Regulators have ordered an aluminum company to preserve three years of documents that may be relevant to an investigation into price rigging in the markets for metals, Reuters reported Monday. The Commodity Futures Trading Commission (CFTC) subpoena is the latest signal of heightened regulatory scrutiny of financial firms’ role in the physical commodities markets, three weeks after a New York Times report revealed firms like Goldman Sachs exert control over metal prices that boosts bank profits at the expense of consumers.
Last week’s CFTC subpoena targeted one unnamed warehousing firm, and specifically focused on documents related to the London Metal Exchange (LME), which is the primary global platform for trading based on metals. The LME sets rules for how the metal industry operates, including limits on how much of a given metal may be moved out of a given warehouse on a given day — the rule which warehouse owners like Goldman Sachs are allegedly abusing for profit. The LME also takes a one percent commission off of the rent that warehouses charge to store metals. With the total global value of metals traded through the exchange measured in the trillions of dollars, changing the system that’s allowed financial firms to inflate prices would cost the LME vast sums.
Those LME rules and fee arrangements have existed for a long time, though, and experts say the market abuses now under investigation stem from the financial sector’s move into the warehousing business. The alleged Goldman scheme hinges on the investment bank’s 2010 purchase of Metro International Trade Services, one of the largest single metal storage companies. Until the deregulation wave of the 1980s and ’90s, banks were forbidden from such crosspollination of ownership. But years of lobbying eroded the barriers that had restricted financial firms from entering the physical commodities business rather than simply making trades tied to commodity prices. The Federal Reserve has the power to reinstate such barriers, and is reportedly reviewing its past approval of financial industry purchases of warehouses, pipelines, and other physical commodities infrastructure.
The metals markets are just the latest flashpoint for financial industry profiteering through market manipulation that costs consumers and harms trade. Since the spring, investigations and fines have popped up over everything from electricity rates to oil prices to currency exchange rates. The manipulation of a key intra-bank lending rate known as LIBOR, revealed last year, may have cost U.S. taxpayers tens of billions of dollars. Analysts like Barry Ritholtz argue that financial traders manipulate nearly every market they touch, subverting the competitive process that benefits consumers and replacing it with an insider’s game that enriches the finance sector while harming all others.