NEW YORK/LONDON Goldman Sachs' (GS.N) 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 trade.
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 clamp-down.
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. copper fabricators.
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 (JPM.N) 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 (GLEN.L) 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 Gindlesperger.
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 (MS.N) 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 punished.
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."
(Editing by Jonathan Leff and Lisa Shumaker)