Exclusive: Goldman's Cohn takes on Washington to defend commodities

NEW YORK Fri May 23, 2014 7:39am EDT

Gary Cohn, president and COO of Goldman Sachs, speaks during a news conference, after a meeting with Brazil's President Dilma Rousseff in Brasilia April 9, 2014. REUTERS/Ueslei Marcelino

Gary Cohn, president and COO of Goldman Sachs, speaks during a news conference, after a meeting with Brazil's President Dilma Rousseff in Brasilia April 9, 2014.

Credit: Reuters/Ueslei Marcelino

NEW YORK (Reuters) - Sen. Sherrod Brown, a Democrat from Ohio, and Goldman Sachs Group Inc. President Gary Cohn, who's from Cleveland, are friendly enough that Brown has been known to rib Cohn for abandoning the Cleveland Indians baseball team in favor of the New York Yankees. The two men first met years ago, and Cohn and his family, who are also Democrats, have contributed to Brown's campaigns.

They may like each other, but the two men are antagonists in a battle over whether Goldman can maintain its lucrative role in physically trading stuff ranging from aluminum to coal to natural gas to zinc.

Brown, 61, has been a critic of the role that banks, particularly Goldman, play in commodities markets, accusing Wall Street of driving up prices for businesses and consumers. Cohn, Goldman's No. 2 executive, met this month with lawmakers including Brown as well as U.S. Federal Reserve officials to explain why a Wall Street bank's presence in the commodities market is actually good for Main Street.

The meetings with lawmakers and the Fed, which haven't been previously reported, show how hard Goldman is fighting to hang on to its commodities business.

"For more than 30 years, we have been helping our clients manage commodity and other risks and we believe that experience has given us an important perspective on the policy debate under way today," Goldman said in a statement.

Goldman reported $902 million in commodities revenues for 2013, up from $492 million the prior year. The bank says those figures, reported in accordance with U.S. Securities and Exchange Commission rules, do not accurately reflect the way it runs its commodities business.

Cohn's meetings come after consumers, including beer-can and steel-railings manufacturers, prompted Brown to hold hearings on the subject of banks and physical commodities through a congressional subcommittee he oversees. Brown has also been considering whether to bring bankers in front of the committee to publicly question their role in the raw materials supply chain, sources said.

This week, Goldman said it began a process to sell one part of its physical trading operations, a metals warehousing business called Metro International Trade Services, that has been the center of controversy over its influence on consumer prices.

The Metro sale announcement follows exits from physical commodities trading businesses by top rivals including Morgan Stanley, JPMorgan Chase & Co, Barclays PLC and Deutsche Bank AG. Though Goldman is selling Metro, it still would like to hold on to other physical commodities assets. The bank is counting on Cohn and other Goldman executives, including Chief Executive Lloyd Blankfein, to persuade regulators and lawmakers not to force its exit.

The Metro sale is meant to rid Goldman of a controversial holding and appease regulators, said Kristofer Tremaine, a former commodities trader and founder of a London-based commodity trade finance fund.

Goldman wrote in April to the Fed in response to a call for public comment about possible new rules on commodities trading. "The letters we and many others sent to the Fed explain the importance to the economy of managing commodity risk and we feel it is important to continue talking with those in Washington who are open to engaging on the subject," Goldman said in its statement to Reuters.

Being in the physical commodities market give banks insight into supply and demand, potentially making trading more profitable. Critics contend that Wall Street's involvement hurts consumers and businesses, because banks can restrict the flow of material through the supply chain to drive prices higher.

During their meeting, Cohn, 53, told Brown that the fears are misdirected. In practice, he said, Goldman acts as an important facilitator between buyers and sellers of commodities. Cohn argued that the bank's role as an intermediary - with the ability to maintain inventories, lend money, be patient with debts and provide hedging products - actually helps the economy flourish, sources said.

VICTORY FOR BEER

It could not be determined whether Cohn discussed the future of the Metro business with Brown in their meeting. Following the announcement, Brown put out a statement celebrating the potential sale.

"This is good news for consumers, taxpayers, and manufacturers that depend on aluminum," he said. "Banks should focus on core banking activities rather than owning physical assets like warehouses, pipelines, and tankers. Today's announcement is a victory for beer and soft drink makers and for the safety and soundness of our financial system."

Cohn did not respond to requests for comment, and Goldman Sachs declined to make him available for an interview.

Metro became the center of controversy after big consumers such as MillerCoors LLC and The Coca-Cola Co accused warehouses and their owners of exploiting London Metal Exchange storage rules to boost rental income, distorting supplies, inflating physical prices of aluminum and costing consumers billions of extra dollars annually. The issue captured public and political attention last year and the Department of Justice and Commodity Futures Trading Commission are looking into the issue.

Another congressional panel, the Permanent Subcommittee on Investigations, which has subpoena power, is also probing banks' role in the commodities market. And the Fed is considering rules that could restrict such activities, or make them less profitable by requiring a capital surcharge on those it deems risky. Wall Street executives say although the Fed has not said what it wants banks to do yet, the regulator has raised the bar on banks explaining why they should be allowed to stay in such businesses.

Cohn also met with Fed staff on his recent trip to explain Goldman's position. One source close to Goldman said its outreach efforts to senators such as Brown were important as long as the Fed is "being hauled up in front of Congress."

A Fed spokeswoman declined to comment.

SOLIDIFY POSITION

If Goldman fends off new regulations, it could solidify its position as the leading Wall Street bank in the commodities market.

Banks that have announced plans to significantly scale back their commodities trading operations have cited regulatory pressure as well as higher capital requirements that are denting profits. Wall Street banks took in as much as $14 billion in commodities trading revenue in 2008, but that figure declined to just $4.5 billion in 2013, according to data from the consulting firm Coalition.

Although Goldman is facing those same pressures, the business is known to have been very profitable for it over the long term. In a January earnings call, Chief Financial Officer Harvey Schwartz described the business as "too important" to its clients to give up.

"The real victor in the mass exodus of the major banks from commodity trading will likely be Goldman Sachs," Bernstein Research analyst Brad Hintz said in a recent report.

Some rivals expect Goldman to feel compelled to exit physical commodities trading. To be sure, Goldman's ability to stay in commodities trading was grandfathered into the 1999 Gramm-Leach-Bliley Act.

One senior Wall Street executive whose firm has decided to exit those businesses said it would not be fair to banks that have gotten out in anticipation of new Fed regulations. If Goldman is successful in its push to remain in physical commodities, rivals will see it as proof that the bank - known for its history of senior executives moving to roles in policy and regulation - still enjoys a cozy relationship with the government, the executive said.

"Sen. Brown is open to hearing the viewpoints of stakeholders affected by legislation before the Banking Committee," said spokeswoman Meghan Dubyak, in an email. "He hopes that even people he disagrees with will find him knowledgeable, accessible, and open to argument. But anyone the least bit familiar with him knows that he has the same message to all audiences - banks should stick to banking."

(Editing by Paritosh Bansal and John Pickering)

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