Here's another example of conflicts that Goldman Sachs embraces: the bank has begun buying warehouses (the ones in Detroit store aluminum) in which the metal is stored while waiting to be sold. Goldman Sachs collects rent on the storage facilities but it also trades in commodities which leaves lots of room for GS chicanery. Unfortunately, those wishing to access the metal have had to wait too long for delivery which created higher prices even when the supply was ample. Prices were driven up by artificially induced shortages of metal produced by long waiting times. Goldman Sachs could possibly earn up to $165 million a year in revenue rent. And we have no idea what it may have earned speculating in the market on the price of aluminum which they seem to maneuver at will.
Why should Goldman Sachs, or any bank for that matter, be trading in metal and owning warehouses in which to store it? It all comes down to money: warehousing earns revenue for the LME (London Metal Exchange) which regulates and certifies the Detroit sheds plus it gets 1% of the rental income and is not anxious to change the regulations which may result in a legal challenge by Goldman Sachs.
Goldman Sachs also owns warehouses in New Orleans which store zinc.
Below is an excerpt from an article in Reuters by Pratima Desai, Clare Baldwin, Susan Thomas, Melanie Burton, Chris Kelly and Karen Norton:
Special Report--Goldman's new money machine: warehouses
By Pratima Desai, Clare Baldwin, Susan Thomas,, Melanie Burton, Chris Kelly and Karen Norton - Reuters
Madden estimates that the U.S. benchmark physical aluminum price is $20 to $40 a tonne higher because of the backlog at the Detroit warehouses. The physical price is currently around $2,800 per tonne.
That premium is forcing U.S. businesses to fork out millions of dollars more for the 6 million tonnes of aluminum they use annually.
It has also had a knock-on impact on the global market, which is forecast to consume about 45 million tonnes of the lightweight, durable metal this year.
Also pushing aluminum costs higher are bank financing deals, which are estimated to have locked up about 70 percent of the 4.4 million tonnes of the metal sitting in LME-registered warehouses around the world. LME inventories hit an all-time record above 4.7 million tonnes in May.
In a typical deal, a bank buys aluminum from a producer, agrees to sell it at some future point at a profit, and strikes a warehouse deal to store it cheaply for an extended time period.
The combination of the financing deals and the metal trapped in Detroit depots, means only a fraction of the inventories are available to the market.
Premiums for physical aluminum -- the amount paid above the LME's cash contract currently trading at $2,620 a tonne -- in the U.S. Midwest hit a record high of $210 a tonne in May, up about 50 percent from late last year. In Europe, the premium is at records above $200 a tonne, double the levels seen in January 2010.
The ripple effect into Asia has seen the premium paid in Japan increase 6 percent to $120 a tonne in the third quarter from the previous quarter, the first rise in nearly six quarters.
COLLECTING THE RENT
You won't hear banks like Goldman complaining. Rental income continues to pour in at the 19 Detroit area warehouses run by Metro as of June.
Read the entire article here