Goldman, JP Morgan under fire in US Senate invesigation into commodities price manipulation

By Josephine Mason

metals storage unit miningNEW YORK, Nov 21 (Reuters) – Complex deals employed by Goldman Sachs’ metals storage unit to build vast stockpiles and then maintain queues test the spirit of the London Metal Exchange operating code, shocking many traders and confirming others’ suspicions.

But the intricate transactions that saw Metro International Trade Services LLC shell out millions of dollars to customers to join exit queues to bolster rental income was within the rules, according to two senior warehousing executives and two veteran traders.

An explosive U.S. Senate report released on Wednesday revealed the “imaginative” methods used to lure millions of tonnes of aluminum into Detroit, Metro’s headquarters, and then keep it there over the past four years.

A fiery hearing of the Senate’s Permanent Subcommittee on Investigations on Thursday offered the clearest insight yet into the deals that metal users say created bottlenecks, leading to two-year long queues and pushing physical prices to record highs even as oversupply grew.

For Nick Madden, Senior Vice President and Supply Chain Officer of Novelis, the world’s biggest aluminum user, the report confirmed his “worst fears”, he told the subcommittee hearing led by Democrat Senator Carl Levin.

It also explained the “strange” things going on in the opaque market over the past four years, he said.

Madden has been one of the most fiercest critics of the LME and the warehouses, which he has blamed for years-long queues and inflated premiums, costing consumers billions of dollars in added costs.

While the detailed report was critical of how the bank has exploited huge commodity stockpiles, it did not contain any smoking guns.

One warehousing source, who is familiar with these transactions, said what he read in the report was “immoral, but not illegal”.

Chris Wibbelman, Metro president and chief executive, rejected the report’s findings in testimony to lawmakers on Thursday, saying the business has played by the rules.

Still, the details reignited a years-long debate on how the ownership of warehouses has transformed the metals market.

Madden has repeatedly called on regulators to ban trading houses, like Glencore and Trafigura, and banks from owning storage sheds.

Massive 100,000-tonne cancellations of warrants in Detroit and Vlissingen in the Netherlands, where Pacorini Metals, Glencore’s storage business, has the majority of its sheds, have roiled the market since 2010.

‘Q MANAGEMENT’

The first alarms were sounded within Metro as early as December 2010 when Mark Askew, then vice president of marketing, said he was worried about rumors that a big cancellation of warrants was aimed at blocking other customers in the queues, the report showed.

That was just months after the first of six such merry-go-round deals that saw the wait time balloon to as long as two years, with millions of tonnes stuck in queues.

“I remain concerned, as I have expressed from start, regarding ‘Q management’ etc” he wrote in an email to Wibbelman.

He quit in April 2013.

Wibbelman told the subcommittee in closed-door meetings that Askew “had never liked the idea” of offering financial incentives to existing Metro customers, the report said.

He denied that it was designed to help put a queue in place to block other clients from leaving.

What’s not clear is whether the report and the public airing of concerns about the deals by the Senate subcommitteemay exert pressure on the Commodity Futures Trading Commission and other regulators.

Under new owners, the LME has tried to introduce sweeping new warehousing rules, but has faced legal challenges from Rusal Plc. Aluminum producers benefit from the high premiums, particularly when LME prices were below the cost of production.

By Michael Flaherty and Josephine Mason

WASHINGTON/NEW YORK, Nov 20 (Reuters) – Goldman Sachs Group Inc on Thursday took the lead in rejecting allegations by a U.S. Senate subcommittee that Wall Street banks were exploiting physical commodity markets to manipulate prices and gain unfair trading advantages.

In an often heated hearing before the Senate’s Permanent Subcommittee on Investigations, Senator Carl Levinpressed bankers and executives on whether the company had inflated physical prices and curbed supplies of aluminum, adding billions of dollars in costs for consumers such as the U.S. Navy and beverage can makers.

Chris Wibbelman, president and chief executive of Metro International Trade Services LLC, the metals warehousing firm Goldman bought in 2010, defended his company’s actions, saying it plays by the rules and contributes jobs to the Detroit area.

Levin, who chairs the subcommittee, directed many of his questions to Wibbelman and appeared frustrated at his testimony.

“Let me refresh your recollection,” Levin said to Wibbelman in reference to a question about a business contract. After the Michigan Democrat read the document, he turned to the Metro CEO, raising his voice and said: “Does that help your recollection?”

The five-hour hearing followed the release on Wednesday of a detailed 403-page report that criticized how banks purchased and exploited huge commodity stockpiles.

The public airing of concerns about bank ownership of physical commodities and assets from pipelines to warehouses has renewed scrutiny of Wall Street’s role in the market.

“This is clearly another case of putting banks on the defensive …,” said Michael Philipp, attorney and partner atMorgan Lewis’s Investment Management and Securities Industry Practice in Chicago.

“I think this potentially puts pressure on the Federal Reserve, who has the power to permit banks to engage in physical commodities.”

The session continues on Friday with officials from the Federal Reserve and U.S. power market regulators.

Experts agreed that the sessions may not have much impact in the long term.

The Federal Reserve has already signaled its intent to pursue regulation of banks and commodities. JPMorgan Chase & Co and Morgan Stanley, which also testified on Thursday, have both made major moves to get out of physical commodities.

Goldman was under particular scrutiny because it has maintained that commodity trading is core to its business, though it is in the process of selling Metro.

CATASTROPHES AND MERRY-GO-ROUNDS

The hearing room was packed with bankers, lawyers and journalists. Star lawyer Abbe Lowell was there as well, retained by Goldman to assist with the two days of testimony, a spokesman for the bank said.

The hearing and report stem from a two-year investigation by the subcommittee into banks and their influence on commodities that shed light on two areas: the Fed’s concerns about weakness of banks’ ability to withstand a major catastrophe and Metro’s multimillion-dollar payments to maintain long wait times and bolster income.

“If you like what Wall Street did for the housing market, you’ll love what Wall Street is doing for commodities,” Levin said in his opening remarks.

Republican Senator John McCain of Arizona, a member of the subcommittee, said Wall Street banks have taken “excessive risk, raised suspicions of market manipulation and gained unfair trading advantages” through their expansion into physical commodities trading.

PLAYING BY THE RULES

Aluminum warehousing was in the spotlight after the report, based on 90,000 pages of bank and regulatory documents as well as 78 interviews and briefings, detailed six so-called “merry-go-round” deals that Levin said caused bottlenecks at Metro’s Detroit warehouses.

Levin said longer queues led to rising physical premiums: “There’s no doubt these six deals that you welcomed as a warehouse and Goldman approved had a direct influence on the length of queue,” he said.

In questioning, Wibbelman said he was offering deals to customers according to the business climate.

About 80 percent of metal stored in Metro warehouses in and out of the London Metal Exchange’s vast network is not subject to any queue and may be purchased by a customer through negotiations with the metal owner, Wibbelman said.

“There simply is no lack of availability for aluminum.”

MillerCoors LLC, the U.S. arm of Molson Coors Brewing Co and SABMiller, has accused warehouses and their owners of inflating the prices of aluminum, and costing consumers billions of extra dollars annually.

“The investment in Metro was never part of Goldman Sachs’ core franchise and has not been integrated into our commodities market-making activities,” Jacques Gabillon, the head of Goldman’s global commodities principal investments group, told the subcommittee.

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