On Tuesday, a Senate subcommittee gathered to examine the impact of Wall Street extending its reach into global markets for commodities. The hearing, led by Sherrod Brown, an Ohio Democrat, became all the more timely with a report two days earlier in the New York Times showing how Goldman Sachs entered the business of storing aluminum, resulting in inventory backlogs and higher prices for customers.
No surprise that the big bank made big profits. The Times noted that regulations put limits on the amount of time the aluminum can be stored. Goldman exploited weaknesses in the rules by making use of more than two dozen warehouses in the Detroit area. Drivers shuttled the aluminum from building to building. Goldman owns the warehouses. Thus it collected multiple fees along the way.
What troubles those in the business of buying aluminum for their products are the delays in getting shipments. They point to deliveries that once took six weeks now extending as long as 16 weeks, the squeeze on supply driving up prices.
Why not go elsewhere for aluminum? That still involves paying the higher price in a global market. Breweries are among the more upset about the practice, roughly 60 percent of the beer sold in this country coming in aluminum cans, bottles and kegs. A beer industry representative noted to the committee the ripple effect, beer buyers paying higher prices, breweries with less cash to pursue capital improvements, even create jobs.
Consider all the industries that use aluminum, from appliance makers to carmakers. Then, weigh the range of commodities — metals, oil, electricity and other basics of economic life. The Times report told about JPMorgan Chase looking to get into the storage of copper, a commodity more widely used than aluminum.
Sherrod Brown reminds that not too long ago, “banks were just banks,” making loans, offering checking and savings accounts. They were barred from owning nonfinancial businesses. That largely changed in the 1990s, and not without reason, the financial industry becoming more sophisticated and complex. Missing has been a regulatory apparatus keeping pace with the industry.
Banks argue that their presence in the commodities market adds stability. Of course, they said something similar about mortgage-backed securities and more exotic investment tools being part of soundly managing risk and capital. It is encouraging to see the Commodities Futures Trading Commission mount an examination of Goldman storing aluminum and the broader endeavor of such banks getting so far from their core business.
How are these banks really helping the economy when they are reaping profits and others subsequently are paying more?
All of it invites consideration of something along the lines of a financial transaction tax, applied at a low rate, a fraction of a fraction of a percentage point. Even at such a puny level, the tax would raise substantial revenue, because of the huge sums traded. That would aid the cause of deficit reduction. More, it would likely work to dampen speculation — without harming the necessary dynamism of capital markets.
Five years after the meltdown on Wall Street, and after passage of new financial regulations, big banks still rate as an unsettling presence, questions remaining about their role in the overall economy, the doubts reinforced when Goldman Sachs adds to its bottom line with a scheme that distorts the global supply of aluminum.