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Old 07-22-2013, 01:03 PM   #1
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Goldman Sachs Aluminum Shuffle

Here's a recent article on Goldman Sach's Aluminum Shuffle

We really need to remove the laws that allow banks to also be traders. But who is willing to stand up to them? It appears that neither Democrats or Republicans want to risk losing big bank donations. Until they are willing to do so - things will not change in a meaningful way.

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The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.

This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.
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Old 07-22-2013, 01:53 PM   #2
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allow banks to also be traders. But who is willing to stand up to them?
Elizabeth Warren is probably a good starting point.
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Old 07-22-2013, 03:03 PM   #3
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Elizabeth Warren is probably a good starting point.
I liked her interview on CNBC that went viral.
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Old 07-22-2013, 03:55 PM   #4
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She is also of indigenous american heritage, since we are in the mood to champion minorities.
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Old 07-22-2013, 07:52 PM   #5
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I honestly don't see the connection between reinstating Glass/Steagall and Goldman manipulating the aluminum forward market.
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Old 07-22-2013, 08:18 PM   #6
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I honestly don't see the connection between reinstating Glass/Steagall and Goldman manipulating the aluminum forward market.
I think she was being used an example as someone willing to take on the Big Banks.
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Old 07-22-2013, 08:23 PM   #7
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I think she was being used an example as someone willing to take on the Big Banks.
I know, I was referring to your comment:

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We really need to remove the laws that allow banks to also be traders.
I don't mean to sound... well, mean... because I am not unsympathetic to this cause. I'm honestly just a little confused.
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Old 07-22-2013, 09:49 PM   #8
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I didn’t see anything inherently wrong with a bank owning Metro International – any owner of Metro International could play the same game with the storage rental fees. It looks as if the problem is with the regulations of the London Metal Exchange (the “Exchange”). Add the Exchange getting a percentage of warehouse rental fees; the Exchange has an incentive to keep the relationship going.

Allowing another exchange to offer a competitive process for buying & selling of metals may be the solution. Or wait for end users to continue to increase purchases directly from suppliers and bypass the commodity market altogether.

Additional regulations are not a panacea – it just takes a little time for smart people to find the loop holes or establish new business structures to deal with the regulations.
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Old 07-23-2013, 03:08 AM   #9
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I didn’t see anything inherently wrong with a bank owning Metro International
I think I might have to disagree with that. I really don't think it's wise to have banks own much of anything. Their "charter" is to safely hold funds and manage loans. If banks get into trading - especially too big to fail style trading - they can pretty much bet on anything. If they win, they win. If they lose, they win. Perhaps I'm missing something here - but that doesn't seem like a good idea.

Additionally - in this example, Goldman uses the funds collected by customers to buy a company to control a price of a commodity and then trade with those same customer dollars for and against that price that they are in full control of...is that capitalism?

I used to be a die hard Ayn Rand style capitalist (well, about 20 years ago). Now, I'm leaning toward the first chapter in the Book of Acts.

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All the believers were together and had everything in common. They sold property and possessions to give to anyone who had need. ACTS 2:44-45
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Old 07-23-2013, 04:34 AM   #10
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I know, I was referring to your comment:



I don't mean to sound... well, mean... because I am not unsympathetic to this cause. I'm honestly just a little confused.
What is your question? Which part is confusing? Goldman is a bank that takes the money from clients to buy companies in order control prices (why else would a bank buy a trucking company?) and then creates markets for those clients and then manipulates that market with the very companies they bought (shipping inventory from to place with the trucks they own to artificially create demand which increases price) and then trades against those customers which siphons wealth from clients, consumers, and the government into their own business and those proceeds are then used to buy even more companies to control more prices and create more markets...and of course some of that cash tucked aside for campaign contributions to make certain the Game of MORE continues...

More, more more...
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Old 07-23-2013, 06:37 AM   #11
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My question is this: what would not allowing banks to be traders do about this problem?

This activity is something that investment banks (such as Goldman) will always do, even if they can neither hold a prop trading division nor own a commercial bank (which is what would happen if the Volker Rule and a new Glass-Steagall were applied, and Goldman continued under its dubious designation as a bank). It's flow trading, which puts it long aluminum (by owning aluminum in its warehouses) and short aluminum (by selling forward contracts for it), hedging risk and giving Goldman a cut in the middle. And even if Goldman is fixing prices, they are still providing value to customers, by removing exposure to fluctuating commodities prices at a price lower than any one customer could achieve, thanks to scale. So, while what Goldman is doing is bad (especially if it entails any collusion from Morgan Stanley, JP Morgan, and the like), it's still likely a net benefit for its customers, and applying even the most stringent of bank-breaking-up rules won't get rid of this activity, because it's very standard and fairly economically vital.
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Old 07-23-2013, 08:26 AM   #12
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Seems like you've assumed that the benefits of scale + decreased price fluctuation leaves customers better off. But the argument (which is supported by pretty reasonable data) is that through this warehouse hoarding, they've actually kept aluminum prices artificially inflated. Maybe your calculus is that even the inflated prices are better than a fluctuating market, but I'm not sure data exists to support that argument in this case.

Doesn't pass the smell test to me.
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Old 07-23-2013, 10:45 AM   #13
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Thank you for this well thought out response. It's very informative. It certainly seems you know your economics and finance - would you mind clarifying some of these points to help me understand? Thanks

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Originally Posted by digitize View Post

This activity is something that investment banks (such as Goldman) will always do,
I think we can agree that while this may be likely, "will always do" anyway is not a valid reason (at least morally).

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even if they can neither hold a prop trading division nor own a commercial bank (which is what would happen if the Volker Rule and a new Glass-Steagall were applied, and Goldman continued under its dubious designation as a bank).
If the Volker Rule and the new Glass-Seagall can't be effective, is there any other means to prevent banks from also trading? Or, are you contending it is a vital component of a modern economy. If so - do you think there should be ANY oversight or regulations to control what they do? (given how vital they are)

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It's flow trading, which puts it long aluminum (by owning aluminum in its warehouses) and short aluminum (by selling forward contracts for it), hedging risk and giving Goldman a cut in the middle.
This concept I'm vaguely familiar with. This is what they refer to as the "spread" - correct? Except in this particular case - they used bad accounting practices (or whatever you want to call this aluminum shuffle) to report their inventory. Do you think that banks need to actually own and control the commodity? Shouldn't they be limited to "marrying" buyers and sellers?

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And even if Goldman is fixing prices, they are still providing value to customers, by removing exposure to fluctuating commodities prices at a price lower than any one customer could achieve, thanks to scale.
Prices seem to fluctuate anyway - but I guess you're claiming they would fluctuate more if banks like Goldman weren't removing as much exposure that would otherwise exist.

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So, while what Goldman is doing is bad -
Okay - we've got some common ground here...

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it's still likely a net benefit for its customers, and applying even the most stringent of bank-breaking-up rules won't get rid of this activity, because it's very standard and fairly economically vital.
I keep hearing how standard and vital this activity is. I'll have to do some macro-finance reading, but I wonder if it is only standard and vital because they (along with the legislative process that allows them to directly fund campaigns which places Goldman loyal legislators into power to create laws and regulations that are pro-Goldman) have built a financial and economic system that requires them to be standard and vital - that makes them the necessary middle man.

Would you agree there is currently something off with the flow of capital? - that wealth is flowing to some people/companies/investors in a historically unsustainable manner and speed?
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Old 07-23-2013, 01:33 PM   #14
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I keep hearing how standard and vital this activity is. I'll have to do some macro-finance reading, but I wonder if it is only standard and vital because they (along with the legislative process that allows them to directly fund campaigns which places Goldman loyal legislators into power to create laws and regulations that are pro-Goldman) have built a financial and economic system that requires them to be standard and vital - that makes them the necessary middle man.

Commodity markets are the modern day equivalent of centralized trading hubs. The markets are standard and vital to the extent it allows globalized trading with more uniform exchange. Breaking up centralized marketplaces would create larger discrepancies in information flow, giving financial institutions greater opportunity to exploit imbalances between markets. The problem in this situation (and, I think we can all see a problem with an entity profiting with no discernible benefit to the market) lies with the rules of the London Metal Exchange.

And there is nothing to suggest this is permanent in any way. It would be helpful to learn how the biggest users of aluminum would change their sourcing strategies to lower costs.
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Old 07-23-2013, 02:27 PM   #15
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Breaking up centralized marketplaces would create larger discrepancies in information flow
Even in today's Information Technology/Business at the Speed of Thought world?
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