The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation. And sure enough, here it is:
industry rules require that all that metal cannot simply
sit in a warehouse forever. At least 3,000 tons of that
metal must be moved out each day.
Without looking I'd bet this is some kind of "anti-hoarding" provision, probably intended to prevent single manufacturers from cornering the market. As is typical, it caused exactly the opposite of the desired consequence.
Moreover, said rule means (among other things) that no manufacturer can hold a strategic reserve of aluminum for unexpected spikes in demand without playing the games that Goldman is playing. Naturally, the response of the New York Times is that we need more such rules and regulations, that next time we'll anticipate their consequences, that the only failing is that they haven't been "strict" enough.
But the "stricter" the rule, the more that little guys get hit with it while Goldman uses teams of lawyers to define and then exploit a safe harbor.[1] In this sense, Goldman and the NYT are in cahoots: "strict" regulations directly benefit big companies.
A safe harbor is a provision of a statute or a regulation
that reduces or eliminates a party's liability under the
law, on the condition that the party performed its actions
in good faith or in compliance with defined standards.
Legislators may include safe-harbor provisions to protect
legitimate or excusable violations, or to incentivize the
adoption of desirable practices.
Without looking I'd bet this is some kind of "anti-hoarding" provision, probably intended to prevent single manufacturers from cornering the market. As is typical, it caused exactly the opposite of the desired consequence.
In your first sentence you admit you don't know what's going on, then in your second sentence you claim that "it caused exactly the opposite of the desired consequence." The point being, this could be an old rule that's worked well until just recently, as far as you know. It's possible it's done more good than ill.
In any case, it's described as an "industry rule," not a government regulation, as your quote makes clear. It's the result of industry "self-regulation." The article mentions this.
The shuffle of stock is an end-run around that rule, but it's not the cause of the higher prices. The delay-to-raise-prices scam would be easier to run and more profitable if the rule that makes the shuffle necessary didn't exist.
You prompted me to dig in further to see what the source of the underlying distortionary rule is. Looks like the LME or London Metal Exchange[1]. But that in turn is governed by the government[2]. And the government, including the CFTC which governs the LME, has indeed passed distortionary "anti-hoarding" laws in allied areas[3]. See links below.
The key question is whether the LME is free to change these rules and/or purchasers are free to use another exchange in response to Goldman's attempt to increase prices. If they are not so free - if, say, the LME's rule here is imposed to be compliant with some CFTC or SEC or equivalent provision - then we are back to where we started.
Conversely, if the participants are free to use another exchange or start a competing one, then this issue is on the level of Zynga spamming Facebook - a dispute between two powerful private parties that will be worked out via LME countermeasures/competition rather than federal regulation.
Goldman's warehouse business relies on a lucrative
opportunity enabled by the LME regulations. Those rules
allow warehouses to release only a fraction of their
inventories per day, much less than the metal that is
regularly taken in for storage.
The Exchange provides the environment for trading and
regulates the operation of the market. It has a statutory
requirement to ensure that business on its markets is
conducted in an orderly manner, providing proper protection
to investors.
Approved as a recognised investment exchange (RIE) and
conforming with UK and other international regulatory
requirements, the LME offers, through price and volume
transparency and audit trails, a legally safe forum for
metals trading. As an RIE, the Exchange comes under the
direct jurisdiction of the UK Financial Conduct Authority
(FCA).
Regulation of the market is largely carried out by the LME,
while the FCA is responsible for regulating the financial
soundness and conduct of LME members' business.
Beyond this, both the Exchange and its members are subject
to regulatory controls and input from various UK bodies and
government offices, as well as EU directives. In
international trading, rules applied by overseas regulatory
bodies such as the US Commodity Futures Trading Commission
(CFTC) also have to be taken into account.
To ensure the observance of these regulations, the LME has
a compliance department under the supervision of the
Executive Director of Regulation & Compliance.
The Commodity Futures Trading Commission approved new
limits on commodities traders. Now analysts want to know
what will happen next.
FORTUNE -- Is the cure for speculation in the energy
markets worse than the illness? Futures industry
professionals are up in arms over a vote by regulators
Tuesday to introduce position limits on hedge funds and
other traders, saying it will lead to commodity hoarding
and large price spikes in the futures.
The CFTC decision (the full text is here) places various
limits on how much a speculative trader, like a hedge fund
or ETF manager, can hold in any of 28 commodity contracts,
including energy. The aim is to prevent a run-up like June
2008 when oil hit $140 a barrel which ultimately introduced
$4 a gallon gasoline at the pumps. The problem is,
according to futures analysts, if speculators aren't
allowed to buy the futures, they'll buy the physical
commodity instead.
"Eventually you're going to see a shortage, I think it's
going to create a disruption in the marketplace. We might
get away with it for some time, but if there's a crisis
like 2008 you'll see one," Phil Flynn, the energy analyst
at PFG Best, a Chicago brokerage, told me this morning (he
also lets loose on his morning market commentary).
Similarly, if less ominously, CME Group (CME) chairman
Terry Duffy told CNBC yesterday ahead of the CFTC vote that
passage would "encourage manipulation" of the markets.
The key question is whether the LME is free to change these rules...
They did change them, that's where the 3,000 number came from, did you even read this story?
...if the participants are free to use another exchange or start a competing one...
I don't see how that's likely to help. First of all, the metal suppliers have an incentive to use Goldman's warehouses and thus the Goldman-controlled exchange, since Goldman's paying them a kickback. Secondly, if enough metal is going through the LME, that sets the de-facto market price and you'd be daft to sell your Al for less than that, wouldn't you?
You're so hostile that you kick the ball into your own net. My question was whether LME was free to "change" the rule by abolishing it, or whether this was related to an underlying CFTC compliance issue. Because trying to increase the stringency of the rule did nothing:
Martin Abbott, the head of the exchange, said at the time
that he did not believe that the warehouse delays were
causing the problem. But the group tried to quiet the furor
by imposing new regulations that doubled the amount of
metal that the warehouses are required to ship each day —
from 1,500 tons to 3,000 tons. But few metal traders or
manufacturers believed that the move would settle the
issue.
This does not argue in favor of your tacit position that we just need more rules, or more men with guns to enforce them.
First of all, the "market distorting regulation" you mention that causes Goldman Sachs to shuffle aluminum around is not a government regulation, it is an industry standard set by the London Metal Exchange. The article suggests that there is a conflict of interest. The Exchange get's 1% of the storage costs, and the same companies that benefit from this rule are the ones that control the Exchange. This is a classic case of monopoly and collusion, not of overreaching government rules a regulation.
The "rules and regulations" that are proposed in the article are simply to reinstate the principle that bankers should not be traders. What's happening is that Goldman Sachs has physical assets in the aluminum market, and also the ability to speculate on that market. From the article: "By controlling warehouses, pipelines and ports, banks gain valuable market intelligence, investment analysts say. That, in turn, can give them an edge when trading commodities. In the stock market, such an arrangement might be seen as a conflict of interest — or even insider trading. But in the commodities market, it is perfectly legal."
How are the "little guys" hurt by preventing insider trading? Do you plan on founding a startup that speculates on commodities and also controls those commodities? Do you think that such a startup should exist or would be capable of bootstrapping without hundreds of billions in initial capital? Startups are only able to exist in the cracks created when we take the hammer to the monopolies.
The little guy is an actual Aluminum Extrusion company, with actual people making an actual product. Jacking up prices of raw material even 1% is taking profit out of his pocket because he certainly cannot pass that cost on. (I used to work for a small company in that business)
He is hurt because he is small and barely getting any discount at all. So all these imagined charges hit HIS pocket for 5% or more "off the top" because he can't avoid buying from the warehouses.
It allows people to do just barely enough to satisfy the rule and nothing more, which can be a problem if the rule is set too low. And to silence their (potentially legitimate) critics with the line "we comply with X, Y and Z regulations..."
If the rule system can't be gamed and those making the rules aren't allowed to participate in the activities they're ruling on, nor can they take kickbacks from those performing the activities then rules are an absolute good. But all those assumptions and assertions I made rarely hold in the real world. So their usefulness tends to be less of an absolute good and more of a mixed bag.
I still don't see how the claim made of "The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation." gibes with "metal must be moved" as the offending regulation.
Because the "metal must be moved" number is way too low.
Imagine that your boss set metrics for you that you could knock out in 30 minutes, but the boss is paying you to be there for a full 8 hours. And imagine that if you worked harder than that, your reward was actually less pay. Also imagine no room for advancement. Someone from outside your company might say that situation is effed up. But to you working for just those 30 minutes and nothing more would be completely logical.
That's the situation facing these metal warehouses. Being efficient and shipping metal faster than absolutely required gets them no short term benefits and does them short term harm: reduced rents.
The problem isn't necessarily the "metal must be moved" rule it's the quantity in the "metal must be moved" rule. So some people say "fix the rule" and others say "abolish the rule" because of substantially different world views. Some people like maintaining and fixing code; others like organizing differently to reduce the amount of code necessary.
Currently the way the regs stand, people have to keep paying rent until the metal leaves the warehouse. So if the owner/manager of the warehouse drags its feet on every shipment and every shipment takes an extra week, that's a lot of rent.
One of the proposed solutions is that the warehouse isn't allowed to charge rent once the order to distribute the metal has been made, but that's not in the regs yet. It's merely propsed. Right now they do charge and as such have every incentive to delay as long as possible.
The New York Times is claiming that they have just discovered this scheme through investigative reporting, but the article is a rewrite of a July 2011 Reuters article by other authors.
They're presumably avoiding that because they'd have to answer the uncomfortable question "And how many billions of dollars have speculators stolen from hardworking Americans by hoarding aluminum since the Reuters piece?" "Er, the spot price is down by a third, actually."
People need to realize that if you hoard something, you might be reducing supply now, but if you want to make money you have to eventually sell and that increases supply at some later point.
There's no cure for high prices like high prices, and vice versa.
Goldman will probably pump-and-dump the warehousing business onto someone unsuspecting.
1. Buy up metal warehouses
2. Stockpile metal, thus reducing market supply
3. Watch as market price increases and rental income holds steady
4. When market prices have risen enough (say 30-50%) and you have a giant stockpile of metal, put the whole business up for sale
5. A giant inventory coupled with high prices and increasing cashflow for the last several years makes the business very attractive to someone with money but not a lot of sophistication
6. Goldman makes a boatload and doesn't have to figure out how to unwind the mess
7. Unsuspecting buyer goes bankrupt within two years
The difference is that the people at GS have relationships with many (most, all?) of the wealthy people in the world. That makes finding a buyer who has enough cash but not enough brains easier.
I'm not suggesting that it's a slam dunk and everyone could be doing it. But being one of the premier investment banks in the world does have some perks.
Agreed. There's definitely a very high chance of information asymmetry when you are dealing with GS. All I'm saying is that there's enough reflexivity (Soros' term) and unknowns in the market that even very smart people like them can lose money.
I think we're probably saying the same thing, just coming from different ends of it.
Some people believe that the future price of aluminum is going to be sufficiently higher than the prevailing price today that they would prefer to pay to store their aluminum and sell at some point in the future. The NYT correctly suggests that this increases the price of aluminum today and that this generates (literal) rent for people who own warehouses. The NYT is furious about it, because they are not envisioning the possible future headline "Women and poor worst hit as consumer good prices skyrocket due to aluminum shortage."
Note: this is me explaining what is happening rather than explaining the causal chain which the NYT thinks is happening, because my version is a lot simpler and more likely to be correct.
Wasn't the point of the original Routers article that GS owned the storage warehouses and therefore could (and did) control the speed/amount of aluminium being shipped out, against the wishes of those who owned the metal. i.e. GS have huge control over the supply of a finite resource. Saying 'well the price did fall' doesn't undermine the argument that GS were controlling the supply to their own benefit since we don't know what positions GS took on aluminium over that time.
> the possible future headline "Women and poor worst hit as consumer good prices skyrocket due to aluminum shortage."
Actually, I'd expect rolling blackouts long before an actual Al shortage.
(Reasoning: Aluminum is one of the most abundant metals in the crust, but it's never found pure. It's always found in an ore, and the cheapest way to refine the ore is very electricity-intensive. As a side note, aluminum was once a fairly expensive metal; the tip of the Washington Monument is made out of it, which was an extravagant expense at the time.)
Metal exchange spot prices for Al are affected by the length of time the stock has been stored; the warehouses dilly-dally to raise the price, the powers who could do something about it (the metal exchange) get a cut for ignoring the whole scam.
I did not read too far into the article, but I read far enough to gather that this is one instance of something I've been reading about elsewhere. Even the specific commodity, aluminium, sounds familiar.
Goldman is one of the largest -- and therefore, most effective -- players, but basically Goldman and its ilk have been using their financial (and legal) clout to essentially corner commodity markets. They are creating effective monopolies for themselves -- or sufficient control to significantly influence availability and therefore pricing.
In this particular instance, as far as I read, they are using their control of aluminium stocks and warehousing to jack up the prices they receive. This may abut regulatory and other concerns, resulting in a "shuffling exercise" to place their price increases within boundaries and definition of an established market mechanism and regulation.
Still in the process of being converted from a public resource to a private commodity -- in the U.S. and some other countries, at least -- but another one to keep an eye on is water, including potable water. There are companies working to privatize supplies, with an eye to charging you whatever the market will bear. And if and when they control said market? And given that most communities are single sourced for local, bulk delivery?
TL;DR (From what I understood): Banks work around regulations to artificially increase the time they are allowed to store metal for - essentially shipping it to each other, back and forth, for a very long time. As they charge for storage, this increases the price of the metal for all manufacturers who use it, who then pass it on to consumers.
They talk about the money made storing aluminium in the warehouse, who's paying that? It sounds like Goldman owns both the aluminium and the warehouses, so all they're doing is buying aluminium and refusing to sell it.
I think it's an old trick, called "cornering the market". One of the clearest ways Ayn Rand's vision of unbridled capitalism is not a practical reality.
Banks/big capitals are evil, I prefer them dead (well the financial instance not the person. The persons however deserve a good old fashion whipping, at the least.)
Moreover, said rule means (among other things) that no manufacturer can hold a strategic reserve of aluminum for unexpected spikes in demand without playing the games that Goldman is playing. Naturally, the response of the New York Times is that we need more such rules and regulations, that next time we'll anticipate their consequences, that the only failing is that they haven't been "strict" enough.
But the "stricter" the rule, the more that little guys get hit with it while Goldman uses teams of lawyers to define and then exploit a safe harbor.[1] In this sense, Goldman and the NYT are in cahoots: "strict" regulations directly benefit big companies.
[1] http://en.wikipedia.org/wiki/Safe_harbor_(law)