How Does This Commodities Scam Work?

WASHINGTON, DC: Giant aluminum man is going to get you.

Photo by ROBYN BECK/AFP/Getty Images

Banks in the United States have traditionally been prohibited from owning non-financial businesses. Wells Fargo can’t start selling burritos, in other words. But there have always been some limited exceptions to this principle. Car companies have often had financing arms, for example. And in recent years, regulators have allowed banks that do commodities trading to also own companies that are involved in the transportation and storage of physical commodities. David Kocieniewski has a long investigation into this, particularly focused on the alumnimum industry, in which he seems to allege that Goldman Sachs uses its control of aluminum warehouses to increase prices to end-users by billions of dollars.

And yet having read the piece twice, I don’t understand how the scam works. The basic idea seems to be that by shuffling aluminum around rather than delivering it promptly, Goldman can charge more rent and boost its profits.

But this (a) doesn’t appear to have anything in particular to do with Goldman Sachs’ well-known investment banking activities and (b) sounds like far too ridiculous a scam to actually work. It amounts to saying that Goldman’s amazing business strategy is to deliberately provide terrible customer service (shipping delays) and high prices (charging extra rent to cover the delays). If it were that easy to make billions of dollars, we’d all be doing it. The story is entirely missing a clear explanation of why this doesn’t just lead someone else to open aluminum warehouses and undercut them. Goldman’s big play in this industry consists of “27 industrial warehouses in the Detroit area” that generally “operate only one shift and usually sit idle 12 or more hours a day.” If there’s one thing we know about Detroit it’s that it contains plenty of cheap buildings and unemployed workers you could put into commission running a proper warehouse and promising much quicker deliveries.

The implication of the article is that the answer to the riddle has something to do with the operations of the London Metal Exchange (which is now a subsidiary of Hong Kong Exchanges and Clearing) where aluminum futures and such are traded. I would hypothesize that the idea is that somehow Goldman uses its influence in commodity trading to somehow force a large share of physical aluminum through the properties it controls. But it’s not obvious to me how you’d do that.

One possibility is that this is just an investigative report gone bad. But Kocieniewski’s basic facts—banks buy warehouses, delays skyrocket, bank profits soar—all seem to check out. But somehow the conventions of newspaper article writing look to have blocked a clear presentation of his thesis. How does owning the warehouses let Goldman get away with this?