6 ms·

The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation. And sure enough,

by temphn 13y ago

The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation. And sure enough, here it is: industry rules require that all that metal cannot simply sit in a warehouse forever. At least 3,000 tons of that metal must be moved out each day. Without looking I'd bet this is some kind of "anti-hoarding" provision, probably intended to prevent single manufacturers from cornering the market. As is typical, it caused exactly the opposite of the desired consequence. Moreover, said rule means (among other things) that no manufacturer can hold a strategic reserve of aluminum for unexpected spikes in demand without playing the games that Goldman is playing. Naturally, the response of the New York Times is that we need more such rules and regulations, that next time we'll anticipate their consequences, that the only failing is that they haven't been "strict" enough. But the "stricter" the rule, the more that little guys get hit with it while Goldman uses teams of lawyers to define and then exploit a safe harbor.[1] In this sense, Goldman and the NYT are in cahoots: "strict" regulations directly benefit big companies. [1] http://en.wikipedia.org/wiki/Safe_harbor_(law) http://en.wikipedia.org/wiki/Safe_harbor_(law) A safe harbor is a provision of a statute or a regulation that reduces or eliminates a party's liability under the law, on the condition that the party performed its actions in good faith or in compliance with defined standards. Legislators may include safe-harbor provisions to protect legitimate or excusable violations, or to incentivize the adoption of desirable practices.

Lagged2Death 13y ago
Without looking I'd bet this is some kind of "anti-hoarding" provision, probably intended to prevent single manufacturers from cornering the market. As is typical, it caused exactly the opposite of the desired consequence. In your first sentence you admit you don't know what's going on, then in your second sentence you claim that "it caused exactly the opposite of the desired consequence." The point being, this could be an old rule that's worked well until just recently, as far as you know. It's possible it's done more good than ill. In any case, it's described as an "industry rule," not a government regulation, as your quote makes clear. It's the result of industry "self-regulation." The article mentions this. The shuffle of stock is an end-run around that rule, but it's not the cause of the higher prices. The delay-to-raise-prices scam would be easier to run and more profitable if the rule that makes the shuffle necessary didn't exist.
- temphn 13y ago
  You prompted me to dig in further to see what the source of the underlying distortionary rule is. Looks like the LME or London Metal Exchange[1]. But that in turn is governed by the government[2]. And the government, including the CFTC which governs the LME, has indeed passed distortionary "anti-hoarding" laws in allied areas[3]. See links below. The key question is whether the LME is free to change these rules and/or purchasers are free to use another exchange in response to Goldman's attempt to increase prices. If they are not so free - if, say, the LME's rule here is imposed to be compliant with some CFTC or SEC or equivalent provision - then we are back to where we started. Conversely, if the participants are free to use another exchange or start a competing one, then this issue is on the level of Zynga spamming Facebook - a dispute between two powerful private parties that will be worked out via LME countermeasures/competition rather than federal regulation. [1] http://www.reuters.com/article/2011/07/29/us-lme-warehousing-idUSTRE76R3YZ20110729 http://www.reuters.com/article/2011/07/29/us-lme-warehousing... Goldman's warehouse business relies on a lucrative opportunity enabled by the LME regulations. Those rules allow warehouses to release only a fraction of their inventories per day, much less than the metal that is regularly taken in for storage. [2] https://www.lme.com/en-gb/regulation/ https://www.lme.com/en-gb/regulation/ The Exchange provides the environment for trading and regulates the operation of the market. It has a statutory requirement to ensure that business on its markets is conducted in an orderly manner, providing proper protection to investors. Approved as a recognised investment exchange (RIE) and conforming with UK and other international regulatory requirements, the LME offers, through price and volume transparency and audit trails, a legally safe forum for metals trading. As an RIE, the Exchange comes under the direct jurisdiction of the UK Financial Conduct Authority (FCA). Regulation of the market is largely carried out by the LME, while the FCA is responsible for regulating the financial soundness and conduct of LME members' business. Beyond this, both the Exchange and its members are subject to regulatory controls and input from various UK bodies and government offices, as well as EU directives. In international trading, rules applied by overseas regulatory bodies such as the US Commodity Futures Trading Commission (CFTC) also have to be taken into account. To ensure the observance of these regulations, the LME has a compliance department under the supervision of the Executive Director of Regulation & Compliance. [3] http://finance.fortune.cnn.com/2011/10/19/cftc-commodities-regulations/ http://finance.fortune.cnn.com/2011/10/19/cftc-commodities-r... The Commodity Futures Trading Commission approved new limits on commodities traders. Now analysts want to know what will happen next. FORTUNE -- Is the cure for speculation in the energy markets worse than the illness? Futures industry professionals are up in arms over a vote by regulators Tuesday to introduce position limits on hedge funds and other traders, saying it will lead to commodity hoarding and large price spikes in the futures. The CFTC decision (the full text is here) places various limits on how much a speculative trader, like a hedge fund or ETF manager, can hold in any of 28 commodity contracts, including energy. The aim is to prevent a run-up like June 2008 when oil hit $140 a barrel which ultimately introduced $4 a gallon gasoline at the pumps. The problem is, according to futures analysts, if speculators aren't allowed to buy the futures, they'll buy the physical commodity instead. "Eventually you're going to see a shortage, I think it's going to create a disruption in the marketplace. We might get away with it for some time, but if there's a crisis like 2008 you'll see one," Phil Flynn, the energy analyst at PFG Best, a Chicago brokerage, told me this morning (he also lets loose on his morning market commentary). Similarly, if less ominously, CME Group (CME) chairman Terry Duffy told CNBC yesterday ahead of the CFTC vote that passage would "encourage manipulation" of the markets.
smadge 13y ago
First of all, the "market distorting regulation" you mention that causes Goldman Sachs to shuffle aluminum around is not a government regulation, it is an industry standard set by the London Metal Exchange. The article suggests that there is a conflict of interest. The Exchange get's 1% of the storage costs, and the same companies that benefit from this rule are the ones that control the Exchange. This is a classic case of monopoly and collusion, not of overreaching government rules a regulation. The "rules and regulations" that are proposed in the article are simply to reinstate the principle that bankers should not be traders. What's happening is that Goldman Sachs has physical assets in the aluminum market, and also the ability to speculate on that market. From the article: "By controlling warehouses, pipelines and ports, banks gain valuable market intelligence, investment analysts say. That, in turn, can give them an edge when trading commodities. In the stock market, such an arrangement might be seen as a conflict of interest — or even insider trading. But in the commodities market, it is perfectly legal." How are the "little guys" hurt by preventing insider trading? Do you plan on founding a startup that speculates on commodities and also controls those commodities? Do you think that such a startup should exist or would be capable of bootstrapping without hundreds of billions in initial capital? Startups are only able to exist in the cracks created when we take the hammer to the monopolies.
- mabhatter 13y ago
  The little guy is an actual Aluminum Extrusion company, with actual people making an actual product. Jacking up prices of raw material even 1% is taking profit out of his pocket because he certainly cannot pass that cost on. (I used to work for a small company in that business) He is hurt because he is small and barely getting any discount at all. So all these imagined charges hit HIS pocket for 5% or more "off the top" because he can't avoid buying from the warehouses.
tossmeup 13y ago
Yep. Apologists. Don't mind the facts or the details, just look for the favorite scapegoat and blame it on liberal bias. Did you even read the article? There are no problems in locating and moving any specific load of metal within a day. A quarter-billion in profit a year and you think they just can't keep track of some metal? This is just another scheme set up by commodity players designed to skim bits of profit off of massive numbers of activities and to play each move in the game for a nice little benefit. This is the vertical integration of the commodities market. They are playing a game based around skimming profits out of everyday business activities where there is any surface area that investors and speculators might be playing. In "lubricating" the trading (where they pay kickbacks to maintain their leases), they are just finding a way to make a cut on action they aren't likely directly playing in. Speculators and investors end up sitting on their "chips" so JP is saying, "hey, we'll give you some cash so you are liquid and OK while you wait to get your bigger gains..." Thing is... it's that 1/10th of a cent per can that consumers pay which is fronting the waiting game for the speculator so they can cash in. Once again, we capitalize the schemes that make douche-bags rich. JP makes money no matter which way aluminum goes, but can net more the higher it goes since their primary partners and customers are traders. The more action in the market, the more need there is to hold chips. A warehouse makes money by staying full. Their incentive is to hold it as long as they can. They are not commodity suppliers. They are middle-men. They don't need to maintain an inventory in case prices rise and they want to cash in. They need owners to be stuck holding massive amounts that have to sit somewhere or find a bunch of traders who are shuffling paper representing the metal that basically just sits there. The warehouse would profit more without the regulation as they wouldn't have to pay to shuffle it around. In free market terms, the industrial consumers ARE going directly to sources instead of using the distribution network because the network is playing games and costing them a fortune. The problem is the drag in supply by the warehouse game increases costs overall. There are people playing games with different commodities and your interests are in protecting the game instead of making efficient markets. Regulations and subsidies are important and effective for managing commodity markets. You are a historically ignorant fool if you think your Libertarian hard-on for anti-regulation and anti-media zeal makes sense here.
jbert 13y ago
Could you elaborate on how the "metal must be moved" rule incentivises delayed shipments?
- msandford 13y ago
  It allows people to do just barely enough to satisfy the rule and nothing more, which can be a problem if the rule is set too low. And to silence their (potentially legitimate) critics with the line "we comply with X, Y and Z regulations..." If the rule system can't be gamed and those making the rules aren't allowed to participate in the activities they're ruling on, nor can they take kickbacks from those performing the activities then rules are an absolute good. But all those assumptions and assertions I made rarely hold in the real world. So their usefulness tends to be less of an absolute good and more of a mixed bag.
  - jbert 13y ago
    I still don't see how the claim made of "The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation." gibes with "metal must be moved" as the offending regulation.
    - msandford 13y ago
      Because the "metal must be moved" number is way too low. Imagine that your boss set metrics for you that you could knock out in 30 minutes, but the boss is paying you to be there for a full 8 hours. And imagine that if you worked harder than that, your reward was actually less pay. Also imagine no room for advancement. Someone from outside your company might say that situation is effed up. But to you working for just those 30 minutes and nothing more would be completely logical. That's the situation facing these metal warehouses. Being efficient and shipping metal faster than absolutely required gets them no short term benefits and does them short term harm: reduced rents. The problem isn't necessarily the "metal must be moved" rule it's the quantity in the "metal must be moved" rule. So some people say "fix the rule" and others say "abolish the rule" because of substantially different world views. Some people like maintaining and fixing code; others like organizing differently to reduce the amount of code necessary.

by temphn 13y ago

Lagged2Death 13y ago

Without looking I'd bet this is some kind of "anti-hoarding" provision, probably intended to prevent single manufacturers from cornering the market. As is typical, it caused exactly the opposite of the desired consequence. In your first sentence you admit you don't know what's going on, then in your second sentence you claim that "it caused exactly the opposite of the desired consequence." The point being, this could be an old rule that's worked well until just recently, as far as you know. It's possible it's done more good than ill. In any case, it's described as an "industry rule," not a government regulation, as your quote makes clear. It's the result of industry "self-regulation." The article mentions this. The shuffle of stock is an end-run around that rule, but it's not the cause of the higher prices. The delay-to-raise-prices scam would be easier to run and more profitable if the rule that makes the shuffle necessary didn't exist.

temphn 13y ago
You prompted me to dig in further to see what the source of the underlying distortionary rule is. Looks like the LME or London Metal Exchange[1]. But that in turn is governed by the government[2]. And the government, including the CFTC which governs the LME, has indeed passed distortionary "anti-hoarding" laws in allied areas[3]. See links below. The key question is whether the LME is free to change these rules and/or purchasers are free to use another exchange in response to Goldman's attempt to increase prices. If they are not so free - if, say, the LME's rule here is imposed to be compliant with some CFTC or SEC or equivalent provision - then we are back to where we started. Conversely, if the participants are free to use another exchange or start a competing one, then this issue is on the level of Zynga spamming Facebook - a dispute between two powerful private parties that will be worked out via LME countermeasures/competition rather than federal regulation. [1] http://www.reuters.com/article/2011/07/29/us-lme-warehousing-idUSTRE76R3YZ20110729 http://www.reuters.com/article/2011/07/29/us-lme-warehousing... Goldman's warehouse business relies on a lucrative opportunity enabled by the LME regulations. Those rules allow warehouses to release only a fraction of their inventories per day, much less than the metal that is regularly taken in for storage. [2] https://www.lme.com/en-gb/regulation/ https://www.lme.com/en-gb/regulation/ The Exchange provides the environment for trading and regulates the operation of the market. It has a statutory requirement to ensure that business on its markets is conducted in an orderly manner, providing proper protection to investors. Approved as a recognised investment exchange (RIE) and conforming with UK and other international regulatory requirements, the LME offers, through price and volume transparency and audit trails, a legally safe forum for metals trading. As an RIE, the Exchange comes under the direct jurisdiction of the UK Financial Conduct Authority (FCA). Regulation of the market is largely carried out by the LME, while the FCA is responsible for regulating the financial soundness and conduct of LME members' business. Beyond this, both the Exchange and its members are subject to regulatory controls and input from various UK bodies and government offices, as well as EU directives. In international trading, rules applied by overseas regulatory bodies such as the US Commodity Futures Trading Commission (CFTC) also have to be taken into account. To ensure the observance of these regulations, the LME has a compliance department under the supervision of the Executive Director of Regulation & Compliance. [3] http://finance.fortune.cnn.com/2011/10/19/cftc-commodities-regulations/ http://finance.fortune.cnn.com/2011/10/19/cftc-commodities-r... The Commodity Futures Trading Commission approved new limits on commodities traders. Now analysts want to know what will happen next. FORTUNE -- Is the cure for speculation in the energy markets worse than the illness? Futures industry professionals are up in arms over a vote by regulators Tuesday to introduce position limits on hedge funds and other traders, saying it will lead to commodity hoarding and large price spikes in the futures. The CFTC decision (the full text is here) places various limits on how much a speculative trader, like a hedge fund or ETF manager, can hold in any of 28 commodity contracts, including energy. The aim is to prevent a run-up like June 2008 when oil hit $140 a barrel which ultimately introduced $4 a gallon gasoline at the pumps. The problem is, according to futures analysts, if speculators aren't allowed to buy the futures, they'll buy the physical commodity instead. "Eventually you're going to see a shortage, I think it's going to create a disruption in the marketplace. We might get away with it for some time, but if there's a crisis like 2008 you'll see one," Phil Flynn, the energy analyst at PFG Best, a Chicago brokerage, told me this morning (he also lets loose on his morning market commentary). Similarly, if less ominously, CME Group (CME) chairman Terry Duffy told CNBC yesterday ahead of the CFTC vote that passage would "encourage manipulation" of the markets.

smadge 13y ago

First of all, the "market distorting regulation" you mention that causes Goldman Sachs to shuffle aluminum around is not a government regulation, it is an industry standard set by the London Metal Exchange. The article suggests that there is a conflict of interest. The Exchange get's 1% of the storage costs, and the same companies that benefit from this rule are the ones that control the Exchange. This is a classic case of monopoly and collusion, not of overreaching government rules a regulation. The "rules and regulations" that are proposed in the article are simply to reinstate the principle that bankers should not be traders. What's happening is that Goldman Sachs has physical assets in the aluminum market, and also the ability to speculate on that market. From the article: "By controlling warehouses, pipelines and ports, banks gain valuable market intelligence, investment analysts say. That, in turn, can give them an edge when trading commodities. In the stock market, such an arrangement might be seen as a conflict of interest — or even insider trading. But in the commodities market, it is perfectly legal." How are the "little guys" hurt by preventing insider trading? Do you plan on founding a startup that speculates on commodities and also controls those commodities? Do you think that such a startup should exist or would be capable of bootstrapping without hundreds of billions in initial capital? Startups are only able to exist in the cracks created when we take the hammer to the monopolies.

mabhatter 13y ago
The little guy is an actual Aluminum Extrusion company, with actual people making an actual product. Jacking up prices of raw material even 1% is taking profit out of his pocket because he certainly cannot pass that cost on. (I used to work for a small company in that business) He is hurt because he is small and barely getting any discount at all. So all these imagined charges hit HIS pocket for 5% or more "off the top" because he can't avoid buying from the warehouses.

tossmeup 13y ago

Yep. Apologists. Don't mind the facts or the details, just look for the favorite scapegoat and blame it on liberal bias. Did you even read the article? There are no problems in locating and moving any specific load of metal within a day. A quarter-billion in profit a year and you think they just can't keep track of some metal? This is just another scheme set up by commodity players designed to skim bits of profit off of massive numbers of activities and to play each move in the game for a nice little benefit. This is the vertical integration of the commodities market. They are playing a game based around skimming profits out of everyday business activities where there is any surface area that investors and speculators might be playing. In "lubricating" the trading (where they pay kickbacks to maintain their leases), they are just finding a way to make a cut on action they aren't likely directly playing in. Speculators and investors end up sitting on their "chips" so JP is saying, "hey, we'll give you some cash so you are liquid and OK while you wait to get your bigger gains..." Thing is... it's that 1/10th of a cent per can that consumers pay which is fronting the waiting game for the speculator so they can cash in. Once again, we capitalize the schemes that make douche-bags rich. JP makes money no matter which way aluminum goes, but can net more the higher it goes since their primary partners and customers are traders. The more action in the market, the more need there is to hold chips. A warehouse makes money by staying full. Their incentive is to hold it as long as they can. They are not commodity suppliers. They are middle-men. They don't need to maintain an inventory in case prices rise and they want to cash in. They need owners to be stuck holding massive amounts that have to sit somewhere or find a bunch of traders who are shuffling paper representing the metal that basically just sits there. The warehouse would profit more without the regulation as they wouldn't have to pay to shuffle it around. In free market terms, the industrial consumers ARE going directly to sources instead of using the distribution network because the network is playing games and costing them a fortune. The problem is the drag in supply by the warehouse game increases costs overall. There are people playing games with different commodities and your interests are in protecting the game instead of making efficient markets. Regulations and subsidies are important and effective for managing commodity markets. You are a historically ignorant fool if you think your Libertarian hard-on for anti-regulation and anti-media zeal makes sense here.

jbert 13y ago

Could you elaborate on how the "metal must be moved" rule incentivises delayed shipments?

msandford 13y ago
It allows people to do just barely enough to satisfy the rule and nothing more, which can be a problem if the rule is set too low. And to silence their (potentially legitimate) critics with the line "we comply with X, Y and Z regulations..." If the rule system can't be gamed and those making the rules aren't allowed to participate in the activities they're ruling on, nor can they take kickbacks from those performing the activities then rules are an absolute good. But all those assumptions and assertions I made rarely hold in the real world. So their usefulness tends to be less of an absolute good and more of a mixed bag.
- jbert 13y ago
  I still don't see how the claim made of "The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation." gibes with "metal must be moved" as the offending regulation.
  - msandford 13y ago
    Because the "metal must be moved" number is way too low. Imagine that your boss set metrics for you that you could knock out in 30 minutes, but the boss is paying you to be there for a full 8 hours. And imagine that if you worked harder than that, your reward was actually less pay. Also imagine no room for advancement. Someone from outside your company might say that situation is effed up. But to you working for just those 30 minutes and nothing more would be completely logical. That's the situation facing these metal warehouses. Being efficient and shipping metal faster than absolutely required gets them no short term benefits and does them short term harm: reduced rents. The problem isn't necessarily the "metal must be moved" rule it's the quantity in the "metal must be moved" rule. So some people say "fix the rule" and others say "abolish the rule" because of substantially different world views. Some people like maintaining and fixing code; others like organizing differently to reduce the amount of code necessary.