally, the Vampire Squid is not alone: JPM, whose commodity group is headed by Blythe Masters currently under investigation by FERC with a slap on the wrist settlement pending, is most certainly involved as well.

JPMorgan, the biggest U.S. bank, inherited electricity sales arrangements in California and the Midwestern U.S. in 2008 when it bought failing investment bank Bear Stearns Cos.

 

Its February 2010 purchase of RBS Sempra Commodities LLP’s worldwide oil and metal investments and European power and gas assets was also a distressed transaction.

 

The European Union ordered Royal Bank of Scotland Group Plc to sell its controlling stake in the firm after a taxpayer bailout.

In short: just like the repeal of Glass Steagall allowed banks to mix deposit collecting and risk-taking divisions, so the Fed's landmark 2003 decision allowed banks to commingle financial and physical commodities.

 

And while the US government, and broader public, seem largely ignorant and without a care if they end up overpaying billions more to Goldman's and JPM's employees, one country where commodities are exceptionally fragmented in their use as both a financial (i.e. paper) and physical commodity is China - maybe if the Fed will not move, then it will be up to China to punish the three firms which are set to unleash the same scheme described above with copper as they have with aluminum.

 

Because one (or three in this case: Goldman, JPM and BlackRock) doesn't amass 80% of the world's copper "on behalf of investors" for non-profit reasons.

 

While we don't expect anything new to develop here, nor anywhere else, until the entire system comes crashing down and forces a fundamental overhaul of modern finance at the grassroots level, tomorrow's hearing will be webcast live and will have the following witnesses:

• Ms. Saule Omarova
  Associate Professor of Law
  University of North Carolina at Chapel Hill School of Law

   

• Mr. Joshua Rosner
  Managing Director
  Graham Fisher & Company

   

• Mr. Timothy Weiner
  Global Risk Manager
  Commodities/Metals, MillerCoors LLC

   

• Mr. Randall D. Guynn
  Head of Financial Institutions Group

We look forward to seeing how the Chairman, or his successor, will deflect this one.

 

 

Photo credit: Natural History Museum NYC: Squid vs Whale

 

 

 

 

 

 

 

 

 

 

Goldman, JP Morgan have Now Become...

A Commodity Cartel

...as They Slowly Recreate De Beers' Diamond Monopoly
by Tyler Durden

June 16, 2011

 

About a month ago we reported on an inquiry launched into JPM's "anti-competitive" and "monopolistic" practices on the LME which have resulted in artificially high prices for a series of commodities which had been hoarded by the Too Big To Fail bank.

 

Today, the WSJ continues this investigation into a practice that is not insular to JPM but also includes Goldman Sachs and "other owners of large metals warehouses" which can simplistically be characterized as a De Beers-like attempt to artificially keep prices high for commodities such as aluminum, courtesy of warehousing massive excess supply, artificially low market distribution of the final product, while collecting exorbitant rents in the process.

 

Specifically,

"Goldman, through its Metro International Trade Services unit, owns the biggest warehouse complex in the LME system, a series of 19 buildings in Detroit that house about a quarter of the aluminum stored in LME facilities.

 

Coca-Cola and other consumers say that Metro in particular is allowing the minimum amount of aluminum allowed by the LME - 1,500 metric tons a day - to leave its facilities, and that Metro could remove much more, erasing supply bottlenecks and lowering premiums for physical delivery in the process.

 

Coca-Cola, which has complained to the LME, says it can take months to get the metal the company needs, even though warehouses are allowing aluminum to come in much more quickly.

 

Warehouses, meantime, collect rent and other fees."

It is not only Goldman's Metro operations, but includes JP Morgan's Henry Bath division, and naturally commodities behemoth Glencore, all of which are taking advantage of the LME's guidelines and rules which make the imposition of a pseudo-monopoly an easy task.

 

The primary driver of this anti-competitive behavior is the fact that GS, JPM and Glencore now control virtually the entire inventory bottlenecking pathways:

"In recent years, major investment banks like Goldman and J.P. Morgan and commodities houses like Glencore have been snapping up warehouses around the world, turning the industry from a disperse grouping of independent operators into another arm of Wall Street. The LME has licensed about 600 warehouses around the world.

 

The transformation has raised questions about whether the investment banks, which also have big commodity-trading arms, are able to use their position as owners of warehouses to manipulate prices to their advantage."

And since the outcome of this anti-competitive delayed tolling collusion ends up having quite an inflationary impact on end prices, the respective administrations are more than happy to turn a blind eye to this market dominant behavior which buffers the impact of deflation on input costs.

 

We may have seen the end of the OPEC cartel. Alas, it has been replaced with a far more vicious one - this one having Goldman Sachs and JP Morgan as its two key members.

 

WSJ explains further:

The warehousing issue alarmed one trader enough to seek government intervention. Anthony Lipmann, managing director of metals trader Lipmann Walton & Co. Ltd., gave evidence to the U.K. House of Commons Select Committee in May 2011, raising concern about large banks and trading houses owning facilities that store other people's metal.

 

The U.K.'s Office of Fair Trading dismissed concerns that ownership of warehouses gives certain market players an unfair advantage, saying on Tuesday that there were no "obvious competition issues that would merit further investigation at this stage."

 

Goldman's Detroit warehouse holds about 1.15 million tons out of a total 4.62 million tons in LME-approved warehouses.

 

Since Goldman bought Metro early last year, the wait time for aluminum delivery in Detroit has increased to about seven months.

 

Metro charges its customers 42 cents a day for storing one metric ton of aluminum in Detroit, which is about the industry average. At 900,000 tons in the warehouses, Goldman is earning $378,000 a day on rental costs, or about $79 million in seven months.

 

"Warehouses are making a lot more money," said Jorge Vazquez, managing director of aluminum at Harbor Commodity Research. Goldman is "really the winner clearly, because if you want to take metal away from the location, you have to wait up to 10 months to get your metal out, and in the meantime you're paying rent."

While the obvious purpose of "warehousing" is nothing short of artificially bottlenecking primary supply, these same warehouses have no problem with acquiring all the product created by primary producers in real time, and not releasing it into general circulation: once again, a tactic used by De Beers for decades to keep the price of diamonds artificially high.

 

But unlike De Beers, Goldman also gets to charge rental fees once demand delivery instructions are sent out.

 

The rent ends up being substantial due to the firm's unwillingness to release handily available product to the market in due course:

Metro, meantime, is taking in metal. Metro also offers cash incentives to producers like Rio Tinto Alcan to store their metal in Metro's sheds for contracted periods, sometimes as much as $150 a ton, according to traders.

 

Once the metal is in the warehouse, the producers sell ownership to this metal on the open market. The new owner can't collect his metal for seven months because of the bottleneck. For that period, the new owner is stuck paying rent to Metro.

 

"The system is set up like a funnel, so you can dump large amounts of metal in the front end and only get a little out at the back end," said David Wilson, director of metals research at Société Générale SA. "It enables a situation where the rules of the warehousing system are taken advantage of."

Another beneficiary of this monopoly behavior of course are the actual metal producers, which benefit from this illegal and conflicted "middleman" intervention:

Aside from warehouses, producers of the metal are benefiting, because they are able to charge more for their metal. Klaus Kleinfeld, chief executive of Alcoa Inc., said in an interview that supply-and-demand factors are leading prices higher.

Yet it is not even Goldman or JPM's fault: after all they are merely following the guidelines set up by the LME:

"You can't blame the warehouses," Mr. Kleinfeld said.

 

U.S. aluminum sheet maker Novelis sent a letter to the LME in May "expressing concerns" about the warehousing situation, a company spokesman said.

 

The complaints led the LME to commission an independent study into the issue last July. That study recommended a sliding scale be adopted, rather than the fixed minimum of 1,500 tons a day. That would result in larger warehouse complexes being required to release more metal.

It effectively doubles the minimum amount required to be relinquished by Metro each day.

 

The ruling would go into effect in April. The LME board on Thursday, however, failed to reach a consensus on the recommendations.

While warehousing used to be a last resort market at inception, it has now become, courtesy of the economies of scale of the middlemen, the "go-to" market, which makes any normal market clearing impossible.

 

Because should true market clearing be allowed, the prices for everything from aluminum to copper would plunge immediately:

The situation is made more aggravating for metal consumers because supply has far outweighed demand for most of the last decade, and there is more than 4.5 million metric tons of surplus metal stored in LME's warehouse system.

Alas as pointed out previously, with the exchanges ultimately merely conforming to the bidding of their host ponzi scheme governments, which will happily allow even further consolidation of warehousing facilities by the trio in order to artificially boost inflation ever higher, the final product is a vicious loop in which everyone benefits...

 

Everyone but the end consumer of course, who is faced with an anti-competitive system controlled by a handful of Fed-funded players.

 

And with China unlikely to open up sales of its own warehouses (especially since Chinese vendors are now well-known to use physical copper in storage to write letters of credit against for speculative purposes) to the market, the system will persevere until such time as global inflationary powers are finally destroyed and there is a scramble to dump inventories.

 

Like what happened in the fall of 2008. At that point just as the status quo drives prices higher, so the unwind will result in a massive undershoot of prices from fair values.

 

Which in turn will allow those insatiable importers of commoditized product such as China to feel like your typical mortgage-free living American at a K-mart blue light special.

 

But of course we don't have to worry about that, because the central planners will never allow the system to implode like it did in 2008. After all that would defeat the whole purpose of central planning...

 

In the meantime, good luck to anyone who wishes to break the cartel's monopoly in the aluminum, copper or any other commodity.