Saturday, July 27, 2013

Wall Street Banks Developed A New Way To Corner Commodity Markets

In the good old days of the "Gilded Age" Wall Street bankers did what they could to corner commodity markets through ownership.  That allowed them to set the prices for important commodities.  That inspired game makers to invent the game of monopoly which rewards the player who can establish monopolistic positions.  The game also included a card that would send a player to jail if she were unlucky.  That card has been removed from the modern version of the game.  It is more consistent with our new era of liberty.  Bankers and other monopolists seldom face the threat of imprisonment.  This article describes the new form of monopoly that enables the banks to profit from monopoly.  They no longer attempt to corner commodity markets through ownership.  Instead, they have purchased warehouses that store the commodities.  They earn a premium for storing a commodity and they have figured out how to increase the length of time that a commodity sits in one of their warehouses.  The average length of storage in one of Goldman Sachs's aluminum warehouses has increased from six weeks to 16 months since they cornered the storage market.  More importantly perhaps, Goldman also trades futures in the aluminum market.  The price of aluminum is determined in spot markets that are very sensitive to variations in supply and demand.  Ownership of the warehouses, and the ability to affect the supply of aluminum in the spot market, gives Goldman  an important advantage in the trading of aluminum future contracts.

Goldman is not alone in this game.  Other Wall Street banks have established positions in other commodity markets.  They have been assisted in their efforts by the Federal Reserve which is responsible for regulating them.  There are many holdovers in the Fed from the Greenspan era who share his anti-regulation philosophy.  The government agency that regulates the commodities futures market is taking a look at this practice.  It is more likely than to Fed to alter this arrangement. 

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