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The Vampire Squid Strikes Again: The Mega Banks' Most Devious Scam Yet

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The JPMorgan deal seemed to be in direct violation of an order sent to the bank by the Fed in 2005, which declared the bank was not authorized to "own, operate, or invest in facilities for the extraction, transportation, storage, or distribution of commodities." The way the Fed later explained this to the Senate was that the purchase of Henry Bath was OK because it considered the acquisition of this commodities company kosher within the context of a larger sale that the Fed was cool with – "If the bulk of the acquisition is a permissible activity, they're allowed to include a small amount of impermissible activities."

What's more, according to LME regulations, no warehouse company can also own metal or make trades on the exchange. While they may have been following the letter of the law, they were certainly violating the spirit: Goldman preposterously seems to have engaged in all three activities simultaneously, changing a hat every time it wanted to switch roles. It conducted its metal trades through its commodities subsidiary J. Aron, and then put Metro, its warehouse company, in charge of the storage, and according to industry experts, Goldman most likely owned some metal, though the company has remained vague on the subject.

If you're wondering why the LME would permit a seemingly blatant violation of its own rules, a good place to start would be to look at who owned the LME at the time. Although it eventual­ly sold itself to a Hong Kong company in 2012, in 2010 the LME was owned by a consortium of banks and financial companies. The two largest shareholders? Goldman and JPMorgan Chase.

Humorously, another was Koch Metals (2.32 percent), a commodities concern that's part of the Koch brothers' empire. The Kochs have been caught up in their own commodity-manipulation schemes, including an episode in 2008, in which they rented out huge tankers and used them to store excess oil offshore essentially as floating warehouses, taking cheap oil out of available supply and thereby helping to drive up energy prices. Additionally, some banks have been accused of similar oil-hoarding schemes.

The motive for the Kochs, or anyone else, to hoard a commodity like oil can be almost beautiful in its simplicity. Basically, a bank or a trading company wants to buy commodities cheap in the present and sell them for a premium as futures. This trade, sometimes called "arbitraging the contango," works best if the cost of storing your oil or metals or whatever you're dealing with is negligible – you make more money off the futures trade if you don't have to pay rent while you wait to deliver.

So when financial firms suddenly start buying oil tankers or warehouses, they could be doing so to make bets pay off, as part of a speculative strategy – which is why the banks' sudden acquisitions of metals-storage companies in 2010 is so noteworthy.

These were not minor projects. The firms put high-ranking executives in charge of these operations. Goldman's acquisition of Metro was the project of Isabelle Ealet, the bank's then-global commodities chief. (In a curious coincidence commented upon by several sources for this story, many of Goldman's most senior officials, including CEO Lloyd Blankfein and president Gary Cohn, started their careers in Goldman's commodities division.)

Meanwhile, Chase's own head of commodities operations, Blythe Masters – an even more famed Wall Street figure, sometimes described as the inventor of the credit default swap – admitted that her company's warehouse interests weren't just a casual thing. "Just being able to trade financial commodities is a serious limitation because financial commodities represent only a tiny fraction of the reality of the real commodity exposure picture," she said in 2010.

Loosely translated, Masters was saying that there was a limited amount of money to be made simply trading commodities in the traditional legal manner. The solution? "We need to be active in the underlying physical commodity markets," she said, "in order to understand and make prices."

We need to make prices. The head of Chase's commodities division actually said this, out loud, and it speaks to both the general unlikelihood of God's existence and the consistently low level of competence of America's regulators that she was not immediately zapped between the eyebrows with a thunderbolt upon doing so. Instead, the government sat by and watched as a curious phenomenon developed at all of these new bank-owned warehouses, in the aluminum markets in particular.

As detailed by New York Times reporter David Kocieniewski last July, Goldman had bought into these warehouses and soon began pointlessly shuttling stocks of aluminum from one warehouse to another. It was a "merry-go-round of metal," as one former forklift operator called it, a scheme of delays apparently designed to drive up prices of the metal used to make the stuff we all buy – like beer cans, flashlights and car parts.

When Goldman bought Metro in February 2010, the average delivery time for an aluminum order was six weeks. Under Goldman ownership, Metro's delivery times soon ballooned by a factor of 10, to an average of 16 months, leading in part to the explosive growth of a surcharge called the Midwest premium, which represented not the cost of aluminum itself but the cost of its storage and delivery, a thing easily manipulated when you control the supply. So despite the fact that the overall LME price of aluminum fell during this time, the Midwest premium conspicuously surged in the other direction. In 2008, it represented about three percent of the LME price of aluminum. By 2013, it was a whopping 15 percent of the benchmark (it has since spiked to 25 percent).

"In layman's terms, they were artificially jacking up the shipping and handling costs," says Mehta.

The intentional warehouse delays were just one part of the anti-capitalist game the banks were playing. As an incentive to get metal under their control, they actually paid the industrial producers of aluminum extra cash to store the metal in their warehouses, fees reportedly as much as $230 a metric ton.

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Matt Taibbi

Matt Taibbi is a contributing editor for Rolling Stone. He’s the author of five books and a winner of the National Magazine Award for commentary. Please direct all media requests to taibbimedia@yahoo.com.

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