Investment banks up to their old tricks

Oscar Ugarteche, Iván Sánchez

29/08/2013

Opinión

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A multinational enterprise (Coca Cola) that purchases aluminium and an individual have accused the Investment Banks Goldman Sachs and JP Morgan and the mining firm Glencore Xstrata of speculation (1). This is according to a collective denunciation accusing them of an illegal pact for warehousing aluminium, presented to the Federal Court of the Northern District of Florida (2).

The accusations point out that the investment banks, through warehousing, can stretch the waiting time for the delivery of the metal up to 16 months. In this way they create an artificial shortage, increase the income from warehousing, as warrants for the value of stocks on hand, and finally, obtain monopoly profits (3).

Since Goldman Sachs bought warehouses in Detroit in 2010, they decided to engage in the warehousing of commodities. From that moment the price of aluminium began to rise; it is estimated that since 2010 it has risen by 2 dollars. In the United States there is an annual consumption of about 90 billion aluminium cans (4). This has given a monopolistic benefit to the banks of a little more than five billion dollars (5). A question for the Securities Exchange Commission (SEC), a regulatory organ of the U.S. Stock Market, is whether the financial transaction includes operations in the commodity markets.

There is no doubt that this is an increasingly frequent practice for investment banks. Both banks have already been charged for similar cases. In July of this year, JPMorgan was accused by FERC, the energy regulatory agency in the United States, of manipulating electricity prices in California (6). Three years ago Goldman Sachs was accused by the SEC of manipulating petroleum prices.

It should be understood that while there is no change in legislation against the intervention of investment banks in different branches of financial, and now productive activity; and maintaining the union of commercial and investment banks, storage, insurance and real estate, these monopolistic practices will continue. In the gold market there is a question regarding the responsibility for the abrupt fall in the month of April, when the price fell from 1,500 dollars an ounce to 1,200, affecting the oft criticized gold mining sector and the economic growth of developing countries that export this metal.

Apparently, commodity prices are now determined, not by real offer and demand, but by the offer and demand of investment banks and their manipulation of the real market, which is a significant distortion of the meaning of what is a "market" and what is an "investment bank". Meanwhile the fines continue to accumulate.

(Translation by Jordan Bishop for ALAI).

- Oscar Ugarteche is a Peruvian economist who works in the Instituto de Investigaciones Económicas, UNAM, Mexico. He is a member of the SNI/Conacyt, Coordinator of the Economic Observatory of Latin America (OBELA) www.obela.org and president of ALAI www.alainet.org

- Iván Sánchez is a member of the OBELA project, IIEC-UNAM ivan_01@comunidad.unam.mx

[1] See “Despojo de Aluminio, pero para los bancos, oro puro” in Observatorio Económico de América Latina, http://www.obela.org/contenido/shuffle-aluminum-banks-pure-gold>. Publication date: 24-07-2013.

[2] See “Nueva denuncia por manipulación del precio del aluminio”en Terra, in http://economia.terra.com.mx/noticias/noticia.aspx?idNoticia=201308071518_AFP_TX-PAR-KES39> Publication date: 07-08-2013.

[3] See “Bolsa de Metales y Goldman Sachs, acusados de monopolizar aluminio” in Yahoo! Finanzas http://es.finance.yahoo.com/noticias/bolsa-metales-goldman-sachs-acusados-162916274.html Publication date: 05-08-2013.

[4] See “A Shuffle of Aluminum, but to Banks, Pure Gold” in The New York Times, <http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=all&_r=1&>.Publication date: 20-07-2013.

[5] See “Manipulación de precios de materias primas bajo la lupa en Estados Unidos” in Terra, http://economia.terra.com.mx/noticias/noticia.aspx?idNoticia=201308071143_AFP_TX-PAR-KEE46> Publication date: 07-08-2013.

[6] See “EEUU acusó a JP Morgan de manipular el mercado de energía” in Ámbito, http://www.ambito.com/noticia.asp?id=699583> Publication date: 29-07-2013.

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