By David Sheppard and Susan Thomas
NEW YORK/LONDON Aug 1 Goldman Sachs'
effort to diffuse intensifying pressure over its commodity
business by throwing open its metal warehouse doors likely comes
too late to head off further scrutiny of Wall Street's commodity
Two weeks of escalating criticism of banks that own
commodity assets and trade raw materials has shaken executives
and the industry, with little sign of the pressure relenting.
Britain's financial watchdog is considering its own
investigation of metals warehouses, sources said, and two
lawmakers questioned whether power regulators were tough enough.
Years of growing frustration over long waiting times and
rising prices at metals warehouses across the world spilled into
Washington this month, with lawmakers questioning why financial
banks are so deeply involved in commercial activity and metal
users including American brewer MillerCoors calling for a
In its first major effort to appease consumers, Goldman
offered on Wednesday to immediately swap aluminum for any
end-users holding metal at its Metro International warehouses,
allowing them to avoid year-long waits and high premiums. It
also refuted the notion that it was causing a shortage of metal,
saying none of its customers had yet taken up the offer.
But the effort met with a skeptical response among some
traders who said the bank had failed to address the big
financial incentives paid by warehouses to attract metal into
their facilities, which critics say have stoked prices.
They also took issue with the bank's decision to limit the
offer to end-users, excluding the hedge funds and other traders
who are believed to account for most of the stockpiled metal.
"It sounds to me like they're offering ice in the winter,"
said U.S. anti-trust lawyer Robert Bernstein, a partner at New
York-based Eaton & Van Winkle LLP, who works on behalf of U.S.
The move is the latest effort by Wall Street's biggest banks
to fend off a barrage of criticism of their role in the raw
materials supply chain, where they do everything from
stockpiling metal for clients to shipping gasoline to New York.
Last week JPMorgan Chase & Co said it was getting
out of the physical commodity business, quitting a sector it
paid billions of dollars over five years to build.
But Goldman's Chief Operating Officer Gary Cohn defended the
bank's role in commodities and J Aron, its commodities trading
arm, calling it a "core" business.
"Commodity hedging is a core competence and one of the most
important things we do in the firm and our clients really need
us to be in that business," Cohn, who once ran J Aron, said on
CNBC. "We are staying in the commodity hedging business."
It is unclear whether the measures will ease pressure from
Washington, where a handful of lawmakers are pressing regulators
including the Federal Reserve and the Commodity Futures Trading
Commission (CFTC) to bring banks to account.
Goldman's move will intensify scrutiny of other merchants
and banks, including Glencore Xstrata and JPMorgan
Chase & Co that have bought warehouses in the past three years,
and also the London Metals Exchange itself, which is in the
midst of its third effort to resolve the issue.
The lengthy waits to receive metal shipments are "a systemic
problem which goes broader than Metro International," said
American Beverage Association spokesman Christopher
In London, the Financial Conduct Authority (FCA) is weighing
whether to launch a probe of the London Metal Exchange (LME)
warehousing system, an about-face from the past few years when
the agency said it did not have authority to delve beyond
derivative markets into the physical trade.
In practice industrial clients needing metal sometimes have
to queue for up to a year while warehouse companies -
increasingly owned by banks or trading houses - benefit from
rents they charge during the wait or traders focus on using
metal in finance deals rather than providing it to clients.
One source at a competing warehousing company was critical
of Goldman's offer: "If they had said we're going to deliver out
faster, that would be a different story."
WHEN SEPTEMBER COMES
While the commotion over commodities trade has focused most
intensely on the warehousing issue, lawmakers are also looking
more broadly at whether banks should be allowed in the
commercial business of crude oil cargoes and power plants.
While welcoming Goldman's effort as "great news", Democrat
CFTC commissioner Bart Chilton said the "the larger issue of
banks owning physical commodities, warehousing and delivery
mechanisms" remained unresolved.
After two weeks of increasingly frenetic activity and vocal
debate, many industry officials expect the din to subside during
August, typically a slow month for the markets and also a
five-week hiatus for legislators in Washington.
But it may again reach fever pitch in September, with
Senator Sherrod Brown expected to call Federal Reserve and bank
officials to another hearing of the powerful banking committee.
That month also marks the end of a five-year grace period
granted to Goldman Sachs and Morgan Stanley to comply
with commercial banking regulations after they gave up their
independence at the height of the financial crisis.
While Goldman has already sold its power plants and trades
little physical oil, Morgan Stanley faces an unknown outcome for
its massive global oil business, its 49 percent share in oil
tanker firm Heidmar and its cherished U.S. logistics and
pipelines business TransMontaigne.
Although the banks say they should be allowed to trade and
invest in commodity businesses more broadly than their rivals
because of an exemption granted to investment banks in a 1999
law, it is unclear how much the Fed will allow.
The Fed announced earlier this month that it was "reviewing"
the landmark 2003 decision that first allowed banks to trade
physical commodities, a shock decision that raised the specter
of even deeper restrictions than banks had been bracing for. It
is unclear when that review may conclude.
"The banks went a little bit too far with the Fed's
authorization to get into the commercial side of commodities
business and I think that the Senate is more than shocked about
what they saw when they started investigating into this
situation," said Richard Bove, a veteran banking analyst
currently working as an equity research analyst for Garden City,
New York-based Rafferty Capital Markets LLC.
"I doubt that any bank will have any, if you will,
commercial commodities business in 12 to 18 months from now."
OPENING THE DOOR
Separately on Wednesday, two Democratic senators questioned
whether a landmark $410 million settlement with JPMorgan earlier
this week over alleged power market manipulation had included
"adequate refunds to defrauded ratepayers."
The penalty is the second-largest ever by the Federal Energy
Regulatory Commission (FERC), but is "equal to roughly 1.3
percent of JPMorgan's 2012 profits", Senators Elizabeth Warren
and Edward Markey, both of Massachusetts, wrote to the FERC
chairman. They also questioned why JPMorgan executives were not
The crack-down is opening opportunities for less-restricted
competitors, particularly foreign banks not overseen by the Fed,
potentially leading to the biggest reshuffling of market power
since the 1990s era of the "Wall Street refiners."
Brazil's Grupo BTG Pactual SA, the privately held bank run
by billionaire André Esteves, is forging ahead with a $300
million-plus expansion plan to create a global powerhouse.
Just months after hiring former Noble Group Chief Executive
Ricardo Leiman to lead the drive, BTG has recruited nearly a
dozen traders, managers and analysts in London, Geneva and New
York to cover everything from freight to grains to natural gas,
according to headhunters and a source familiar with the plans.
"From a regulatory perspective they may try to become like
Macquarie, a representative of a foreign bank," said Peter
Henry, senior consultant at Commodity Search Partners in New
York. "There's an angle there."