In Senate hot seat, Goldman denies commodity manipulation

WASHINGTON (Reuters) - Goldman Sachs Group Inc on Thursday took the lead in rejecting allegations by a powerful U.S. Senate subcommittee that Wall Street banks were exploiting physical commodity markets to manipulate prices and gain unfair trading advantages.

In an often heated hearing before the Senate's Permanent Subcommittee on Investigations, Senator Carl Levin pressed bankers and executives on whether the company had inflated physical prices and curbed supplies of aluminum, adding billions of dollars to costs for consumers, like the U.S. Navy and beverage can makers.

Chris Wibbelman, president and chief executive officer of Metro International Trade Services LLC, the metals warehousing firm Goldman bought in 2010, defended his company's actions, saying it plays by the rules and contributes jobs to the Detroit area.

Wibbelman received the brunt of Levin's questions and the senator, who chairs the subcommittee, appeared frustrated at his testimony.

"Let me refresh your recollection," Levin said to Wibbelman in reference to a question about a business contract. After the Michigan Democrat read the document, he turned to the Metro CEO, raising his voice and said: "Does that help your recollection?"

The hearing, which continues on Friday with officials from the Federal Reserve and U.S. power market regulator, follows the release on Wednesday of a detailed 403-page report that criticized how banks purchased and exploited huge commodity stockpiles.

The public airing of concerns about banks' ownership of physical commodities and assets from pipelines to warehouses renewed scrutiny on Wall Street.

But experts said it may have little impact on an industry that is retrenching and with the Federal Reserve already signaling its intent to move forward in some way with changes in regulation.

Levin, one of several lawmakers who have led the criticism of the blending of commerce and finance on Wall Street, is retiring from the Senate in early January.

"There will be a lot of sound and fury, but it won't amount to much in the long term," said Craig Pirrong, a finance professor at the University of Houston.

Goldman is under particular scrutiny because it has maintained that commodity trading is core to its business.

The company is in the process of selling Metro, though details of bidders and timing remain unclear.

JPMorgan Chase & Co and Morgan Stanley, who will address the panel later on Thursday, have both made major moves to get out of the physical commodity space.

CATASTROPHES AND MERRY-GO-ROUNDS

The hearing and report stem from a two-year investigation by the subcommittee into banks and their influence on commodities.

The report shed light on two areas: the Fed's concerns about weakness in banks' ability to withstand a major catastrophe and intricate details of Metro's multi-million dollar payments to maintain long wait times and bolster income.

"If you like what Wall Street did for the housing market, you'll love what Wall Street is doing for commodities," Levin said in his opening remarks.

"Goldman's ability to influence any portion of the price for a key component of the industrial economy is simply unacceptable."

Republican Senator John McCain of Arizona, a member of the subcommittee, said Wall Street banks have taken "excessive risk, raised suspicions of market manipulation and gained unfair trading advantages" through their expansion into physical commodities trading.

PLAYING BY THE RULES

Aluminum warehousing was in the spotlight after the report, based on 90,000 pages of bank and regulatory documents as well as 78 interviews and briefings, detailed six so-called "merry-go-round" deals that Levin said caused bottlenecks at Metro's Detroit warehouses.

Levin said longer queues led to rising physical premiums: "There's no doubt these six deals that you welcomed as a warehouse and Goldman approved had a direct influence on the length of queue," he said.

Metro paid millions of dollars to existing customers who agreed to either join or keep their metal in a queue.

In questioning, Wibbelman said he was offering deals to customers according to the business climate.

Only a small percentage of aluminum stockpiles are subject to the kind of metal backlogs that have come under scrutiny, Wibbelman said.

About 80 percent of metal stored in Metro warehouses in and out of the London Metal Exchange's vast network is not subject to any queue and may be purchased by a customer through negotiations with the metal owner, Wibbelman said.

"There simply is no lack of availability for aluminum."

MillerCoors LLC, the U.S. arm of Molson Coors Brewing Co and SABMiller, has accused warehouses and their owners of inflating the prices of aluminum, and costing consumers billions of extra dollars annually.

"The investment in Metro was never part of Goldman Sachs' core franchise and has not been integrated into our commodities market-making activities," Jacques Gabillon, the head of Goldman's global commodities principal investments group, told the subcommittee.

(Reporting by Michael Flaherty in Washington DC and Josephine Mason in New York; Editing by Bernard Orr and Paul Simao)