WASHINGTON — The manipulation of aluminum, which is driving up prices for manufacturers and has already cost consumers roughly $5 billion, has been the subject of scrutiny in Washington this summer.
However, experts assert that the problem originated in Washington when Congress imposed looser regulations on bank holding companies in 1999.
London Mercantile Exchange holding companies that own and operate warehouses in the U.S. are among those accused of slowing shipments to manufacturers. The goal is to receive maximum payments on rent and storage, resulting in higher premiums for certain commodities across the board.
“Aluminum prices in general, and for can sheet in particular, have remained inflated relative to the massive oversupply and record production…when supplies rise while demand is flat to down, prices should fall,” said Tim Weiner, risk manager for Miller Coors LLC in Chicago.
The outcome can be seen at local supermarkets and convenience stores as prices for canned drinks steadily increase.
The Senate agriculture committee has called on the Commodity Futures Trading Commission to evaluate its role in policing the price distortions in order to protect consumers and manufacturers that bare the brunt of price increases.
“If you have doubts about the authority of the agency to ensure markets are safe for trading and free from fraud or manipulation, this Committee needs to know,” Debbie Stabenow, D-Mich., chairwoman of the Senate agriculture committee, said in a Tuesday letter to the commission.
However, commodity price manipulation by holding companies is a direct result of regulatory exemptions made by Congress over the past decade, according to banking and policy experts.
“There has been a qualitative change in the practice of mixing banking and commerce,” said Saule T. Omarova, associate law professor at the University of North Carolina at Chapel Hill.
The Bank Holding Company Act of 1956 restricted the financial activity of holding companies by maintaining that activities be closely related to banking. But in 1999, the Gramm-Leach-Bliley Act allowed certain bank holding companies to engage in broader activities that were “financial in nature,” according to the statute.
Since then, regulations have allowed holding companies to engage in a number of activities not closely tethered to traditional banking practices.
“In conducting these activities, they function as traditional commodity merchants rather than purely financial intermediaries,” Omarova said. “ That’s why it is important to understand how the law has failed to prevent, and apparently has enabled, this extensive entry of banking organizations into the sphere of general commerce.”
Some lawmakers recognize the detrimental effects of looser regulation and are calling for change.
“This expansion of our financial system into traditional areas of commerce has been accompanied by a host of anti-competitive activities: speculation in the oil and gas markets; inflated prices for aluminum and potentially copper and other metals; and energy manipulation,” said Sen. Sherrod Brown, D-Ohio, in a statement last week.
In the case of Goldman Sachs’ facilities in Detroit, it was reported that the slowed shipping operations earned the name “merry-go-round of metal” from warehouse employees that were ordered to move aluminum back and forth in storage without shipping pending orders.
The result of these aluminum market manipulations has cost manufacturers tens of millions of dollars over the last several years. MillerCoors, the beer-making giant, estimates that these warehouse rules added roughly $3 billion in additional expense to companies purchasing aluminum last year.
Despite the control holding companies can command over the commodities market, full disclosure about such assets is not required. According to Security and Exchange Commission filings, Goldman Sachs reports commodities in its fixed income, currencies and commodities division. Morgan Stanley, on the other hand, includes all commodity operations in a fixed income and commodity division within its institutional securities segment. Neither provides full financial information.
Critics fear that if aluminum price manipulation continues, other commodities will be next.
The SEC approved JPMorgan’s plan to launch an exchange-traded fund that would be backed by stored copper reserves in January 2013. And the SEC shot down an argument by opponents that the fund would deplete copper availability and drive up prices.
“Approval of this commodity-based security is a blow to American businesses and consumers that rely on copper for industrial machinery, plumbing, transportation, electric power generation and transmission, and electronics,” said Sen. Carl Levin, D-Mich., of the ruling.
Experts and lawmakers that oppose holding company activity in commodity markets assert that the lack of public debate on the issue is troubling and sets a dangerous precedent.
“Commodity activity by bank holding companies, “raises potentially serious public policy concerns that must be addressed through fully informed public deliberation,” Omarova said.