Goldman Sachs, Big Banks Accused Of Manipulating Commodity Prices

Shortly after the financial collapse of late 2008, Rolling Stone journalist Matt Taibbi famously likened one of the world’s largest investment banks, Goldman Sachs (GS) , to “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

It actually took a few years for this scathing epithet to catch on in any noticeable way, but nowadays it is not uncommon to find references to “vampire squid” even in mainstream financial publications, and when referring to the financial industry as a whole, not only to Goldman Sachs. Still, all the attention that this one sentence has garnered has perhaps taken the focus off of the sentence that followed it, in which Taibbi casually asserted that, “In fact, the history of the recent financial crisis…reads like a Who's Who of Goldman Sachs graduates.”

Irrespective of one’s feelings about Goldman Sachs, or any of the other too-big-to-fail banks for that matter, it is hard to deny that some doubts are not at least justifiable when it comes to the legality of the bank’s wide array of business activities. And this issue has surfaced once more with The New York Times’ publication last Sunday of its findings resulting from an investigation into Goldman’s role in manipulating the price of basic materials, aluminum in this case.

The Times reported that Goldman, through 27 storage warehouses it owns in the now bankrupt Detroit area, has sought to “exploit pricing regulations set up by an overseas commodities exchange,” meaning the London Metal Exchange. The way this caper ostensibly works is that a fleet of trucks moves 1,500-pound bars of aluminum from warehouse to warehouse, at a rate of at least two or three times a day.

The point, of course, is to increase profits. Prolonging the time the metal spends in storage allows Goldman to make more money on storage fees which, according to the NYT, adds “many millions a year to the coffers.” And as this naturally drives costs up for manufacturers, it also drives up costs for consumers, who rely on all sorts of products that are made from aluminum: cans of soda, beer, and other beverages, cars, electronics, aluminum siding for homes, and so on.

The Times’ article also highlights the subtlety of the scheme, as the profits for Goldman can be measured at a rate of about one-tenth of a cent per each aluminum can sold. This tiny number seems less negligible considering that Americans alone purchase some 90 billion cans per year.

Goldman Sachs has managed to profit from aluminum, regardless of the costs to the industry as a whole or to consumers, through its purchase of International Metro Trade Services, one of the US’s biggest metal storage companies, in whose warehouses can be found more than a quarter of the supply available on the market. Ever since the bank has owned Metro, the wait time for delivery of metal has grown from six weeks to more than 16 months in some cases, time during which the bank accumulates larger profits from storage fees. The situation has become so severe that even Coca-Cola (KO) , which is dealing with fizzling demand for its products, has tried to avoid buying its aluminum from the company.

Industry analysts say that Goldman Sachs’ intrusion into aluminum storage has added completely artificial costs to the spot price of the metal, but Goldman is not the only bank that is in on the commodity storage scheme. JPMorgan Chase (JPM) recently was reported to be in talks to settle a $500 million energy manipulation case, and late last year, the Securities and Exchange Commission approved a scheme that will allow Goldman, JPMorgan, and other hedge funds such as BlackRock (BLK) to buy and store copper. In SEC filings, Goldman has claimed that it will store copper in the same warehouses in which it is currently storing aluminum.

Goldman Sachs’ media relations department was not too slow in responding, given the seriousness of the allegations. The bank’s counterclaims rest mainly on the fact that Metro International’s warehouses store only 1.5 million tons of aluminum compared with the 48 million produced worldwide, as well as the fact that aluminum production has outpaced demand over the past few years, leading to a pile-up in storehouses.

Now, however, the matter is being complicated by an investigation by the Commodities Futures Trading Commission, and whatever action is subsequently taken, or not, more should come to light about the role of big banks in commodities markets.