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Wednesday, September 4, 2013

Strategic CSR - Goldman Sachs

What is so interesting about the story about Goldman Sachs’ involvement in the aluminum warehousing business, which broke over the summer, is how quickly the firm got out of the business as soon as it’s involvement became widely known. As indicated in the article in the url below, the shift was rapid:
“Aluminum deliveries into warehouses run by big banks and trading firms have plunged this summer, highlighting Wall Street's retreat from the once-lucrative commodities business amid stagnant markets, new rules and regulatory scrutiny.”
You know a company was doing something wrong when it doesn’t even try to defend its actions once it is caught. As is now apparent, their involvement was a game (a lucrative game) and, once the rules changed, the company moved on—no regrets and no consequences (as of yet):
“In its heyday, the firms offered aluminum producers cash, rent discounts and other incentives to put metal into storage rather than selling to users such as brewers and soft-drink makers, according to analysts and traders. Meanwhile, the prolonged time in inventory generated hefty rental income for warehouse owners that more than made up for the incentives paid out.”
When you are a company that trades in commodities futures (i.e., betting on future prices), as is Goldman Sachs (and many others), it is helpful to have a significant amount of control over the supply of those commodities to the market:
“Industrial aluminum users such as Coca-Cola Co. and aluminum sheet maker Novelis Inc. have complained to the London Metal Exchange that warehouses had artificially slowed the release of aluminum, limiting supply and driving up prices. A MillerCoors LLC executive testified in a Senate banking committee hearing last month that the practices were inflating consumer prices by billions of dollars.”
The result of all the sudden scrutiny?
“Average daily aluminum shipments to LME warehouses were down 79% in the first 19 days of August from two months earlier, according to data provided by New York-based metals consulting firm CPM Group Inc. August's daily average rate of aluminum deliveries is the lowest since November 2011, CPM Group said. At the same time, the cash incentives dangled before producers by the banks and trading firms that own the facilities have recently dropped to $50 a metric ton from more than $200 this past spring, traders said.”
To give you a sense of how much money these market-moving practices could have been earning for the banks:
“Raw-materials trading in 2008 generated as much as a third of revenue within large banks' market-making business, which matches buyers and sellers in the fixed income, currency and commodities markets; it now accounts for less than 7%.”
Oh, the wonders of transparency:
“… warehouse operators including Goldman Sachs Group Inc. and Glencore Xstrata PLC … now are the subject of investigations by several U.S. authorities, including a Senate panel.”
Take care
David Chandler & Bill Werther
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On Wall Street, a Reversal of Fortune
By Christian Berthelsen and Tatyana Shumsky
August 20, 2013
The Wall Street Journal