Wall Street giants’ commodities trading boom may have just fizzled out as The Goldman Sachs Group, Inc. (GS) and JPMorgan Chase & Co. (JPM) face a subpoena related to the hoarding of aluminum and the artificial rise in the metal’s price.
The Commodity Futures Trading Commission (:CFTC) has issued subpoenas to the Wall Street banks and owners of other key warehouses, including Glencore Xstrata plc as part of its investigation into malpractices in the aluminum market. Such malpractices are supposed to have led consumers and manufacturers to incur losses of billions of dollars since 2010.
According to market rumors, the subpoena involved more than 30 areas of inquiry, including transferring metal from one warehouse to another within the same company. The regulatory authority also requested for trading details related to the warehouse operations from Jan 2010.
The lawsuit comes in the wake of criticism of banks that own commodity assets and trade raw materials. The warehouse owners have been accused of artificially increasing waiting times to facilitate lease payment and raise metal prices. Notably, in July, the Federal Reserve stated that it was reviewing its 2003 decision of allowing banks to pursue trading in the physical commodity market.
Rising aluminum prices have hit numerous industries, particularly the beverage sector. The subpoena is the latest sign of the CFTC stepping up its investigation as it looks into charges made by The Coca-Cola Company (KO) and Encore Wire Corp. (WIRE) that hoarding and lengthy waiting times has made metals more expensive. Recently, Molson Coors Brewing Company (TAP) said that the inflated price of the metal was costing consumers around $3 billion annually.
Trouble has been brewing for the banks’ commodities operations for quite some time. Earlier this month, a class action lawsuit was filed against Goldman and London Metal Exchange (:LME) – a subsidiary of Hong Kong Exchanges and Clearing Limited – in the U.S. District Court for the Eastern District of Michigan by Mich.-based aluminum extrusion company, Superior Extrusion Inc. The suit accused Goldman and LME of hoarding approximately 1.5 million tons of aluminum at warehouses in Detroit in order to take advantage of inflating prices.
Within a week, a similar lawsuit was filed related to the hoarding of aluminum and the artificial rise in the metal’s price. Goldman, JPMorgan, Glencore and LME were the accused companies.
Further, with the heightened regulatory and political scrutiny of banks’ ownership in the physical commodity business, JPMorgan announced its plan to exit such operations last month. JPMorgan follows Morgan Stanley (MS) and Goldman, which have been trying to sell their physical commodity business for more than a year now.
Wall Street biggies’ involvement with commodities trading seems to be over with heightened regulatory scrutiny and litigation woes. Regulators are becoming increasingly concerned about the risks arising from banks' ownership of warehouses and plants. They believe that banks' holdings of these assets tend to concentrate market power and increase bank profits, consequently adversely affecting consumers. Therefore, regulators across the globe are investigating banks’ role in the commodity trading business more closely.
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