Tuesday, August 06, 2013

A Shuffle of Aluminum, but to Banks, Pure Gold

This is the big NY Times story from a couple of weeks ago about investment banks manipulating the aluminum markets A Shuffle of Aluminum, but to Banks, Pure Gold "The inflated aluminum pricing is just one way that Wall Street is flexing its financial muscle and capitalizing on loosened federal regulations to sway a variety of commodities markets, according to financial records, regulatory documents and interviews with people involved in the activities.

The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone. In the last year, federal authorities have accused three banks, including JPMorgan, of rigging electricity prices, and last week JPMorgan was trying to reach a settlement that could cost it $500 million."

Kevin Drum followed up a little, Goldman Sachs and the Aluminum Warehouses: Part 3.

"This condition is commonly called contango, and it's not unusual in commodities markets. Goldman was able to profit from this—their financing costs were already low, and buying the warehouse business provided them with low storage costs—but that's not the whole story. It turns out that lots of Goldman customers wanted to get in on this action too, but they were limited by the fact that contango plays were a big drain on their balance sheets. To help out, Goldman "created a business in freeing up the balance sheets of those firms which were encumbered by large but clearly profitable contango trades, by financing these trades and taking them off-balance sheet in return for some of the contango margin." In other words, Goldman helped its customers expand their trading positions in return for a cut of the profits. Owning the warehouses was key to this."

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