The U.S. banking major, The Goldman Sachs Group, Inc. (GS) along with The London Metal Exchange (:LME) – a subsidiary of Hong Kong Exchanges and Clearing Limited – was recently sued in a class-action lawsuit. The suit was filed in the U.S. District Court for the Eastern District of Michigan, over aluminum warehousing. The main plaintiff in the lawsuit was a Mich.-based aluminum extrusion company, Superior Extrusion Inc.
The plaintiffs accused Goldman of anti-competitive and monopolistic actions in the warehousing business. The suit also imputed Goldman and LME of hoarding approximately 1.5 million tons of aluminum at warehouses in Detroit in order to take advantage of inflating prices.
Additionally, consumers and the U.S. regulators have accused Goldman and other warehouse owners of artificially increasing waiting times to facilitate lease payment and raise metal prices.
The lawsuit comes in the wake of criticism of banks that own commodity assets and trade raw materials. 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.
Further, following complaints of banks and traders manipulating supplies and prices, the Commodities Futures and Trading Commission has initiated an inquiry on the banks’ role in the metals warehousing operation. This had resulted in JPMorgan Chase & Co. (JPM) announcing its plans to exit the physical commodity business, including stakes of commodities assets and physical trading operations.
Since Mar 2013, Goldman has also been trying to sell its warehousing business – Metro International Trade Services LLC, while Morgan Stanley (MS) has been trying to find a buyer for its oil pipeline and terminals business – TransMontaigne – for more than a year now.
Notably, rising aluminum prices have hit numerous industries, including the beverage sector. Customers have to pay more for canned drinks each time the cost of the metal creeps up. Molson Coors Brewing Company (TAP) said that the inflated price of the metal was costing consumers around $3 billion annually.
Therefore, lawmakers are concerned about the risks from banks' ownership of warehouses and plants. They believe that banks' holdings of these assets tend to concentrate market power and increase bank profits, thereby affecting consumers.
Goldman currently carries a Zacks Rank #2 (Buy).
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