Senate report: Goldman Sachs boosted aluminum costs by manipulating the market

Nov 20, 2014 at 10:50 am

A two-year investigation released this week by a U.S. Senate committee accuses two large Wall Street banks of manipulating markets for basic commodities, a point that has ties to Metro Detroit. 

Starting in 2010, Goldman Sachs purchased a company, Metro International Trading Services, that owned a boatload of warehouses around the world that stored metals, including aluminum.

About a dozen of those warehouses were situated in Metro Detroit. Notably, the warehouse company stored 85 percent of the market for aluminum that's typically used to make beer and pop cans. As the report found, after purchasing Metro International, Goldman built up an aluminum empire of sorts: "At one point in 2012, Goldman owned about 1.5 million metric tons of aluminum, worth $3.2 billion, more than 25% of annual North American aluminum consumption at the time.  

That gave Goldman seriously flexibility to change how the market operated, the report says. For instance, after Goldman purchased the company, it increased the wait-time to withdraw aluminum from about 40 days to more than 600 days. The net-effect? 

"Since being acquired by Goldman, Metro's practices have likely added billions of dollars in cost to a wide range of aluminum users, from beer makers to car manufacturers to defense companies that make warships for the Navy," the report says. 

The way the scheme works is oddly confusing, but essentially the idea is this, according to the report: Metro International caused a serious bottleneck in the aluminum supply by canceling major orders and transfers of aluminum; this allowed them to collect more rent payments. Meanwhile, it used incentives to ensure such metals were stored in its cabal of warehouses. 

If you're interested in some additional background on the topic, Dustin Walsh of Crain's Detroit Business wrote about the initial complaint filed by Coca Cola against Goldman back in June of 2011. The New York Times dove into the subject last year in a lengthy investigation

And if you think this whole idea of Goldman (a bank which deals in commodities) owning a company that stores aluminum (a commodity) doesn't seem right, this Rolling Stone piece from Matt Taibbi can helpfully explain why you're feeling this way. Here's a snip:

Allowing one company to control the supply of crucial physical commodities, and also trade in the financial products that might be related to those markets, is an open invitation to commit mass manipulation. It's something akin to letting casino owners who take book on NFL games during the week also coach all the teams on Sundays.