
A Shuffle of Aluminum, but to Banks, Pure Gold - smd4
http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html
======
temphn
The only way that Goldman could possibly make _more_ money by artificially
delaying shipments would be because of a market-distorting regulation. And
sure enough, here it is:

    
    
      industry rules require that all that metal cannot simply 
      sit in a warehouse forever. At least 3,000 tons of that 
      metal must be moved out each day. 
    

Without looking I'd bet this is some kind of "anti-hoarding" provision,
probably intended to prevent single manufacturers from cornering the market.
As is typical, it caused exactly the opposite of the desired consequence.

Moreover, said rule means (among other things) that no manufacturer can hold a
strategic reserve of aluminum for unexpected spikes in demand without playing
the games that Goldman is playing. Naturally, the response of the New York
Times is that we need more such rules and regulations, that next time we'll
anticipate their consequences, that the only failing is that they haven't been
"strict" enough.

But the "stricter" the rule, the more that little guys get hit with it while
Goldman uses teams of lawyers to define and then exploit a safe harbor.[1] In
this sense, Goldman and the NYT are in cahoots: "strict" regulations directly
benefit big companies.

[1]
[http://en.wikipedia.org/wiki/Safe_harbor_(law)](http://en.wikipedia.org/wiki/Safe_harbor_\(law\))

    
    
      A safe harbor is a provision of a statute or a regulation 
      that reduces or eliminates a party's liability under the 
      law, on the condition that the party performed its actions 
      in good faith or in compliance with defined standards. 
      Legislators may include safe-harbor provisions to protect 
      legitimate or excusable violations, or to incentivize the 
      adoption of desirable practices.

~~~
Lagged2Death
_Without looking I 'd bet this is some kind of "anti-hoarding" provision,
probably intended to prevent single manufacturers from cornering the market.
As is typical, it caused exactly the opposite of the desired consequence._

In your first sentence you admit you don't know what's going on, then in your
second sentence you claim that "it caused exactly the opposite of the desired
consequence." The point being, this could be an old rule that's worked well
until just recently, as far as you know. It's possible it's done more good
than ill.

In any case, it's described as an "industry rule," not a government
regulation, as your quote makes clear. It's the result of industry "self-
regulation." The article mentions this.

The shuffle of stock is an end-run around that rule, but it's not the cause of
the higher prices. The delay-to-raise-prices scam would be easier to run and
more profitable if the rule that makes the shuffle necessary didn't exist.

~~~
temphn
You prompted me to dig in further to see what the source of the underlying
distortionary rule is. Looks like the LME or London Metal Exchange[1]. But
that in turn is governed by the government[2]. And the government, including
the CFTC which governs the LME, has indeed passed distortionary "anti-
hoarding" laws in allied areas[3]. See links below.

The key question is whether the LME is free to change these rules and/or
purchasers are free to use another exchange in response to Goldman's attempt
to increase prices. If they are not so free - if, say, the LME's rule here is
imposed to be compliant with some CFTC or SEC or equivalent provision - then
we are back to where we started.

Conversely, if the participants are free to use another exchange or start a
competing one, then this issue is on the level of Zynga spamming Facebook - a
dispute between two powerful private parties that will be worked out via LME
countermeasures/competition rather than federal regulation.

[1] [http://www.reuters.com/article/2011/07/29/us-lme-
warehousing...](http://www.reuters.com/article/2011/07/29/us-lme-warehousing-
idUSTRE76R3YZ20110729)

    
    
      Goldman's warehouse business relies on a lucrative 
      opportunity enabled by the LME regulations. Those rules 
      allow warehouses to release only a fraction of their 
      inventories per day, much less than the metal that is 
      regularly taken in for storage.
    

[2] [https://www.lme.com/en-gb/regulation/](https://www.lme.com/en-
gb/regulation/)

    
    
      The Exchange provides the environment for trading and 
      regulates the operation of the market. It has a statutory 
      requirement to ensure that business on its markets is 
      conducted in an orderly manner, providing proper protection 
      to investors.
    
      Approved as a recognised investment exchange (RIE) and 
      conforming with UK and other international regulatory 
      requirements, the LME offers, through price and volume 
      transparency and audit trails, a legally safe forum for 
      metals trading. As an RIE, the Exchange comes under the 
      direct jurisdiction of the UK Financial Conduct Authority 
      (FCA).
    
      Regulation of the market is largely carried out by the LME, 
      while the FCA is responsible for regulating the financial 
      soundness and conduct of LME members' business.
    
      Beyond this, both the Exchange and its members are subject 
      to regulatory controls and input from various UK bodies and 
      government offices, as well as EU directives. In 
      international trading, rules applied by overseas regulatory 
      bodies such as the US Commodity Futures Trading Commission  
      (CFTC) also have to be taken into account. 
    
      To ensure the observance of these regulations, the LME has 
      a compliance department under the supervision of the 
      Executive Director of Regulation & Compliance.  
    

[3] [http://finance.fortune.cnn.com/2011/10/19/cftc-
commodities-r...](http://finance.fortune.cnn.com/2011/10/19/cftc-commodities-
regulations/)

    
    
      The Commodity Futures Trading Commission approved new 
      limits on commodities traders. Now analysts want to know 
      what will happen next.
    
      FORTUNE -- Is the cure for speculation in the energy 
      markets worse than the illness? Futures industry 
      professionals are up in arms over a vote by regulators 
      Tuesday to introduce position limits on hedge funds and 
      other traders, saying it will lead to commodity hoarding 
      and large price spikes in the futures.
    
      The CFTC decision (the full text is here) places various 
      limits on how much a speculative trader, like a hedge fund 
      or ETF manager, can hold in any of 28 commodity contracts, 
      including energy. The aim is to prevent a run-up like June 
      2008 when oil hit $140 a barrel which ultimately introduced  
      $4 a gallon gasoline at the pumps. The problem is, 
      according to futures analysts, if speculators aren't 
      allowed to buy the futures, they'll buy the physical 
      commodity instead.
    
      "Eventually you're going to see a shortage, I think it's 
      going to create a disruption in the marketplace. We might 
      get away with it for some time, but if there's a crisis 
      like 2008 you'll see one," Phil Flynn, the energy analyst 
      at PFG Best, a Chicago brokerage, told me this morning (he 
      also lets loose on his morning market commentary). 
     
      Similarly, if less ominously, CME Group (CME) chairman 
      Terry Duffy told CNBC yesterday ahead of the CFTC vote that 
      passage would "encourage manipulation" of the markets.

~~~
Lagged2Death
_The key question is whether the LME is free to change these rules..._

They _did_ change them, that's where the 3,000 number came from, did you even
read this story?

 _...if the participants are free to use another exchange or start a competing
one..._

I don't see how that's likely to help. First of all, the metal suppliers have
an incentive to use Goldman's warehouses and thus the Goldman-controlled
exchange, since Goldman's paying them a kickback. Secondly, if enough metal is
going through the LME, that sets the de-facto market price and you'd be daft
to sell your Al for less than that, wouldn't you?

~~~
temphn
You're so hostile that you kick the ball into your own net. My question was
whether LME was free to "change" the rule by _abolishing_ it, or whether this
was related to an underlying CFTC compliance issue. Because trying to increase
the stringency of the rule did nothing:

    
    
      Martin Abbott, the head of the exchange, said at the time 
      that he did not believe that the warehouse delays were 
      causing the problem. But the group tried to quiet the furor 
      by imposing new regulations that doubled the amount of 
      metal that the warehouses are required to ship each day — 
      from 1,500 tons to 3,000 tons. But few metal traders or 
      manufacturers believed that the move would settle the 
      issue.
    

This does not argue in favor of your tacit position that we just need more
rules, or more men with guns to enforce them.

------
droithomme
The New York Times is claiming that they have just discovered this scheme
through investigative reporting, but the article is a rewrite of a July 2011
Reuters article by other authors.

[http://www.reuters.com/article/2011/07/29/us-lme-
warehousing...](http://www.reuters.com/article/2011/07/29/us-lme-warehousing-
idUSTRE76R3YZ20110729)

~~~
patio11
They're presumably avoiding that because they'd have to answer the
uncomfortable question "And how many billions of dollars have speculators
stolen from hardworking Americans by hoarding aluminum since the Reuters
piece?" "Er, the spot price is down by a third, actually."

~~~
MikeCapone
People need to realize that if you hoard something, you might be reducing
supply now, but if you want to make money you have to eventually sell and that
increases supply at some later point.

There's no cure for high prices like high prices, and vice versa.

~~~
msandford
Goldman will probably pump-and-dump the warehousing business onto someone
unsuspecting.

1\. Buy up metal warehouses

2\. Stockpile metal, thus reducing market supply

3\. Watch as market price increases and rental income holds steady

4\. When market prices have risen enough (say 30-50%) and you have a giant
stockpile of metal, put the whole business up for sale

5\. A giant inventory coupled with high prices and increasing cashflow for the
last several years makes the business very attractive to someone with money
but not a lot of sophistication

6\. Goldman makes a boatload and doesn't have to figure out how to unwind the
mess

7\. Unsuspecting buyer goes bankrupt within two years

~~~
MikeCapone
Maybe. Or maybe it'll backfire and they'll lose a lot of money.

If it was that easy, it's all that everybody would do. But it's harder than
that (just ask the Hunt brothers), I believe.

~~~
msandford
The difference is that the people at GS have relationships with many (most,
all?) of the wealthy people in the world. That makes finding a buyer who has
enough cash but not enough brains easier.

I'm not suggesting that it's a slam dunk and everyone could be doing it. But
being one of the premier investment banks in the world does have some perks.

~~~
MikeCapone
Agreed. There's definitely a very high chance of information asymmetry when
you are dealing with GS. All I'm saying is that there's enough reflexivity
(Soros' term) and unknowns in the market that even very smart people like them
can lose money.

I think we're probably saying the same thing, just coming from different ends
of it.

Cheers.

------
guard-of-terra
Could not figure out what is going on from reading the page one, can somebody
explain using simple terms?

~~~
patio11
Some people believe that the future price of aluminum is going to be
sufficiently higher than the prevailing price today that they would prefer to
pay to store their aluminum and sell at some point in the future. The NYT
correctly suggests that this increases the price of aluminum today and that
this generates (literal) rent for people who own warehouses. The NYT is
furious about it, because they are not envisioning the possible future
headline "Women and poor worst hit as consumer good prices skyrocket due to
aluminum shortage."

Note: this is me explaining what is happening rather than explaining the
causal chain which the NYT thinks is happening, because my version is a lot
simpler and more likely to be correct.

~~~
anon1385
Wasn't the point of the original Routers article that GS owned the storage
warehouses and therefore could (and did) control the speed/amount of aluminium
being shipped out, against the wishes of those who owned the metal. i.e. GS
have huge control over the supply of a finite resource. Saying 'well the price
did fall' doesn't undermine the argument that GS were controlling the supply
to their own benefit since we don't know what positions GS took on aluminium
over that time.

------
Zakharov
They talk about the money made storing aluminium in the warehouse, who's
paying that? It sounds like Goldman owns both the aluminium and the
warehouses, so all they're doing is buying aluminium and refusing to sell it.

------
danbmil99
I think it's an old trick, called "cornering the market". One of the clearest
ways Ayn Rand's vision of unbridled capitalism is not a practical reality.

------
Qantourisc
Banks/big capitals are evil, I prefer them dead (well the financial instance
not the person. The persons however deserve a good old fashion whipping, at
the least.)

------
jgalt212
Goldman's Moto: Don't NOT be evil.

