Goldman Sachs and other big banks have been accused of costing American consumers more than $5 billion over the past three years through its dealings in the obscure business of warehousing aluminum. These dealings were the subject of a Senate hearing on July 23.
The rhetoric level was high, exemplified by Senator Sherrod Brown (D–OH) who likened Goldman’s aluminum activities as market manipulation, and asked, “What do we want our banks to do…issue mortgages or corner the metals market?”
This and other hyperbolic assertions ignore a critical element of logic: Goldman’s warehouses store a miniscule slice of the market for aluminum, making nonsense of the claim that it—or other banks—possess any market power to seriously affect, never mind manipulate, the market.
The controversy was brought to the fore by a New York Times article on the activities of Metro International Trade Services, a Goldman subsidiary acquired in 2010. Metro International owns a network of 27 warehouses in the Detroit area in which it stores aluminum for other businesses. Operation of these facilities helps Goldman better understand trends in commodity markets. The Times reports that “each day, a fleet of trucks shuffles 1,500-pound bars of metal among the warehouses.” The Times investigation alleges that “this back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal.”
The Senate subcommittee on Financial Institutions and Consumer Protection held a hearing about the practice, the Federal Reserve began a review of its rules that allow financial institutions to own physical commodities, and the Commodity Futures Trading Commission initiated an inquiry into Goldman’s warehouse operations. The Senate hearing was topped off by Senator Elizabeth Warren (D–MA) who likened the practices to a “business method pioneered by Enron.”
Subsequently, JP Morgan Chase announced its intention to exit the physical commodities business amid “mounting criticism of banks’ ownership of such holdings.” The New York Times editorialized that “policy makers must thoroughly investigate the aluminum warehousing strategies to determine whether Goldman and other warehouse operators distorted prices.”
But Goldman owns so little of the global aluminum market that, even if it is intentionally raising its own prices, such shenanigans would have no effect on global prices. Goldman stores about 1.5 million tons of aluminum in its warehouses, which amounts to barely 3 percent of the total amount of aluminum produced each year. Even if Goldman colluded with other financial firms, there would be little market clout, as only about 5 percent of the world’s aluminum produced each year is stored by financial firms with warehousing systems like Goldman’s.
Customer complaints that Metro International is slow to deliver stored aluminum when they need it could very well be valid. And it could be true that aluminum prices have increased. But bad service and higher prices are hardly indications that the market is manipulated. And given the small market shares involved, such claims are far-fetched at best. The allegations do fit into a convenient storyline that big banks are bad. That’s the narrative that many in the media and Congress propound. And, as they said in the Old West, when the legend conflicts with the facts, print the legend.
Nicolas Vega is currently a member of the Young Leaders Program at The Heritage Foundation. The author worked as a summer analyst at Goldman Sachs in 2011.