U.S. banks grilled over commodities trading practices

Goldman Sachs executives sparred with U.S. senators today over accusations that U.S. banks had an unfair advantage in trading commodities such as aluminum and copper.

Banks such as Goldman Sachs, Morgan Stanley and JP Morgan Chase bought up large stockpiles of aluminum and copper and were able to influence prices by manipulating their holdings, the Senate found in a report released Wednesday.

The report said the scale of their commodities stakes put the U.S. financial system at risk as the banks had inadequate procedures to hedge their risk in commodities holdings.

The Senate is holding two days of hearings into the practice of Wall Street banks holding physical commodities and engaging in related businesses such as power plants and warehouses.

Sen. Carl Levin, who heads the Senate’s Permanent Subcommittee on Investigations, said Goldman Sachs engaged in an elaborate scheme to delay aluminum shipments and jack up the price of aluminum.

According to the report, it controlled a network of metal-storage facilities in the Detroit vicinity, and allowed aluminum to stockpile inside the warehouses, delaying shipments to users of aluminum, such as the makers of beverage cans. This allowed aluminum suppliers to charge more for the metal and helped push its price higher, while the bank made money from its commodities holdings in aluminum.

Manipulating prices

Levin charged that Goldman engaged in a “merry-go-round” of aluminum movement between its warehouses with no purpose other than to drive the price of the commodity higher.

Chris Wibbelman, president and chief executive officer of Metro International Trade Services LLC, the metals warehousing firm Goldman bought in 2010, defended his company's actions, saying it plays by the rules and contributes jobs to the Detroit area.

Goldman has denied any wrongdoing.

The report also alleges that banks exceeded U.S. limits on the amount of commodities they were allowed to hold in order to manipulate prices.

The banks involved had invested in oil, coal and power plants, as well as copper and other commodities.

Exposed to huge risks

The scale of those investments put the bank’s financial health in jeopardy if they had been exposed to an environmental catastrophe such as the Gulf oil spill or a mine explosion.

"There's great risk to the economy," said Levin, a Democrat who will leave the Senate at the end of the year. "We need to restore the separation of commerce and banking."

The Senate report urged the Federal Reserve to impose a “clear” limit on how much banks can hold and participate in businesses involving physical commodities.

Morgan Stanley issued a statement saying it has a “prudent” approach to risk management.

The hearing continues on Friday with officials from the Federal Reserve and U.S. power market regulator.