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Goldman Sachs’ metal storage unit paid customers to boost queues -report

November 19, 2014

EnergyEnergy

(REUTERS) – Goldman Sachs Group Inc’s (GS) metals storage unit paid Deutsche Bank, Glencore and British hedge fund Red Kite millions of dollars in incentives that helped extend wait times in the firm’s Detroit storage hub, a Senate report showed on Wednesday.

The report, based on interviews with Metro and Goldman executives, contains for the first time details of six “merry-go-round” transactions involving 600,000 tonnes in which existing customers agreed to either join or keep their metal in a queue.

The 400-page report by the Senate’s Permanent Subcommittee On Investigations exposes details of complex transactions that explain for the first time how Metro went to huge efforts to maintain long wait times in Detroit to boost income.

The potentially explosive report offers the clearest glimpse yet into the complex strategy that created long queues, and it is likely to reignite a years-long debate on how the ownership of warehouses has transformed the metals market.

Aluminum has been in the spotlight for years after the appearance of long wait times in Detroit, where Metro is headquartered and millions of tonnes of aluminum have been stockpiled, shortly after Goldman bought Metro in February 2010.

How or who behind the queues was the center of much market speculation over the years, but not until now ever known.

In the first board meeting following the acquisition by Goldman, Metro executives and its board of directors made a strategic decision to market for the first time incentives to customers with metal already stored in warehouses, Metro Chief Executive Chris Wibbelman told the subcommittee, the report said.

“Under Goldman’s ownership, Metro implemented unprecedented practices to aggressively attract and retain aluminum in its Detroit warehouses,” the report said.

The fact that Goldman engaged in extensive aluminum trading at the same time it was approving practices leading to a long warehouse queue has given rise to serious questions about the integrity of the aluminum market, the report said.

INCENTIVES

Most of these deals involved Metro paying incentives for a financial firm to cancel contracts on metal held in Metro’s warehouses; join the queue to exit; and upon reaching the head of the queue, load out the metal from one warehouse and return it into another nearby. Later, the customer would return the aluminum for storage again.

These merry-go-round deals resulted not only in Metro retaining metal inside its system, but lengthened the queue, essentially blocking other metal owners from exiting Metro warehouses, the report said.

Warehouses have often paid incentives to lure new metal into their sheds, but this was the first time transactions involving metal going back into warehouses have been made known.

The strategy started shortly after Goldman bought the company when Metro became concerned owners of metal were removing metal to store elsewhere, leading to a loss of revenue.

In September 2010, DB Energy Trading, a unit of the German bank, agreed the first merry-go-round deal, involving 100,000 tonnes of aluminum, most of which was loaded out of one warehouse and into another.

Deutsche Bank and Metro confirmed the existence of transaction, but said there was never any contract.

The impact was immediate: the wait time to get metal on Sept. 15, 2010, was 20 days. A week later, on Sept. 22, a few days after Deutsche canceled the warrants, Detroit had a queue of nearly 120.

By the end of December 2012, the wait to get aluminum out of the Detroit warehouse system was approaching 500 days, with the increase largely attributable to warrant cancellations by JPMorgan, Red Kite, and Goldman, the report said.