[temphn]

The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation. And sure enough, here it is:

  industry rules require that all that metal cannot simply 
  sit in a warehouse forever. At least 3,000 tons of that 
  metal must be moved out each day. 

Without looking I'd bet this is some kind of "anti-hoarding" provision, probably intended to prevent single manufacturers from cornering the market. As is typical, it caused exactly the opposite of the desired consequence.

Moreover, said rule means (among other things) that no manufacturer can hold a strategic reserve of aluminum for unexpected spikes in demand without playing the games that Goldman is playing. Naturally, the response of the New York Times is that we need more such rules and regulations, that next time we'll anticipate their consequences, that the only failing is that they haven't been "strict" enough.

But the "stricter" the rule, the more that little guys get hit with it while Goldman uses teams of lawyers to define and then exploit a safe harbor.[1] In this sense, Goldman and the NYT are in cahoots: "strict" regulations directly benefit big companies.

[1] http://en.wikipedia.org/wiki/Safe_harbor_(law)

  A safe harbor is a provision of a statute or a regulation 
  that reduces or eliminates a party's liability under the 
  law, on the condition that the party performed its actions 
  in good faith or in compliance with defined standards. 
  Legislators may include safe-harbor provisions to protect 
  legitimate or excusable violations, or to incentivize the 
  adoption of desirable practices.

[Lagged2Death]

Without looking I'd bet this is some kind of "anti-hoarding" provision, probably intended to prevent single manufacturers from cornering the market. As is typical, it caused exactly the opposite of the desired consequence.

In your first sentence you admit you don't know what's going on, then in your second sentence you claim that "it caused exactly the opposite of the desired consequence." The point being, this could be an old rule that's worked well until just recently, as far as you know. It's possible it's done more good than ill.

In any case, it's described as an "industry rule," not a government regulation, as your quote makes clear. It's the result of industry "self-regulation." The article mentions this.

The shuffle of stock is an end-run around that rule, but it's not the cause of the higher prices. The delay-to-raise-prices scam would be easier to run and more profitable if the rule that makes the shuffle necessary didn't exist.

[temphn]

You prompted me to dig in further to see what the source of the underlying distortionary rule is. Looks like the LME or London Metal Exchange[1]. But that in turn is governed by the government[2]. And the government, including the CFTC which governs the LME, has indeed passed distortionary "anti-hoarding" laws in allied areas[3]. See links below.

The key question is whether the LME is free to change these rules and/or purchasers are free to use another exchange in response to Goldman's attempt to increase prices. If they are not so free - if, say, the LME's rule here is imposed to be compliant with some CFTC or SEC or equivalent provision - then we are back to where we started.

Conversely, if the participants are free to use another exchange or start a competing one, then this issue is on the level of Zynga spamming Facebook - a dispute between two powerful private parties that will be worked out via LME countermeasures/competition rather than federal regulation.

[1] http://www.reuters.com/article/2011/07/29/us-lme-warehousing...

  Goldman's warehouse business relies on a lucrative 
  opportunity enabled by the LME regulations. Those rules 
  allow warehouses to release only a fraction of their 
  inventories per day, much less than the metal that is 
  regularly taken in for storage.

[2] https://www.lme.com/en-gb/regulation/

  The Exchange provides the environment for trading and 
  regulates the operation of the market. It has a statutory 
  requirement to ensure that business on its markets is 
  conducted in an orderly manner, providing proper protection 
  to investors.

  Approved as a recognised investment exchange (RIE) and 
  conforming with UK and other international regulatory 
  requirements, the LME offers, through price and volume 
  transparency and audit trails, a legally safe forum for 
  metals trading. As an RIE, the Exchange comes under the 
  direct jurisdiction of the UK Financial Conduct Authority 
  (FCA).

  Regulation of the market is largely carried out by the LME, 
  while the FCA is responsible for regulating the financial 
  soundness and conduct of LME members' business.

  Beyond this, both the Exchange and its members are subject 
  to regulatory controls and input from various UK bodies and 
  government offices, as well as EU directives. In 
  international trading, rules applied by overseas regulatory 
  bodies such as the US Commodity Futures Trading Commission  
  (CFTC) also have to be taken into account. 

  To ensure the observance of these regulations, the LME has 
  a compliance department under the supervision of the 
  Executive Director of Regulation & Compliance.  

[3] http://finance.fortune.cnn.com/2011/10/19/cftc-commodities-r...

  The Commodity Futures Trading Commission approved new 
  limits on commodities traders. Now analysts want to know 
  what will happen next.

  FORTUNE -- Is the cure for speculation in the energy 
  markets worse than the illness? Futures industry 
  professionals are up in arms over a vote by regulators 
  Tuesday to introduce position limits on hedge funds and 
  other traders, saying it will lead to commodity hoarding 
  and large price spikes in the futures.

  The CFTC decision (the full text is here) places various 
  limits on how much a speculative trader, like a hedge fund 
  or ETF manager, can hold in any of 28 commodity contracts, 
  including energy. The aim is to prevent a run-up like June 
  2008 when oil hit $140 a barrel which ultimately introduced  
  $4 a gallon gasoline at the pumps. The problem is, 
  according to futures analysts, if speculators aren't 
  allowed to buy the futures, they'll buy the physical 
  commodity instead.

  "Eventually you're going to see a shortage, I think it's 
  going to create a disruption in the marketplace. We might 
  get away with it for some time, but if there's a crisis 
  like 2008 you'll see one," Phil Flynn, the energy analyst 
  at PFG Best, a Chicago brokerage, told me this morning (he 
  also lets loose on his morning market commentary). 
 
  Similarly, if less ominously, CME Group (CME) chairman 
  Terry Duffy told CNBC yesterday ahead of the CFTC vote that 
  passage would "encourage manipulation" of the markets.

[Lagged2Death]

The key question is whether the LME is free to change these rules...

They did change them, that's where the 3,000 number came from, did you even read this story?

...if the participants are free to use another exchange or start a competing one...

I don't see how that's likely to help. First of all, the metal suppliers have an incentive to use Goldman's warehouses and thus the Goldman-controlled exchange, since Goldman's paying them a kickback. Secondly, if enough metal is going through the LME, that sets the de-facto market price and you'd be daft to sell your Al for less than that, wouldn't you?

[temphn]

You're so hostile that you kick the ball into your own net. My question was whether LME was free to "change" the rule by abolishing it, or whether this was related to an underlying CFTC compliance issue. Because trying to increase the stringency of the rule did nothing:

  Martin Abbott, the head of the exchange, said at the time 
  that he did not believe that the warehouse delays were 
  causing the problem. But the group tried to quiet the furor 
  by imposing new regulations that doubled the amount of 
  metal that the warehouses are required to ship each day — 
  from 1,500 tons to 3,000 tons. But few metal traders or 
  manufacturers believed that the move would settle the 
  issue.

This does not argue in favor of your tacit position that we just need more rules, or more men with guns to enforce them.

[smadge]

First of all, the "market distorting regulation" you mention that causes Goldman Sachs to shuffle aluminum around is not a government regulation, it is an industry standard set by the London Metal Exchange. The article suggests that there is a conflict of interest. The Exchange get's 1% of the storage costs, and the same companies that benefit from this rule are the ones that control the Exchange. This is a classic case of monopoly and collusion, not of overreaching government rules a regulation.

The "rules and regulations" that are proposed in the article are simply to reinstate the principle that bankers should not be traders. What's happening is that Goldman Sachs has physical assets in the aluminum market, and also the ability to speculate on that market. From the article: "By controlling warehouses, pipelines and ports, banks gain valuable market intelligence, investment analysts say. That, in turn, can give them an edge when trading commodities. In the stock market, such an arrangement might be seen as a conflict of interest — or even insider trading. But in the commodities market, it is perfectly legal."

How are the "little guys" hurt by preventing insider trading? Do you plan on founding a startup that speculates on commodities and also controls those commodities? Do you think that such a startup should exist or would be capable of bootstrapping without hundreds of billions in initial capital? Startups are only able to exist in the cracks created when we take the hammer to the monopolies.

[mabhatter]

The little guy is an actual Aluminum Extrusion company, with actual people making an actual product. Jacking up prices of raw material even 1% is taking profit out of his pocket because he certainly cannot pass that cost on. (I used to work for a small company in that business)

He is hurt because he is small and barely getting any discount at all. So all these imagined charges hit HIS pocket for 5% or more "off the top" because he can't avoid buying from the warehouses.

[jbert]

Could you elaborate on how the "metal must be moved" rule incentivises delayed shipments?

[msandford]

It allows people to do just barely enough to satisfy the rule and nothing more, which can be a problem if the rule is set too low. And to silence their (potentially legitimate) critics with the line "we comply with X, Y and Z regulations..."

If the rule system can't be gamed and those making the rules aren't allowed to participate in the activities they're ruling on, nor can they take kickbacks from those performing the activities then rules are an absolute good. But all those assumptions and assertions I made rarely hold in the real world. So their usefulness tends to be less of an absolute good and more of a mixed bag.

[jbert]

I still don't see how the claim made of "The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation." gibes with "metal must be moved" as the offending regulation.

[msandford]

Because the "metal must be moved" number is way too low.

Imagine that your boss set metrics for you that you could knock out in 30 minutes, but the boss is paying you to be there for a full 8 hours. And imagine that if you worked harder than that, your reward was actually less pay. Also imagine no room for advancement. Someone from outside your company might say that situation is effed up. But to you working for just those 30 minutes and nothing more would be completely logical.

That's the situation facing these metal warehouses. Being efficient and shipping metal faster than absolutely required gets them no short term benefits and does them short term harm: reduced rents.

The problem isn't necessarily the "metal must be moved" rule it's the quantity in the "metal must be moved" rule. So some people say "fix the rule" and others say "abolish the rule" because of substantially different world views. Some people like maintaining and fixing code; others like organizing differently to reduce the amount of code necessary.

[jbert]

> Because the "metal must be moved" number is way too low.

I can see that the regulation might be ineffective because of that.

But I don't see how anyone could claim such a regulation makes it more profitable to make late shipments.

[msandford]

Currently the way the regs stand, people have to keep paying rent until the metal leaves the warehouse. So if the owner/manager of the warehouse drags its feet on every shipment and every shipment takes an extra week, that's a lot of rent.

One of the proposed solutions is that the warehouse isn't allowed to charge rent once the order to distribute the metal has been made, but that's not in the regs yet. It's merely propsed. Right now they do charge and as such have every incentive to delay as long as possible.