
Goldman's new money machine: warehouses - amaranand
http://www.reuters.com/article/2011/07/29/us-lme-warehousing-idUSTRE76R3YZ20110729
======
cletus
Investment banks do provide valuable services: market making (providing
liquidity in many markets), capital raising, the creation of financial
instruments so investors can hedge against certain kinds of risk and so on.

Unfortunately I think we're reaching the point of banks overstepping their
bounds and creating far more problems than they really should.

This strategy seems similar to the "demand shock" approach they used in
driving up wheat prices in recent years. And of course the subprime crisis was
the result of lax regulation, arguably criminal negligence by Standard &
Poor's and Moody's (who rated certain baskets of loans as AAA) and a lot of
players who simply didn't have to bear any risk.

I'm really not sure what the solution is here but something really needs to
bring this system into check. Such paper shenanigans are having real negative
consequences.

In Australia we have a strict financial regulation regime, arguably too strict
in some cases, but we didn't have the bubble in real estate prices that the US
did. "No doc" and "low doc" lending never reached the point of collapsing the
market.

One could argue that financial regulation is to blame and you're probably
right but I have no faith in the US government's ability to correct this or
pretty much anything else. Washington now seems to be nothing more than a
battleground for special interest lobbying and ideologues devoid of
rationality.

In the past ~30 years or so investment banks have generally undergone a change
from being a partnership to being a corporation. The major difference between
the two is partnerships have unlimited liability. Much like a law firm, the
partners are _personally_ liable for losses.

I've come to the conclusion that this change has been detrimental to the
function of the financial industry as a whole. Combine this with Federal
government bailouts and investment bankers seem to act with complete impunity
with regards to risk.

Something needs to change.

~~~
Alex3917
"Investment banks do provide valuable services: market making (providing
liquidity in many markets), capital raising, the creation of financial
instruments so investors can hedge against certain kinds of risk and so on."

I hear this argument a lot. While I think it would be an exaggeration to say
that what Wall Street does benefits no one, at the same time it's clear that
what Wall Street does is designed primarily to benefit themselves. Any benefit
to society is merely a happy accident that gets leveraged for propaganda
purposes, whereas on a day to day basis what they're really doing is earning
money off the backs of those that are actually trying to do things that
benefit society.

~~~
cletus
> at the same time it's clear that what Wall Street does is designed primarily
> to benefit themselves.

So what?

I don't begrudge them making a profit. Capitalism is the engine that propelled
us from riding around on horses to putting a man on the Moon in the span of
one man's lifetime.

But there are builders and extractors [1]. Allowing a farmer to forward-sell
his crop so his income is known adds value. It also allows consumers to know
what price they're paying in advance. Both of these make a profit for the bank
but they provide value to both parties. This is not a zero sum game.

But when banks create funds that stockpile food for the purpose of driving up
prices, the only real beneficiary is the bank's investors. In the short term,
suppliers benefit from higher prices but long term you face increased
inflation if the price rise is sufficiently large and you start applying the
inevitable "me too" to other industries.

If you'd like to see how well denying the profit motive works you need look no
further than the former Soviet Union.

[1]: <http://cdixon.org/2010/06/19/builders-and-extractors/>

~~~
umarmung
There is really only ONE possible and proven sustainable solution to this
mess. It was realised in the aftermath of worst financial crisis ever seen,
the Great Depression. It worked so well to create such stability, or at least
certainly did not cause any harm to the real economy for so long, that the
world saw the longest sustained period of growth it has ever seen and is also
considered by all economists to be the "golden age" of capitalism from 1945 to
1971 (they only differ on precisely how the combination of all factors came
together).

The solution in the aftermath of the Great Depression was Glass-Steagal and
capital controls globally. This meant,

1\. The money supply effectively only circulated _within_ each country and
transfers between countries were always linked to trade. Since jobs follow
business investment, this meant very high employment per nation.

2\. Financial instability had minimal to zero systemic impact in advanced
countries because banks were only permitted to engage in funding and financing
directly related to the real economy.

3\. In addition, a side effect due to the partitioning and lack of artificial
wealth interconnectedness, TBTF was not possible.

4\. All manner of speculators were able to exist even then, but they knew they
only had one chance with the capital they had since completely different types
of financial activity were not allowed to co-mingle under the same
organisation or group.

5\. Finally, money was linked to the gold standard and debt creation
(including printing) that did not relate to trade was very difficult - though
not impossible, especially for governments which wanted to run or extend huge
war machines for their empires.

Having to pay for the Vietnam War and coinciding with domestic inflation,
caused Nixon to move the dollar off the gold standard in 1971, a fitting end
to the Golden Age on 15 August 1971. Almost exactly 40 years later, here we
are - in real (inflation-adjusted) economic terms per capita for median person
effectively back to square zero with the worst in the real economy still to
come as the ripples of the crises continue on through entire sovereigns.

An alternative way to look at it, is that the combination of financial
deregulation and financial "innovation" since 1980 caused capital to move
well-ahead of the globalisation of the real economy. Like a very strong wave,
it caused ripples and bubbles in the assets available to it before real growth
and high quality assets (including highly educated workers) backing it caught
up. In a sense, the financial industry became too efficient at shifting
liquidity and wealth transfer relative to the underlying economy. Combine this
with the enormous increase in money supply generated by the political masters
of the new fiat currencies, this meant the mother of all deleveraging and
financial crisis was being deferred into the future. Well, the future is here
now.

In short, there is a reason why in every country above subsistence level in
the world, the financial industry is almost as heavily regulated as the
nuclear industry. Like writing a good, large and complex computer program,
having a few huge procedures with many side effects is far worse along every
dimension than having many much smaller and well-organised functions with
minimal to no side-effects.

The solution is "Compartmentalization" aka. Glass-Steagall on steroids for the
financial industry. It is even advocated by high profile economists and others
who publicly foresaw the 2007 crisis.

~~~
yummyfajitas
_2\. Financial instability had minimal to zero systemic impact in advanced
countries because banks were only permitted to engage in funding and financing
directly related to the real economy._

Um, the dotcom bubble happened under Glass-Steagall. So did 1987, the 1997
Asian financial crisis, and the 73-74 crash.

 _3\. In addition, a side effect due to the partitioning and lack of
artificial wealth interconnectedness, TBTF was not possible._

No. The Savings&Loan bailout and LTCM bailout both occurred under the Glass-
Steagall regime.

 _4\. All manner of speculators were able to exist even then, but they knew
they only had one chance with the capital they had since completely different
types of financial activity were not allowed to co-mingle under the same
organisation or group._

You have no idea what you are talking about. The decline of product-specific
trading desks was caused by the onset of stat-arb and had nothing to do with
Glass-Steagall.

 _40 years later, here we are - in real (inflation-adjusted) economic terms
per capita for median person effectively back to square zero..._

This is a statistical artifact. The median person who's parents were in the
united states in 1968 has income (adjusted for chained CPI, which is not the
same as inflation) 29% higher than their parents. Immigrants lower the
average/median.

[http://crazybear.posterous.com/did-immigrants-and-
simpsons-p...](http://crazybear.posterous.com/did-immigrants-and-simpsons-
paradox-cause-the)

------
lawnchair_larry
Goldman is the great american bubble machine, and it's disgusting.

 _"From tech stocks to high gas prices, Goldman Sachs has engineered every
major market manipulation since the Great Depression -- and they're about to
do it again"_

[http://www.rollingstone.com/politics/news/the-great-
american...](http://www.rollingstone.com/politics/news/the-great-american-
bubble-machine-20100405)

~~~
rapind
So hypothetically if someone wanted to _opt-out_ of this essentially corrupt
system completely, how would they go about it? I mean paying taxes in a
country with bailouts certainly ties you up into the system. Even without
bailouts, living in a country tied to a dollar that's being printed like mad
kind of ties you up into it too right?

So... how exactly would one go about this? Possible?

~~~
invalidOrTaken
It's not trivial, but one way you could opt out would be...opting out.

[http://www.trulymovingpictures.org/festival-
years/2010/movie...](http://www.trulymovingpictures.org/festival-
years/2010/movie/zero-currency)

Linked is a review of the movie _Zero Currency_ , about a former social worker
who stopped using money or barter. Disclaimer: I haven't seen it.

A good place to start would be to own your own home, aggressively invest in
solar energy, and grow your own food.*

All that's pretty expensive though...maybe you could go work in finance and
save up?

*3D printing might also be worth a look for some items.

~~~
jes
Even if you own your own home, you typically still have to pay taxes. You may
have to earn some income if you don't have money saved up for your taxes, so
you'll probably have to pay income taxes as well.

Bottom line, it's difficult to fully opt out. But what you suggest is not a
bad start.

------
rdl
This has been posted here before. Part of me respects then for being such
excellent hackers of the letter of the law, but mostly I agree that this firm
in specific is a. Armpits squid which is out of control and distorts markets,
causes widespread harm to markets and individuals, and is not effectively
controlled by regulators (who are largely Goldman alumni, in their revolving
door system). I have no idea what the right solution is to this problem. I am
kind of ashamed to have several friends who now work for Goldman.

~~~
drats
I think you raising "hackers" with this is the perfect way to describe the
situation. Goldman are hackers in the same sense the main stream media refers
to crackers as hackers, not hackers in the creative sense used by this
community.

Futures markets have a purpose, in food and energy for example, but GS along
with others has been manipulating them in dodgy ways. Ditto for this article
and aluminum. They helped Greece cook the books to enter the eurozone, and
then insured against Greek default knowing there would be bailouts. They
recommended to various customers to invest in all sorts of CDOs _while at the
same time betting against them having internally decided they were going to
fail_. There is absolutely no doubt in my mind that there should be numerous
prosecutions in relation to GS but incompetence in public officials with a
generous sprinkling of corruption makes this unlikely.

I'm a big fan of America but I've never understood the romanticism around the
mafia (the Godfather films and the Sopranos TV series for example). If I had
friends in the mafia I would disown them, and I'd seriously rather die than
join it. While GS is perhaps not as bad directly, indirectly the consequences
of their actions have been and are enormously immoral. I recommend you
challenge your friends on these issues firmly, send them a link to Salman
Khan's story[1] and tell them to put their (no doubt considerable) talents to
better use: doesn't have to be a non-profit either. Even if they decide not to
leave they should be made aware that there is social sanction associated with
being linked to, if not directly involved in, the vortex of corruption
surrounding that company.

[1]<http://en.wikipedia.org/wiki/Salman_Khan_(educator)>

~~~
potatolicious
The type of people that Goldman employs aren't stupid, or ignorant. I've known
a few - they are perfectly aware of what the company does, and the moral
minefield they are in.

To accept employment there requires a conscious relinquishing of moral
culpability - i.e., these people have decided that, yes, what the company does
is fundamentally wrong, but for whatever reason (money, fame, power, the
thrill of the hack, satisfaction of working on the winning team, etc) _they
don't care_.

I'm not sure what use it would be to preach to people like this.

~~~
fleitz
I'm going to take massive downvotes on this but...

You can't preach to people like that, they're fully rational and immune to
patriotic emotional dulce et decorum est bullshit.

They don't care that their going to hell for their actions because they know
hell doesn't exist.

The world isn't some retarded star wars black and white fantasy, it's black
and black pretending to be white. Stop naming shadows in platos cave and get
out into the sunshine.

Google didn't succeed because open source is some miracle of business, they
succeeded because they created a platform for clicking ads and open source
software makes that platform cheaper. Gmail isn't a gift to the internet
community, it's more ads. If they didn't make money from it, they'd shut it
down.

~~~
potatolicious
I don't care that I'm going to hell, because I know hell doesn't exist.
Indeed, no matter how pious I act, by _some_ religion's definition I'm damned
anyways.

But yet I'm not out there destroying livelihoods for personal profit. Way to
pander to the stereotype that fear of the hereafter/almighty is the only way
to get people to act morally/curb antisocial behavior.

I police my own behavior because, by some lucky stroke of evolutionary
development, I have been granted the ability for high-level thought. Many
people have been able to use this tremendously powerful ability to better us
all collectively. Some seem only interested in using theirs for self-interest,
even at the (grave) expense of everyone else.

This really is the core of it though: many people I've met in finance _do_
believe wholeheartedly in "might makes right" - that morality and what the
system allows them to do are one and the same.

I fear these people greatly.

~~~
fleitz
You're a programmer, most of what you is put people out of work.

That thing you automated? Someone who doesn't know how to program lost their
job because of it, and it ain't coming back.

You'll tell yourself that you've created opportunities for two more
programming jobs for someone else to enhance your automation work, but that
guy with the GED is still out of work. Tough shit buddy, should have learned
to program.

The difference between you and people in finance is they've stopped lying to
themselves about what they do. Btw, I'm a programmer whose going into finance.
Why? Because I can eliminate more jobs and make more money for myself doing
that then I could eliminating jobs as a programmer. Now I'm just eliminating
big money financier jobs instead of 40K grunt jobs. Hey broker dude, screw
your 5% finders fee, my program will take 1% instead. Hit the bricks pal.
Middle men need to eat just as much as producers and consumers.

We put people out of work for our own personal profit, the only difference is
you're pretending about what you do and I'm not.

And you know the really funny thing is? We'll all be better off because the
next generation of people won't have to do those silly jobs, but in the mean
time people are going to be out of work.

Do you know how many researchers, secretaries, etc are out of work because of
Google? Stop kidding yourself and get real about how the world works.

I could write a brilliant essay filled with bullshit about how I'm making the
world a better place increasing efficiency, allowing one person to do more,
and live a better life, and it would be just as true as what I just wrote.
Financiers know double entry accounting and they know that for every credit
there is a debit, both sides of the leger are equally true.

~~~
potatolicious
Ah yes, you're right of course - there is no objective measure of the balance
of good and evil. What I do _does_ eliminate jobs. Does the benefit to
everyone else outweigh the loss of these jobs? Many people would say yes, some
would say no. Some job eliminations open the door for more jobs - for
different people. Does this balance the morality of putting people out of
work?

I don't know. Nobody does. But there _is_ some measure of balance to what we
do. What we do has a benefit - a benefit to someone other than just ourselves.
Right now I work in travel informatics. What I do empowers tens of millions of
customers to make better choices about how they travel, find better prices,
put more information at their fingertips, keeping them informed.

The price of this is that I'm also putting airline service agents out of work,
not to mention travel agents. I've made an end run around them and made it
easier to get all of this information than going and talking to a human.

Personally, I think this is a worthwhile balance. The loss of these jobs also
means a massive improvement to the efficiency of travel, and the happiness of
tens of millions of travelers. This isn't a clueless assumption either - the
emails I've seen from users demonstrates that people _are_ passionate about
what we do. You can disagree - and you wouldn't be wrong. I am, after all, not
the arbiter of what is and isn't a worthwhile trade.

There's a difference between _this_ and what Goldman does, though. The balance
is _way_ on the other end of the scale. The artificial supply squeeze on
industries benefits... what exactly, besides Goldman itself? The price is
obvious - rising consumer prices, starving people who can no longer afford to
eat (re: the food crisis that Goldman is also accused of contributing to),
wars and revolutions caused by desperate, hungry people.

So what's the upside? What did we gain for this price Goldman has exacted?

> _"Financiers know double entry accounting and they know that for every
> credit there is a debit, both sides of the leger are equally true."_

Please name the "credit" of what Goldman has done here.

We're not idiots, we know there's a credit and a debit. The question is, this
doesn't seem to be the case in situations like these, where it seems we're all
paying the price, and the only "credit" is to the financier.

~~~
yummyfajitas
_The artificial supply squeeze on industries benefits... what exactly, besides
Goldman itself?_

If aluminum becomes more scarce in the future (Goldman seems to be betting
that it will be), then Goldman has done us all a favor by conserving it in the
present.

If it is not more scarce in the future, then Goldman will lose money.

~~~
tptacek
It's troubling that a comment like this has to be buried deep in a thread
about religion, Platonic ideals, might-makes-right, higher-order thought, and
the nature of morality --- most of it stipulating Goldman is evil.

------
DenisM
A normal person would never starve a child to better his own lot. Instead he
will give his pension fund savings to Goldman Sachs, who will then promptly
cause a world-wide famine by manipulating the food markets. Which is why GS
gets paid the big bucks - they absolve the future retirees of the moral
responsibility for the starvation of the less fortunate.

~~~
jrockway
What makes you think that Goldman is doing this for anyone other than
themselves?

------
hristov
This is pretty awful, but it seems like one of these problems that could and
should be solved by the free market.

Somebody should just start a new metals exchange that caters to the needs of
its clients rather than trying to squeeze them. There is no reason why America
has to do its metals trading in some ancient London exchange.

~~~
gwright
It wouldn't surprise me to find out that it is next to impossible to create a
new metals exchange due to onerous government regulations that effectively
keep out new competitors.

I don't completely understand what is going on in the original story but it
also wouldn't surprise to find out that it is only via the existance of
various regulations that this scheme is viable.

~~~
lawnchair_larry
Actually Goldman tends to exploit a lack of regulations, and will lobby to get
regulations removed in order for them to exploit markets further.

Interestingly, the propaganda used to win public support for these moves is
that "big government is bad, and we should let the market decide".

Your opinion of regulations needs to take a 180, in my opinion :)

 _"The date was November 4, 1999. Senator Byron Dorgan was captured only by
the cameras of CSPAN2.

"I want to sound a warning call today about this legislation," he declared, "I
think this legislation is just fundamentally terrible."

The legislation was the repeal of the Glass-Steagall Act (alternatively known
as Gramm Leach Bliley), which allowed banks to merge with insurance companies
and investment houses.

The title of the bill was 'The Financial Modernization Act.' And so if you
don't want to modernize, I guess you're considered hopelessly old fashioned."

Ten years later, Dorgan has been vindicated. His warning that banks would
become "too big to fail" has proven basically true in the wake of the current
financial crisis. He seems eerily prescient for claiming then that Congress
would "look back ten years time and say we should not have done this."_

[http://www.huffingtonpost.com/2009/05/11/glass-steagall-
act-...](http://www.huffingtonpost.com/2009/05/11/glass-steagall-act-the-
se_n_201557.html)

Even the titles of bills in this country are propaganda. It's frustrating.

People like Christopher Dodd should definitely be in prison. Take a look at
his role and support in the article linked above, and then take a look at
this:

[https://secure.wikimedia.org/wikipedia/en/wiki/Chris_Dodd#Co...](https://secure.wikimedia.org/wikipedia/en/wiki/Chris_Dodd#Controversies)

~~~
gwright
Arguing about 'regulation' with no context or means to evaluate them doesn't
get us very far.

Regulations that enhance and encourage fair competition should be supported.
Regulations that reduce competition or hinder commerce should not be
supported.

There is always concern for negative externalities and this is an area where
regulations can have a role.

------
Cieplak
A similar thing is happening with generic chemotherapy drugs. Profit margins
for generics are thin, so few companies manufacture them. When a supply issue
arises, distributors stockpile the drug and charge hospitals one or two scales
of magnitude of the generic price.

~~~
cperciva
... which is a perfect example of why we need derivatives markets. If
hospitals purchased drugs a year in advance of anticipated demand, they would
pay a slight premium, but wouldn't be subject to squeezes like this.

~~~
jcdreads
...unless Goldman stopped selling derivatives on chemotherapy drugs and
instead began to stockpile a large fraction of the available chemotherapy
drugs in warehouses in Detroit.

------
gersh
My understanding of this is you buy a futures contract that says you get so
much metal on a certain date. The date arrives, and Goldman Sachs tells you
that you own the metal, but it is in our warehouse. Further, you have to wait
months before you can get it out of the warehouse, and you owe rent until
then.

------
ruggeri
Did anyone else feel this was a poorly written article? Maybe I'm obtuse, but
I found it _very_ difficult to understand. I felt like the writers were too
busy sexing up the article to focus on explaining what's going on here...

It sounds like metal traded on the LME must be stored in an LME certified
warehouse. The LME-certified warehousing market doesn't appear to be very
competitive, as Metro/GS can take its sweet time getting you your metal yet
not go out of business. _LME's_ conflict of interest is that it's supposed to
regulate warehousers when one of its biggest members (GS) owns said
warehouses. The alleged "warehouse strategy" then was for GS to buy the
warehouses and create the conflict in the first place.

Did I get it?

------
SandB0x
I realise these are quite hyperbolic, but you might be interested to watch
this short profile of commodities giant Glencore, mentioned in the article:
<http://www.youtube.com/watch?v=u6rSBifsvwg>

------
darksaga
I find it curious the article never mentions the real culprit in hogging
resources - China. When I was working in the bike industry, over the course of
a few years, ALL of our bikes jumped in price considerably. After talking with
one the reps from Specialized, they said China has put a huge strain on raw
materials like Aluminum, Titanium, and Steel. By doing so, they've pushed the
prices up across the board.

The stuff Goldman Sachs is doing pales in comparison to what China has been
doing over the past 5-8 years.

------
Mordor
Please can someone stage a protest outside their warehouse to prevent all
movement in and out?

------
Canada
Wow, finally this months old story is making the rounds here?

------
raarky
How is this any different to stockpiling gold?

