Did Goldman Sachs rig the commodities markets? - Nov. 20, 2014
"Goldman Sachs has been trying to distance itself from the "vampire
squid" image it developed during the financial crisis. The findings of a
Senate investigation into commodities market rigging probably won't
help.
According to the report, Wall Street banks may have manipulated commodity prices in recent years, raising costs on consumers. The investigation looked into the holdings and dealings of Goldman (GS), JPMorgan Chase (JPM) and Morgan Stanley (MS) in physical commodities.
Banks have long been involved in trading commodities, but recently
they've become major players in the transport and storage of commodities
like aluminum, copper, and uranium
The report found that in
some cases, the banks "used their physical commodity activities to
influence or even manipulate commodity prices."
Market jamming: The
probe zeroed in on Goldman's ties to aluminum, a key metal involved in
everything from soda and beer cans to manufacturing cars and jets.
Goldman encouraged its clients to move aluminum around for one
warehouse to another, the report said. The bank even went as far as
offering cash incentives to do so.
The deals, referred to as
"merry-go-round" transactions by the report, helped cause unprecedented
backlogs. Some metal owners to wait up to about two years to get their
metal out of storage, the report claimed.
The long lines drove
prices higher and made it harder for aluminum buyers to hedge their
price risks. Some industrial aluminum users claimed the dysfunction
inflated aluminum costs by $3 billion, the report said."
...
"Bailout risk: As if possible manipulation wasn't
bad enough, the Senate probe found that these banks' physical commodity
activities put them at risk of needing another taxpayer-funded bailout.
That's because the firms failed to protect themselves against the risk
of a catastrophic event like an oil spill or mine explosion that could
leave them on the hook for serious liabilities, similar to what happened
with "toxic assets" during the financial crisis of 2008.
"More
is needed to safeguard the U.S. financial system and protect taxpayers
from being forced to bailout large financial institutions involved with
physical commodities," the report found."
