By Tim Dulaney, PhD and Tim Husson, PhD
We mentioned a couple of weeks ago that Goldman Sachs has been in the business of aluminum metal storage for quite a while. A NY Times investigation found that, through a subsidiary, Goldman Sachs has been artificially inflating the prices of aluminum by magnifying storage costs.
Bloomberg News, the NY Times, and Law360 are reporting that Superior Extrusion Inc., a Michigan-based aluminum processor, has filed a class action lawsuit that alleges Goldman Sachs and the London Metal Exchange (LME) entered into agreements that decreased efficiency in the aluminum market to generate "hundreds of millions of dollars per year in storage revenues during their regime of artificially high storage rates". The lawsuit -- Superior Extrusion Inc. v. Goldman Sachs Group Inc. et al. -- was filed last Thursday in Federal District Court in Michigan's Eastern District.
The plaintiff alleges that the delays between customer order and delivery have been as long as 16 months. While the LME has been working to "speed up withdrawals from stockpiles in warehouses where waiting times exceed 100 calendar days" and Goldman has made moves to "ease delays at its Metro aluminum warehouses", it seems that this is just too little too late.
Goldman may have showed the defense's cards a bit when their spokesman pointed out that "aluminum prices are down 40 percent from their peak in 2006". It will be up to the plaintiff to show that, even in light of this marked decline in aluminum prices, Goldman inflated the prices of aluminum.
The lawsuit comes as investment banks are under scrutiny for their physical commodities businesses. Just yesterday, the chairman of the Commodities Futures Trading Commission Bart Chilton argued that the Federal Reserve should reverse its policy allowing banks to own such assets, claiming it had "obvious conflicts of interest." It will be interesting to see whether the issue is settled by regulators, by the courts, or both.
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