“Pushing back on the direction of the political economy is vital to preserving government, whose costs and services can not be sustained by taxes alone.”
On a tenth of a cent over the course of four years, the New York Times estimated Goldman Sachs made $5 billion. Not in the market. Not in private accounts. Not in mergers, acquisitions, stock offerings, proprietary trading. Neither did that tenth of a cent or the $5 billion directly create new jobs. No.
This bizarre capital expansion took place in commodities. Aluminum. Its center wasn’t the bauxite mines of Guyana, Guinea, Vietnam or Australia. The main source of this mind-boggling wealth scheme lay in 27 long storage sheds along the Detroit River. Except for occasional barges and trains, it’s an abandoned, gritty area, an industrial wasteland with cheap rents, where aluminum ingots are stored. Behind near empty parking lots, a few giant forklifts unload and move the ingots back and forth with a skeleton crew.
The London Metal Exchange (LME) controls the spot price for aluminum, administering the market where buyers and sellers met to arrange contracts for supply and demand. These contracts have a premium added that is not a part of the market auction. It is always added to the market price. It’s small, very small. It’s the cost of storing refined aluminum in ingots, billets, wire rod, or other forms in LME-approved warehouses. The premium is time-sensitive; it increases the longer aluminum is stored. It doesn’t differ for each transaction, warehouse, or different storage times; the longest times determine the premium. It applies to every contract.
The story of how a tenth of a cent becomes $5 billion in three years begins when Goldman Sachs, one of the world’s largest investment banks, bought a global warehouse and logistics company, Metro International Trade Company, for an undisclosed price. An old rule of thumb says Goldman’s secrecy involved more than just being discreet, but Goldman’s purchase didn’t attract much attention.
You ask: what’s an investment bank filled with ambitious MBA traders doing buying a warehouse company with sheds filled with aluminum ingots on the Detroit waterfront? Isn’t there more profit in buying aluminum, the commodity itself? Trading, after all, is Goldman’s specialty. The firm can exploit the differences in global prices in micro-seconds, can analyze long- and short-term trends, can churn profits using its enormous cash resources. Why invest—in warehouses?
More: at the time, the LME was owned and operated by a consortium of banks that included Goldman; Goldman belonged to the elite group that set the market’s rules and regulated its trading! Why invest—in warehouses?
After purchasing Metro International, Goldman’s expenses were low; the business didn’t tie up capital or demand big cash flow—and only Goldman saw its hidden potential.
Goldman’s purchase of Metro International stemmed from a 2003 rule change by the Federal Reserve Bank that approved “certain commodity activities as complementary to financial activities and thus permissible for bank holding companies.” This landmark Federal Reserve decision permitted banks to range far afield from financial activities and trade in physical commodities, even electric utilities. It broke down the firewall between banking and commerce.
But Goldman didn’t trade aluminum; it stored it. Its warehouses were a part of an approved LME network of storage facilities.
After Goldman purchased Metro International, the average storage time for the processed aluminum in its warehouses rapidly increased from 6 weeks to 16 months. Metro International, the New York Times reported, stored 1.5 million tons in its Detroit facilities. The LME requires at least 3,000 tons be moved daily. For Goldman-owned Metro International that meant moving ingots between facilities, shuttling truckloads back and forth in round trips, taking an exorbitant amount of time to locate ingots already arranged and stacked in sections by ownership. Storage time increased tenfold, but that increase to 16 months only represented an additional tenth of a cent per can, in the retail market. Continue reading How a Tenth of a Cent Becomes $5 Billion