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19 Aug 2013
Are financial institutions manipulating commodities markets?
FXstreet.com (New York) - The bourgeoning relationship between America’s legal system and its biggest constituent banks has spilled into the realm of industrial metals.
Indeed, the Commodities Futures Trading Commission (CFTC) has reportedly issued subpoenas to Goldman Sachs, JPMorgan Chase as well as others as it investigates complaints that banks and other owners of metals warehouses that have been accused of hoarding metals and artificially driving up prices. In light of this developing report, private class-action suits filed in federal courts spanning New York, Michigan, Louisiana and Florida have made similar price-fixing allegations, of which the banks unanimously deny all involvement.
The origin of these complaints is on the storage of aluminum in warehouses that are licensed by the London Metal Exchange (LME) – once owned by member banks like Goldman and now belongs to Hong Kong Exchanges and Clearing. The allegation states that end-users of the metal, which is found in everything from automobile parts to beer cans, have been needlessly forced to queue to get supplies out of the warehouses, paying rent in the meantime.
A hearing held last month by the Senate banking committee included testimony by Tim Weiner, a risk manager for MillerCoors. “The aluminum-warehousing system imposed waits exceeding 18 months and all key elements of the system for aluminum and base metals worldwide are controlled by the same entities—bank holding companies.” he revealed. The civil lawsuits are likely to be consolidated by a federal panel in the autumn. Formal discovery will follow and then, eventually, a trial.
The regulatory probes may also lead to another courtroom date for Goldman et al. In the past the chance of a trial has been lower than that of a settlement, but regulators are under pressure to try more cases. The CFTC may be the lead agency at the moment but Mary Jo White, the chairman of the Securities and Exchange Commission, has publicly said her agency is looking into the involvement of banks in commodities.
Potential ramifications of tampering
The wider context of this sudden interest in aluminum is a general question over whether big banks should be owners of physical commodities and the infrastructure for finding, transporting and storing them. Aluminum is in and of itself not the only bit of the commodities world where Wall Street banks have a big presence.
Morgan Stanley has stakes in Heidmar, an oil-tanker operator, and TransMontaigne, a fuel distributor. Goldman is the proud owner of coal mines, a railway and a port terminal in Colombia, whereas JPMorgan Chase paid $36m earlier this year to buy stakes in geothermal power plants in California and Nevada.
Apart from the questions of legality surrounding the recent revelations in commodity ownership, many are questioning that banks are using their position to manipulate prices. The Federal Reserve is reviewing a 2003 decision that allowed Citigroup, and by extension other Wall Street banks, to enter into transactions in physical commodities that are complementary to their financial activities. This does however readdress the question of whether banks should be banned from financing commodities especially if they are required taking physical delivery of them.
Indeed, the Commodities Futures Trading Commission (CFTC) has reportedly issued subpoenas to Goldman Sachs, JPMorgan Chase as well as others as it investigates complaints that banks and other owners of metals warehouses that have been accused of hoarding metals and artificially driving up prices. In light of this developing report, private class-action suits filed in federal courts spanning New York, Michigan, Louisiana and Florida have made similar price-fixing allegations, of which the banks unanimously deny all involvement.
The origin of these complaints is on the storage of aluminum in warehouses that are licensed by the London Metal Exchange (LME) – once owned by member banks like Goldman and now belongs to Hong Kong Exchanges and Clearing. The allegation states that end-users of the metal, which is found in everything from automobile parts to beer cans, have been needlessly forced to queue to get supplies out of the warehouses, paying rent in the meantime.
A hearing held last month by the Senate banking committee included testimony by Tim Weiner, a risk manager for MillerCoors. “The aluminum-warehousing system imposed waits exceeding 18 months and all key elements of the system for aluminum and base metals worldwide are controlled by the same entities—bank holding companies.” he revealed. The civil lawsuits are likely to be consolidated by a federal panel in the autumn. Formal discovery will follow and then, eventually, a trial.
The regulatory probes may also lead to another courtroom date for Goldman et al. In the past the chance of a trial has been lower than that of a settlement, but regulators are under pressure to try more cases. The CFTC may be the lead agency at the moment but Mary Jo White, the chairman of the Securities and Exchange Commission, has publicly said her agency is looking into the involvement of banks in commodities.
Potential ramifications of tampering
The wider context of this sudden interest in aluminum is a general question over whether big banks should be owners of physical commodities and the infrastructure for finding, transporting and storing them. Aluminum is in and of itself not the only bit of the commodities world where Wall Street banks have a big presence.
Morgan Stanley has stakes in Heidmar, an oil-tanker operator, and TransMontaigne, a fuel distributor. Goldman is the proud owner of coal mines, a railway and a port terminal in Colombia, whereas JPMorgan Chase paid $36m earlier this year to buy stakes in geothermal power plants in California and Nevada.
Apart from the questions of legality surrounding the recent revelations in commodity ownership, many are questioning that banks are using their position to manipulate prices. The Federal Reserve is reviewing a 2003 decision that allowed Citigroup, and by extension other Wall Street banks, to enter into transactions in physical commodities that are complementary to their financial activities. This does however readdress the question of whether banks should be banned from financing commodities especially if they are required taking physical delivery of them.