banks role in physical commodities markets came under
fire at a U.S. Senate hearing July 23, with London Metal
Exchange aluminum warehouses in Michigan facing sharp criticism
currently waits a year to 18 months to get metal out of LME
warehouses in the Detroit area, according to Tim Weiner, the
companys global risk manager for commodities and metals.
"Imagine a warehouse with a huge door marked in and
a tiny door marked out, " Weiner said,
blasting LME rules, premiums paid by warehouses to attract
metal and high rents charged to customers.
Such factors drive up
prices for consumers and stymie end-user innovation, costing
MillerCoors tens of millions of dollars every year and other
end-users billions, Weiner said. MillerCoors has approached the
LME about its concerns, but only minor changes have been
proposed that "do not go far enough, fast enough" or correct
underlying problems such as bank stakes in warehouses and their
role in shaping LME policies, he said.
Proposed new rules by
the LME aimed at limiting long waits for metal (
amm.com, July 1) would not take effect until April
2014 at the earliest, Weiner noted.
doesnt encounter similar problems with other commodities,
such as barley, necessary for its day-to-day operations, he
said, noting that the company has also found regulators in the
United States and abroad unable or unwilling to address
problems with the LME.
"We simply ask for the
same regulatory and legislative oversight of the LME that other
U.S. futures exchanges receive in order to level the playing
field," Weiner said, adding that action is needed to restore
confidence in the LME.
Such comments appeared
to garner sympathy from both Democratic and Republican
"What do we want our
banks to do ... issue mortgages or corner the metals markets?"
Sen. Sherrod Brown (D., Ohio), asked, characterizing LME
warehouse rules as peculiar.
Sen. Pat Toomey (R.,
Pa.) agreed. "It seems rather odd that a large buyer of a
commodity cannot access that commodity in a timely fashion," he
A potential conflict
of interest exists when financial institutions can both make
bets on physical commodities and influence supply, University
of North Carolina at Chapel Hill law professor Saule T. Omarova
said, questioning the relationship between Goldman Sachs Group
Inc. and Metro International Trade Services LLC, a warehousing
company owned by the bank.
currently has the right to appoint Metros board members
and engage in extensive consultations with Metros
management, Omarova said. "Its very hard to tell how much
informal influence Goldman Sachs ... exerts over Metro
Internationals management decisions," she said,
questioning whether the Federal Reserve was doing its job of
probing such relations on the ground.
Goldman Sachs defended
its position in the commodities market July 23, contending that
it acts in the interest of investors and that warehouses allow
metals producers to store excess stock in times of weak demand,
such as the 2008 financial crisis.
LME-listed warehouses more than tripled during the financial
crisis, resulting in large amounts of metal accumulating at
some warehouse locations, the bank said.
A spokeswoman for the
LME said it has worked since 2010 to shorten warehouse queues,
adding that there is no aluminum shortage in the market. The
LME is legally prevented from capping rents or preventing
trading companies from owning warehouses, she said.
Elizabeth Warren (D.,
Mass.) argued that big banks have essentially taken the model
of the former Enron Corp. and applied it to physical
commodities. "And that movie does not end well," she said.