Corporate Corruption: The Case of Aluminum

On my other blog, HOOKED, about medicine and the pharmaceutical industry, I have recently been talking about corporate corruption:

http://brodyhooked.blogspot.com/2013/07/the-corrupt-us-health-system-and.html

A striking example that has nothing to do with health care emerged in a story in today’s New York Times business section:

http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?ref=business&_r=0

This story is quite complicated and would cause most readers to yawn and give up before reading a third of the article. (The Houston Chronicle had a vastly edited-down version of the story in today’s paper, which made no sense at all to me, and so I had to track down the original long article before I could grasp what was going on.) As to the corporate powers that manipulate us and run off with the proceeds, they probably like it that way.

As best as I can boil it down, in 2010, the huge banking firm Goldman Sachs bought Metro International Trade Services, a firm that warehouses massive amounts of aluminum in Mt. Clemens, Michigan, a Detroit suburb. Goldman, in the bad old days when government regulations had some teeth, would not have been allowed to buy a firm that was part of the metal commodities trade; but in these new, deregulated days, apparently anything goes, so everything that follows in this account is strictly legal.

Since Goldman bought out Metro, the wait for delivery of shipments of aluminum metal to manufacturers who make stuff out of aluminum has grown from 6 weeks to 16 months. Partly as a result of these delays, the price of aluminum on the spot market has doubled. Even firms that don’t get their aluminum from Metro warehouses, like the beverage companies that make aluminum cans and can no longer stand the long delays, have to pay the higher prices.

The reason the prices and delays have both jumped, according the the Times investigation, is simply that Metro makes more money the longer it gets to store the aluminum in its warehouses. So under Goldman’s influence, the company has found various ways to hang onto the metal longer and delay shipments. (For example, the firm pays special incentives to speculators who buy up aluminum to hold onto their supplies longer.) The result is about a quarter billion dollars a year in rents. The total impact on the price of aluminum goods to consumers over this past 3-year period is estimated at $5B.

As the Times documents, the on-the-ground aspect of these deliberate shipping delays is somewhat ludicrous. Trucks and forklifts work diligently doing nothing more than moving the huge bars of aluminum from one Metro warehouse to another and then back again.

In theory at least, all this chicanery could quickly be put a stop to by the London Metal Exchange, which oversees 719 warehouses around the world and sets the rules under which they operate. But funny thing—the London exchange gets 1 percent of the rent charged by each warehouse. So for some reason they seem reluctant to take any action that would cause Goldman, through its Metro subsidiary, to lose any of that rent money. (In The Golden Calf, I told the story of the Great Recession of 2008, in which a prominent part was played by large Wall Street ratings firms that were supposed to tell us whether the financial instruments put on the market by the big banks, including the derivatives made up of subprime mortgage loans, were safe or not. As the ratings firms had to compete for business among the banks they were supposed to rate, it should have come as no surprise that they had bestowed AAA ratings on junk bonds that were eventually worth pennies on the dollar.)

According to the Times, due to similar shenanighans where speculators are allowed to drive up the costs of commodities, the average American pays about $10 extra for a gallon of gas beyond what crude oil would actually cost in an unmanipulated market. And the big banks, having tasted huge profits from aluminum, are about to go into the even more lucrative copper warehouse trade—a move enabled by the outgoing SEC chair, amidst assurances that nothing in these deals would have any impact on the price of copper in the open market.

And thus does economism, the belief that if we just let the market operate free of government regulation, all of us will be propserous, continues to control our national policies.

A brief editorial comment. In my younger days, the old folks still around then could recall the New Deal programs of the Great Depression, including the Civilian Conservation Corps. To hear the anti-Roosevelt people tell it, this program was an outrage; just to make work to help bring down unemployment, the government would pay one group of workers to dig holes, then another group of workers to fill them in again. Apparently when the government does something like this so workers and their families need not starve, it’s a moral outrage. But when Goldman Sachs moves aluminum bars from one warehouse to another and back again, just so it can make a few extra bucks and the consumer has to pay an estimated $12 extra for each new US-made car, it’s all fine and dandy. So long as it’s the rich and not the poor who take home the unearned, extorted cash, there’s no moral outrage from the economism crowd.