Goldman Sachs, helpful as ever, has stepped up to do its part in implementing a discrete soda tax. Over the weekend, David Kocieniewski wrote about the complex of metal-storage warehouses in Detroit owned by Goldman, where about a quarter of the world’s aluminium available for delivery is stored.
The tl;dr version of the story is, to quote Kevin Drum, “if you control the inventory of a commodity, you can make a lot of money”. Once Goldman bought the warehouses in 2010, it created a “a merry-go-round of metal”, in which aluminium gets moved from building to building and kept as “dark inventory” instead of being delivered. While waiting around (for over a year, on average), Goldman makes money on the futures and derivatives contracts tied to the underlying asset, while still collecting rent on the metal being stored, according to Izabella Kaminska.
In doing so, the bank has succeeded in pushing up the price of aluminium, to the tune of $5 billion over the last three years, or a cent and a half per American per day. This isn’t enough to be the driving factor behind the spike in PBR prices, but it is enough to spur industry giants including Coca-Cola into action. Both beer and soda companies are unhappy -- even as they have moved away from using the Goldman warehouses, they still have to pay the higher prices for raw materials, which will cut into their healthy profit margins (Coca-Cola’s second quarter gross margin was 61%).
This particular issue isn’t actually all that new: the WSJ reported the backlog in Goldman’s Detroit warehouses back in 2011, and Kaminska has been on the story from the beginning. It’s of interest again now because it came out last week that the Federal Reserve is mulling a move to ban big banks from physical commodity markets, which they have only been allowed to operate in since 2003. The Senate banking committee is also set to take up the subject this week.
Goldman isn’t the only one vulnerable to a shift in regulations: JPMorgan and Morgan Stanley also have operations that would be affected. -- Shane Ferro
On to today’s links:
Secular Declines
The end of big law's assured profitability and stability - Noam Scheiber
"The comparison to winning the lottery is apt: many lottery winners don’t live happily ever after" - Above the Law
Regulations
If Dodd-Frank doesn't work, here's what might - Mike Konczal
Wall Street's new DC strategy: we're here to help - Reuters
Delaying The Inevitable
Your password will eventually be stolen - Matt Buchanan
Must Read
Mapping economic mobility across the US - David Leonhardt
Felix
The SEC's important case against Stevie Cohen - Reuters
The Fed
Why Janet Yellen should succeed Bernanke - Sheila Bair
Without policy uncertainty, unemployment would have been 6.5% last year - The Fed
Real Talk
"No significant electoral faction... demands the joint reduction of government and corporate power" - Will Wilkinson
Spurious Correlations
Country-level data can't tell you anything about smoking and healthcare costs - Worthwhile Canadian Initiative
Wisdom
"Indolence requires patience" - NYRB
Oxpeckers
"You can publish any old crap nowadays as long as it’s well-targeted" - Slate
Your Retirement Plans
The actuarial change that could cause America's pension obligations to balloon - DealBook
Legalese
Does the Detroit bankruptcy really violate the Michigan state constitution? - Credit Slips
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