Banks accused of using commodity units to unfair advantage
WALL Street’s biggest banks have used their ownership of metals warehouses, oil tankers and other commodities businesses to gain unfair trading advantages and dominate markets, according to a US Senate investigation.
In a report on Goldman Sachs Group, Morgan Stanley and JPMorgan Chase, a Senate panel said the firms had eroded the line separating banking from commercial activities to the detriment of consumers and the financial system. The holdings gave banks access to non-public information that could move markets and increase the likelihood that industrial accidents would spur taxpayer bailouts, the report said.
“We simply cannot allow a large, powerful Wall Street bank the power to influence the price of a commodity essential to our economy,” Senator Carl Levin, who chairs the permanent subcommittee on investigations, said in Washington on Wednesday. He added that his staff “found substantial evidence that these activities expose major banks to catastrophic risks that are poorly understood”.
The scrutiny over banks’ involvement with commodities has spurred the Federal Reserve to consider tightening regulations and prompted some Wall Street firms to try to shed assets.
Levin’s new findings include details on Deutsche Bank and other clients who entered into controversial aluminium transactions with Goldman Sachs and reveal that a former employee questioned whether the New York-based bank had adequate safeguards to prevent market-moving data from being passed on to the firm’s traders.
The 400-page report also referenced a 2012 Fed study of four banks that found each had capital and insurance shortfalls for commodity units of as much as $15 billion (R165.6bn). That meant that if each bank experienced a catastrophe on the scale of BP’s 2010 oil spill in the Gulf of Mexico, they couldn’t cover the losses, the report said.
The investigation, which is the focus of two-day public hearings that started yesterday, is a swan song for retiring Levin, a Michigan Democrat who’s long been a scourge of the banking industry. His 2010 showcase of Goldman Sachs’s mortgage trades helped crystallise the financial crisis in the minds of the American public and left a stain on the bank.
The commodities probe, unlike some investigations done by the panel, doesn’t feature as many smok- ing-gun e-mails and instead points to circumstantial evidence. The report still highlights the breadth of Wall Street’s reach into non-banking businesses and the potential conflicts of interest that come with it.
The investigation covers a broad range of commodity investments in recent years including Goldman Sachs’s ownership of Colombian coal mines, as well as a uranium trading business; Morgan Stanley’s natural gas and oil transport operations; and JPMorgan’s electricity and metals businesses.
A focus of Levin’s examination is Goldman Sachs’s 2010 purchase of Metro International Trade Services, an operator of warehouses that’s part of the London Metal Exchange system. The Senate report said the acquisition allowed the bank to have a major influence on aluminium trading.
With Goldman Sachs employees in control of Metro’s board of directors, the warehouse took steps to increase the amount of time it took to remove aluminium, which may have led to higher prices, according to the report. Soon after Goldman Sachs bought it, Metro began paying incentives to traders to store aluminium in the company’s warehouses.
In a series of private deals worked out in e-mails and unsigned contracts, Metro also gave special incentives to a small group of financial firms to keep metal in its Detroit warehouses by first loading it out and then back in. Six so-called “merry-go-round deals” from 2010, 2012 and 2013 were struck with Deutsche Bank; Red Kite Group, a London-based hedge fund; and Swissbased commodity trader Glencore, according to the report.
A Deutsche Bank spokeswoman declined to comment, while officials at Red Kite and Glencore didn’t respond to e-mails sent after regular European business hours.
The September 2010 deal with Deutsche Bank was suggested by senior executives at Metro and a board subcommittee composed of Goldman Sachs employees, the report said. The transaction wound up having an immediate impact on the queues at the warehouse and resulted in other users having to wait longer and pay more to store their aluminium. The transaction increased the wait in Detroit from about 20 days to almost 120 days, the report found.
The report alleged the long delays led to a surge in the price of aluminium, which Goldman Sachs was trading at the same time. Goldman Sachs said the transactions responded to client requests and weren’t improper. – Bloomberg