Back in June 2011 we first reported how "Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly" in an article that explained, with great detail, how Goldman et al engage in artificial commodity traffic bottlenecking (thanks to owning all the key choke points in the commodity logistics chain) in order to generate higher end prices, rental income and numerous additional top and bottom-line externalities and have become the defacto commodity warehouse monopolists. Specifically, we compared this activity to similar cartelling practices used by other vertically integrated commodity cartels such as De Beers: "While the obvious purpose of "warehousing" is nothing short of artificially bottlenecking primary supply, these same warehouses have no problem with acquiring all the product created by primary producers in real time, and not releasing it into general circulation: once again, a tactic used by De Beers for decades to keep the price of diamonds artificially high."
Over the weekend, with a 25 month delay, the NYT "discovered" just this, reporting that the abovementioned practice was nothing but "pure gold" to the banks. It sure is, and will continue to be. And while we are happy that the mainstream media finally woke up to this practice which had been known to our readers for over two years, the question is why now? The answer is simple - tomorrow, July 23, the Senate Committee on Banking will hold a hearing titled "Should Banks Control Power Plants, Warehouses, And Oil Refiners."
While congratulations are also due to the Senate for finally waking up to this monopolistic travesty conducted by the big banks, we can only assume that this is due to various key non-bank industry participants (such as MillerCoors) crying foul so much that even the Fed is now involved and is supposedly reviewing its own decision from 2003 that allowed this activity in the first place.
When the Federal Reserve gave JPMorgan (JPM) Chase & Co. approval in 2005 for hands-on involvement in commodity markets, it prohibited the bank from expanding into the storage business because of the risk. Five years later, JPMorgan bought one of the world’s biggest metal warehouse companies.
While the Fed has never explained why it let that happen, the central bank announced July 19 that it’s reviewing a 2003 precedent that let deposit-taking banks trade physical commodities. Reversing that policy would mark the Fed’s biggest ejection of banks from a market since Congress lifted the Depression-era law against them running securities firms in 1999.
“The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” said Barbara Hagenbaugh, a Fed spokeswoman. She declined to elaborate.
“When Wall Street banks control the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation,” Brown said in an e-mailed statement. Goldman Sachs, Morgan Stanley and JPMorgan are the biggest Wall Street players in physical commodities.
Of course, when one is a monopoly, the revenues follow easily. The trick, of course, is to keep Congress very much unaware of said monopoly and let the good times roll.
The 10 largest banks generated about $6 billion in revenue from commodities, including dealings in physical materials as well as related financial products, according to a Feb. 15 report from analytics company Coalition. Goldman Sachs ranked No. 1, followed by JPMorgan.
While banks generally don’t specify their earnings from physical materials, Goldman Sachs wrote in a quarterly financial report that it held $7.7 billion of commodities at fair value as of March 31. Morgan Stanley had $6.7 billion.
On June 27, four Democratic members of Congress wrote a letter asking Fed Chairman Ben S. Bernanke, among other things, how Fed examiners would account for possible bank runs caused by a bank-owned tanker spilling oil, and how the Fed would resolve a systemically important financial institution’s commodities activities if it were to collapse.
Just because questions like these finally had to be asked, one has to laugh. One person not laughing, tough, is Ben Bernanke - the man whose Fed allowed bank commodity cartellization to take place originally. He is certainly not laughing now that he may be forced to undo this permission, in the process impairing banks to the tune of billions in revenue: as a reminder, the Fed works purely to benefit America's banks and to provide them with whatever top-line amenities they need and are confident they can pass by under the noses of dumb congressmen. But at least the Fed promises it can "supervise" all these TBTF banks. Or can it?
Now, “it is virtually impossible to glean even a broad overall picture of Goldman Sachs’s, Morgan Stanley’s, or JPMorgan’s physical commodities and energy activities from their public filings with the Securities and Exchange Commission and federal bank regulators,” Saule T. Omarova, a University of North Carolina-Chapel Hill law professor, wrote in a November 2012 academic paper, “Merchants of Wall Street: Banking, Commerce and Commodities.”
The added complexity makes the financial system less stable and more difficult to supervise, she said in an interview.
“It stretches regulatory capacity beyond its limits,” said Omarova, who is slated to be a witness at the Senate hearing. “No regulator in the financial world can realistically, effectively manage all the risks of an enterprise of financial activities, but also the marketing of gas, oil, electricity and metals. How can one banking regulator develop the expertise to know what’s going on?”
Now that the entire world is looking, and not just a select subset of Zero Hedge readers, the full extend of Goldman's monopoly becomes apparent:
Goldman Sachs owns coal mines in Colombia, a stake in the railroad that transports the coal to port, part of an oil field off the coast of Angola and one of the largest metals warehouse networks in the world, among other investments. Morgan Stanley’s involvement includes Denver-based TransMontaigne Inc. (TLP), a petroleum and chemical transportation and storage company, and Heidmar Inc., based in Norwalk, Connecticut, which manages more than 100 oil tankers, according to its website.
Mark Lake, a spokesman for New York-based Morgan Stanley, referred to company regulatory filings that said the bank didn’t expect to have to divest any of its activities after the grace period ends. He declined to elaborate or to comment on the Fed’s announced rule review.
Brian Marchiony, a spokesman for JPMorgan, also declined to comment on the review, as did Michael DuVally, a Goldman Sachs spokesman.
In February 2010, Goldman Sachs bought Romulus, Michigan-based Metro International Trade Services LLC, which as of July 11 operates 34 out of 39 storage facilities licensed by the London Metal Exchange in the Detroit area, according to LME data. Since then, aluminum stockpiles in Detroit-area warehouses surged 66 percent and now account for 80 percent of U.S. aluminum inventory monitored by the LME and 27 percent of total LME aluminum stockpiles, exchange data from July 18 show.
Traders employed by the bank can steer metal owned by others into Metro facilities, creating a stockpile, said Robert Bernstein, an attorney with Eaton & Van Winkle LLC in New York. He represents consumers who have complained to the LME about what they call artificial shortages of the metal.
“The warehouse companies, which store both LME and non-LME metals, do not own metal in their facilities, but merely store it on behalf of the ultimate owners,” said DuVally, the Goldman Sachs spokesman. “In fact, LME warehouses are actually prohibited from trading all LME products.”
Right - Goldman is doing humanity a favor and what not, just like when it was shorting RMBS, when Goldman was merely "making markets." Or unmarkets as the case may be. In the meantime, aluminum prices are surging, as we said would happen back in June 2011:
Buyers have to pay premiums over the LME benchmark prices even with a glut of aluminum being produced. Premiums in the U.S. surged to a record 12 cents to 13 cents a pound in June, almost doubling from 6.5 cents in summer 2010, according to the most recent data available from Austin, Texas-based researcher Harbor Intelligence.
Warehouses are creating logjams, said Chris Thorne, a Beer Institute spokesman.
Naturally, the Vampire Squid is not alone: JPM, whose commodity group is headed by Blythe Masters currently under investigation by FERC with a slap on the wrist settlement pending, is most certainly involved as well.
JPMorgan, the biggest U.S. bank, inherited electricity sales arrangements in California and the Midwestern U.S. in 2008 when it bought failing investment bank Bear Stearns Cos. Its February 2010 purchase of RBS Sempra Commodities LLP’s worldwide oil and metal investments and European power and gas assets was also a distressed transaction. The European Union ordered Royal Bank of Scotland Group Plc to sell its controlling stake in the firm after a taxpayer bailout.
In short: just like the repeal of Glass Steagall allowed banks to mix deposit collecting and risk-taking divisions, so the Fed's landmark 2003 decision allowed banks to commingle financial and physical commodities. And while the US government, and broader public, seem largely ignorant and without a care if they end up overpaying billions more to Goldman's and JPM's employees, one country where commodities are exceptionally fragmented in their use as both a financial (i.e. paper) and physical commodity is China - maybe if the Fed will not move, then it will be up to China to punish the three firms which are set to unleash the same scheme described above with copper as they have with aluminum. Because one (or three in this case: Goldman, JPM and BlackRock) doesn't amass 80% of the world's copper "on behalf of investors" for non-profit reasons.
While we don't expect anything new to develop here, nor anywhere else, until the entire system comes crashing down and forces a fundamental overhaul of modern finance at the grassroots level, tomorrow's hearing will be webcast live on Zero Hedge and will have the following witnesses.
Ms. Saule Omarova
Associate Professor of Law
University of North Carolina at Chapel Hill School of Law
Mr. Joshua Rosner
Graham Fisher & Company
Mr. Timothy Weiner
Global Risk Manager
Commodities/Metals, MillerCoors LLC
Mr. Randall D. Guynn
Head of Financial Institutions Group
We look forward to seeing how the Chairman, or his successor, will deflect this one.
Photo credit: Natural History Museum NYC: Squid vs Whale