Wall Street giants' commodities trading boom may have just
fizzled out as
The Goldman Sachs Group, Inc.
JPMorgan Chase & Co.
) face a subpoena related to the hoarding of aluminum and the
artificial rise in the metal's price.
GOLDMAN SACHS (GS): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis
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ENCORE WIRE CP (WIRE): Free Stock Analysis
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The Commodity Futures Trading Commission (CFTC) has issued
subpoenas to the Wall Street banks and owners of other key
warehouses, including Glencore Xstrata plc as part of its
investigation into malpractices in the aluminum market. Such
malpractices are supposed to have led consumers and manufacturers
to incur losses of billions of dollars since 2010.
According to market rumors, the subpoena involved more than 30
areas of inquiry, including transferring metal from one warehouse
to another within the same company. The regulatory authority also
requested for trading details related to the warehouse operations
from Jan 2010.
The lawsuit comes in the wake of criticism of banks that own
commodity assets and trade raw materials. The warehouse owners
have been accused of artificially increasing waiting times to
facilitate lease payment and raise metal prices. Notably, in
July, the Federal Reserve stated that it was reviewing its 2003
decision of allowing banks to pursue trading in the physical
Rising aluminum prices have hit numerous industries, particularly
the beverage sector. The subpoena is the latest sign of the CFTC
stepping up its investigation as it looks into charges made by
The Coca-Cola Company
Encore Wire Corp.
) that hoarding and lengthy waiting times has made metals more
Molson Coors Brewing Company
) said that the inflated price of the metal was costing consumers
around $3 billion annually.
Trouble has been brewing for the banks' commodities operations
for quite some time. Earlier this month, a class action lawsuit
was filed against Goldman and London Metal Exchange (LME) - a
subsidiary of Hong Kong Exchanges and Clearing Limited - in the
U.S. District Court for the Eastern District of Michigan by
Mich.-based aluminum extrusion company, Superior Extrusion Inc.
The suit accused Goldman and LME of hoarding approximately 1.5
million tons of aluminum at warehouses in Detroit in order to
take advantage of inflating prices.
Within a week, a similar lawsuit was filed related to the
hoarding of aluminum and the artificial rise in the metal's
price. Goldman, JPMorgan, Glencore and LME were the accused
Further, with the heightened regulatory and political scrutiny of
banks' ownership in the physical commodity business, JPMorgan
announced its plan to exit such operations last month. JPMorgan
) and Goldman, which have been trying to sell their physical
commodity business for more than a year now.
Wall Street biggies' involvement with commodities trading seems
to be over with heightened regulatory scrutiny and litigation
woes. Regulators are becoming increasingly concerned about the
risks arising from banks' ownership of warehouses and plants.
They believe that banks' holdings of these assets tend to
concentrate market power and increase bank profits, consequently
adversely affecting consumers. Therefore, regulators across the
globe are investigating banks' role in the commodity trading
business more closely.