The Market Manipulation of Investment Banks
Executive Summary
- Investment banks have become so powerful that they are not engaging in disruptive commodity speculation that undermines industry.
Introduction
The following quotation describes market manipulation.
“An executive for MillerCoors testified that manipulation of the aluminum market cost manufacturers over $3B. The World Bank estimated that in 2010, 44 million people worldwide were pushed into poverty because of high food prices. The chief cause? More than 100 studies agree the cause is speculation in the commodities market. (Goldman Sachs made $440M in 2012 from food market speculation.) For Americans who love their cars (and SUVs), the biggest impact might be felt at the gas pump where experts estimate that financial speculation has added anywhere from $1 to $1.50 to gas prices.”
Source: New Economic Perspectives
http://neweconomicperspectives.org/2014/03/financial-sector-greatest-parasite-human-history.html
And in this quotation.
“But those are purely financial schemes. In these new, even scarier kinds of manipulations, banks that own whole chains of physical business interests have been caught rigging prices in those industries. For instance, in just the past two years, fines in excess of $400 million have been levied against both JPMorgan Chase and Barclays for allegedly manipulating the delivery of electricity in several states, including California.” – Matt Taibbi
Furthermore, purchases of real assets dovetail with market speculation and allow investment banks to make their speculation come true, as is covered in the following quotation.
“So when financial firms suddenly start buying oil tankers or warehouses, they could be doing so to make bets pay off, as part of a speculative strategy – which is why the banks’ sudden acquisitions of metals-storage companies in 2010 are so noteworthy. Meanwhile, Chase’s own head of commodities operations, Blythe Masters – an even more famed Wall Street figure, sometimes described as the inventor of the credit default swap – admitted that her company’s warehouse interests weren’t just a casual thing. “Just being able to trade financial commodities is a serious limitation because financial commodities represent only a tiny fraction of the reality of the real commodity exposure picture,” she said in 2010. Loosely translated, Masters was saying that there was a limited amount of money to be made simply trading commodities in the traditional legal manner. The solution? “We need to be active in the underlying physical commodity markets,” she said, “to understand and make prices.” We need to make prices. The head of Chase’s commodities division actually said this, out loud,” As detailed by New York Times reporter David Kocieniewski last July, Goldman had bought into these warehouses and soon began pointlessly shuttling stocks of aluminum from one warehouse to another. It was a “merry-go-round of metal,” as one former forklift operator called it, a scheme of delays apparently designed to drive up prices of the metal used to make the stuff we all buy – like beer cans, flashlights, and car parts. When Goldman bought Metro in February 2010, the average delivery time for an aluminum order was six weeks. Under Goldman ownership, Metro’s delivery times soon ballooned by a factor of 10, to an average of 16 months, leading in part to the explosive growth of a surcharge called the Midwest premium, which represented not the cost of aluminum itself but the cost of its storage and delivery, a thing easily manipulated when you control the supply. So even though the overall LME price of aluminum fell during this time, the Midwest premium conspicuously surged in the other direction. In 2008, it represented about three percent of the LME price of aluminum. By 2013, it was a whopping 15 percent of the benchmark (it has since spiked to 25 percent). Both Goldman and Glencore reportedly offered such incentives, which not only allowed the companies to collect more rent (Goldman was charging a daily rate of 48 cents a metric ton) but also served to discourage industrial producers like Alcoa or the Russian industrial giant Rusal (which has Glencore CEO Ivan Glasenberg on its board of directors) from selling directly to manufacturers. The result of all this was a bottlenecking of aluminum supplies. A crucial industrial material that was plentiful and even in oversupply was now stuck in the speculative merry-go-round of the bank finance trade.
Coca-Cola was the first to file a complaint against Goldman over the warehouse issue, doing so in mid-2011. Many people in and around the industry weren’t surprised that it was the world’s biggest and most powerful corporate consumer of aluminum that came forward first. Other manufacturers, many believe, kept their mouths shut out of fear the banks would punish them. “It’s very likely that commercial companies deliberately avoided an open confrontation with Goldman because it was a Wall Street powerhouse with which they had – or hoped to establish – important credit and financial-advisory relationships,” says Omarova. One government official who has investigated the issue for Congress said even some of the country’s largest aluminum users have been reluctant to come forward. “When some of these huge transnationals don’t want to talk about it, it makes you wonder,” the aide noted. The bank has consistently maintained that its interest in the warehouse company Metro is not “strategic,” that it only bought the firm “as an investment,” and will sell it within 10 years. JPMorgan Chase and other banks announced that it might be getting out of the physical commodities business altogether. The aluminum delays were not just an isolated incident of banks scheming to boost rent revenue.
Recently, evidence has surfaced that the same kinds of behavior may be going on across the LME. In order for a parcel of metal to be traded on the LME, it has to be what’s called “on warrant.” If you are the owner of a metal that you no longer want to be traded, you can “cancel the warrant” – essentially taking it out of the system. It’s still in the warehouse but in a kind of administrative limbo. You can see hints of the phenomenon in other LME metals. Five years ago, just 1.3 percent of the LME’s copper stocks had canceled warrants. Today, 59 percent of it does. In January 2009, just 2.3 percent of zinc stocks were canceled; it’s at 32 percent today. Zinc incidentally has something else in common with aluminum – a shipping-and-handling-like premium, called the U.S. zinc premium in the United States, which has skyrocketed in recent years, increasing by 400 percent between the summer of 2012 and the summer of 2013, when the price plateaued just as the aluminum scandal broke. Then there’s nickel. Thirty-seven percent of the global stock is now classified as canceled. Five years ago, 0.5 percent was. One industry insider, who is very familiar with and utilizes the nickel market, says that although there is a massive global oversupply of the metal, prices are being artificially propped up as much as 20 to 30 percent.”
Source: New Economic Perspectives
http://neweconomicperspectives.org/2014/03/financial-sector-greatest-parasite-human-history.html