Goldman’s Latest Scam: Turning Empty Space into Riches

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Who knew that Detroit was so commodity-rich it was ruining entire segments of industry?

Only, I presume Detroit gets little to none of the fortune Goldman is making by hoarding aluminum in warehouses in the city, thereby driving the price up and making millions on warehouse rent. This Reuters article describes the scam, but it works sort of like this.

The London Metal Exchange has rules to smooth out market prices for the commodities sold on its market (the rules thus serve the same goal as derivatives). As part of this, the exchange regulates over 640 metals warehouses around the world. The idea is, the metals can be stored there during recession, then used after the economy improves. The LME requires that a certain amount of metal must be delivered each day, to keep it flowing. But it sets those limits by city, not by warehouse. So in a city like Detroit, owning a concentration of warehouses allows a firm to create an artificial bottleneck in supply of the metal. And it’s costing the people who actually want to use aluminum to do something productive with it.

“It’s driving up costs for the consumers in North America and it’s not being driven up because there is a true shortage in the market. It’s because of an issue of accessing metal … in Detroit warehouses,” said Nick Madden, chief procurement officer for Atlanta-based Novelis, which is owned by India’s Hindalco Industries Ltd and is the world’s biggest maker of rolled aluminum products. Novelis buys aluminum directly from producers but is still hit by the higher prices.

[snip]

Premiums for physical aluminum — the amount paid above the LME’s cash contract currently trading at $2,620 a tonne — in the U.S. Midwest hit a record high of $210 a tonne in May, up about 50 percent from late last year. In Europe, the premium is at records above $200 a tonne, double the levels seen in January 2010.

The ripple effect into Asia has seen the premium paid in Japan increase 6 percent to $120 a tonne in the third quarter from the previous quarter, the first rise in nearly six quarters.

One of the keys to this scam is that the traders that own the warehouses also own the exchange.

The lack of real change has some in the industry questioning the very structure of the LME, which, unlike its publicly owned U.S.-based rival commodities exchanges, is owned by many of the financial institutions that trade there.

[snip]

That concern is growing. Critics of the exchange point to a potential problem with zinc supply though New Orleans, where inventories now account for 61 percent of total LME-registered stocks.

Most of the warehouses in New Orleans are owned by Goldman and Glencore.

And those same traders are buying up warehouse companies around the world.

Now, given that the two cities mentioned in this article–Detroit and New Orleans–are seriously hurting, it seems one solution would be for the cities to impose a tax designed to move product (presumably, such a tax would also create more work for those working in the warehouses). If concentrated empty space is their competitive advantage, why shouldn’t they stick it to Goldman?

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17 replies
  1. emptywheel says:

    Btw, meant to link to this Yves Smith post in which she takes on Krugman by pointing to role of supply in commodity bubbles.

    That is not where our bone of contention with Krugman over oil in 2008 or our reservations now lie. It’s over statements like this:

    But for food, it’s just not happening: stocks are low and falling.

    This is simply not knowable, or at least not to the degree of confidence that Krugman has.

    One thing I do on a regular basis is analyze information about market size and activity, and over time, it’s taken place in a very wide range of industries (yours truly specializes in oddball deals). Unless you are dealing with markets in which the government demands extensive reporting (like Japan, the data you can get in Japanese is just fantastic) or ones where you have a system of centralized reporting or other tight controls (like pharmaceuticals), it is very difficult even to get decent estimates of market size. So a basic issue is: understand the integrity of data.

    Now consider commodities. Inventories can be held LOTS of places: storage facilities by private owners (major refiners such as flour mills), finished product, private speculators (there have been reports for years of base metal stockpiling in China), even the consumer level (during the oil crisis, people kept their auto gas tanks fuller due to the even-odd license plate gas station system). Consider what a monstrous supervisory apparatus around the world would be required to track all or even a substantial portion of where inventories in various commodities could be held.

    The logical fallacy for Krugman is the official inventories he is looking at are only a subset of the places where inventory can be accumulated, and in many if not most cases a small enough subset that he cannot reach conclusions of the absence of inventory accumulation.

  2. klynn says:

    I am shaking my head after reading this post. I am lost for words at the level of greed consistently displayed by GS.

    So. Much. Usury.

    In many hidden forms.

  3. emptywheel says:

    @klynn: One of the things I found most interesting is that even in spite of this game, Goldman is still losing money in its commodity trading business. I’m curious why, and to what degree is it holding the world hostage to try to make up for whatever that why is.

  5. posaune says:

    Any thoughts as to whether GS is hedging cotton? oh, and I’m glad you’re not in an old law tenement!

  6. DWBartoo says:

    Goldman Sachs …

    ” … holding the world hostage.”

    T-shirts of the world unite!

    Great truthing.

    Have you any idea as to what “regular” people, if they KNOW about this, and live in Detroit, think of this “astute”, speculative, anticipatory “hoarding” on such a massive scale?

    Outen the word

    before “they” outen the light.

    Completely unrestrained greed.

    Perhaps we should drop leaflets on Detroit?

    (Prolly be charged with littering.)

    DW

  7. gremlint says:

    That Reuters site is interesting. They don’t seem to allow any comments that are anti-capitalist. It’s only a matter of time before the internet becomes as manipulated as the airwaves.

  8. klynn says:

    @emptywheel:

    What outside financial failures could GS cause by playing this game? My point, are they taking a short term loss to benefit from a larger investment such as CDSs that may be tied to the commodity?

  9. Gitcheegumee says:

    @#8

    Here is a large investment by GS in the New Orleans Community,one of the cities cited as a warehouse location in the Reuters article.

    McCormack Baron Salazar and The Goldman Sachs Urban Investment Group (“Goldman Sachs”) announced on May 10, 2010, a strategic partnership and shared vision for the future of rebuilding distressed communities across the country.

    Goldman Sachs’ partnership interests began with its equity investment in McCormack Baron Salazar’s revitalization of Harmony Oaks, (formerly C.J. Peete) a HOPE VI development in New Orleans, Louisiana. This former public housing site was the home to nearly 150 families when Hurricane Katrina struck on August 29, 2005.Nearing completion, the $172 million, 460-unit redevelopment, was designed to replicate the traditional Central City neighborhood. In February 2010, both firms welcomed the first returning residents to Harmony Oaks.

    About the Goldman Sachs Urban Investment Group (UIG)

    Founded in 2000, The Goldman Sachs Urban Investment Group (“UIG”) deploys the firm’s capital by making investments and loans that benefit low- and moderate-income people and underserved communities. Through its comprehensive community development platform, UIG is a catalyst in the revitalization of distressed urban neighborhoods. UIG is part of The Goldman Sachs Group, Inc. (NYSE: GS); to learn more about UIG, visit http://www.gs.com/uig.

    NOTE: The Reuters article does not specify exactly where the warehouses in New Orleans are located,but it would be very interesting to know if it is at the Port of NOLA.
    Additionally, these urban partnerships between GS and the MBS Group extend to other locations also,such as LA .

    (Curious if these other projects are all adjacent to port cities also. That would acconmodate the transport and delivery of metals to the warehouses.)

  11. prostratedragon says:

    Looks like a data assembly opportunity for someone with a grant or a little cash. Has anything actually changed by way of practices or opportunity (lotta new space available) in the right time frame?

    Whenever I see some cheap revenue being skimmed off an enduring asset, I wonder who is warehousing the asset? Or in this case, who owns the land the warehouses are sitting on. (Think open-air parking lots for comparison.) Is the ultimate landlord also GS? (More likely it’s someone whose interests they are representing, because large scale land assembly can take a very long time, during which there can be many ostensible projects, while GS is publically owned and traded.)

  12. bittersweet says:

    @emptywheel: Marcy, that comment sounds like the opening to a drama murder movie starring Julia Roberts. I worry about your safety sometimes. But I can not wait until you figure out the answer! I hope that your 100,000’s of readers shines a safety light on your brilliant inquires! GS hordes materials to speculate on them, but still manages to report a loss on commodity trading business. Are they showing profit for a different company? Is the loss a write off of some kind? Is it only a loss until they spring the next part of the plan? They make far more money on the gambling than the actual commodity, right?

  13. Gitcheegumee says:

    @prostratedragon:

    Or in this case,WHO owns the land the warehouses are sitting on? pd

    NOTE: THIS is what I was getting at when I queried if the NOLA warehouses were possibly on NOLA port property.

    I have in the past mentioned the Dubai Ports deal,which would have had Saudi ownership of US ports-including New Orleans. Eventually AIG got the deal,not the Saudis.

    If you google up AIG and Goldman Sachs,you will get some particularly interesting hits…especially involving back door bailouts.

    And,the billion dollar investment that GS and Madrone Group(Waltons of WalMart)made in the Pritzker Hyatt Hotel chain,could prove quite a bonanza of real estate opportunities for future warehousing sites.

    (Think all the dead real estate WalMart owns that could be easily converted to warehousing spaces .)

  14. Gitcheegumee says:

    Think all the dead real estate WalMart owns that could be easily converted to warehousing spaces …OR …WalMartels.

  15. Gitcheegumee says:

    Goldman fund makes move on US portswww.techzone360.com/news/2007/07/13/2782963.htm – CachedJul 13, 2007 – (Lloyds List Via Thomson Dialog NewsEdge) GOLDMAN Sachs has revealed … The deal follows AIG Global Investment Group’s investment in Dubai …

    Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs …www.bloomberg.com/apps/news?pid=newsarchive&sid=ax3yON…Similar
    Feb 23, 2010 – The new headquarters of Goldman Sachs Group Inc. … These were the deals that pushed the insurer to the brink of insolvency — and were …

  16. Gitcheegumee says:

    Pritzker family could soon own less than half of Hyatt – Chicago …articles.chicagotribune.com/…/ct-biz-0420-hyatt-filing-20110419_1… – CachedApr 19, 2011 – The billionaire Pritzker family is preparing to decrease its ownership of the Hyatt hotel chain to less than 50 percent while not …

    NOTE: This article is timely informative and very well worth the read in it’s entirety.

  17. Gitcheegumee says:

    I would be curious if these GS entities and investments are considered REITS:

    A real estate investment trust or REIT ( /ˈriːt/) is a tax designation for a corporate entity investing in real estate.
    The purpose of this designation is to reduce or eliminate corporate income taxes. In return, REITs are required to distribute 90% of their taxable income into the hands of investors. The REIT structure was designed to provide a real estate investment structure similar to the investment structure mutual funds provide in stocks.[1]

    REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges.

    REITs can be classified as equity, mortgage, or hybrid.

    The key statistics to examine in a REIT are net asset value (NAV), funds from operations (FFO), adjusted funds from operations (AFFO) and cash available for distribution (CAD). REITs face challenges from both a slowing U.S. economy and the global financial crisis, which depressed share values by 40 to 70 percent in some cases.[2]-Wikipedia

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