Risky Business: Why Banks Own Metals Warehouses

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March 6 (Bloomberg) –- Graham Fisher Managing Director Josh Rosner discusses how banks gain profit potential and operational information by owning metal warehouses. He speaks with Alix Steel and Adam Johnson on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

Quite a bit.

How has this been allowed to happen?

The concern is that traders at jp morgan and goldman are creating the flows, not just watching them.

Amazingly, it was not supposed to happen.

When we repealed glass-steagall act or past greenwich wiley, there were parts of those that allow them to be grandfathered.

The fed never really defined it more narrowly than that they were grandfathered.

The banks themselves, not the investment banks, but the banks that had not been in this business in 2003 started applying for licenses to be involved in the physical commodities space, really, as, a to the financial services.

In other words, if they are trading in commodities derivatives on behalf of customers, the argument was we can settle the trades physically and we are supporting our customers needs.

That was allowed and the fed approved that.

And just to be clear, there is the precedent for gold.

There are gold stores in a number of banks.

Right.

The fed come however, said to the bank, you can own physical commodities for the settlement, or where it is complement three to your customers business.

You cannot own storage or warehousing.

And yet, here we are with jpmorgan getting into it because sampras was essentially forced out of it.

Now we have a situation where there have been an increase in complaints by end-users.

Miller coors gave us a wonderful example of this in testimony.

He said, look, i go to this warehouse and i say, i want to take out my aluminum.

And you go and it's 12 to 18 months.

You go to a store and you buy a sixpack of beer and the guy says, go round the back.

You go around the back and they say you can pick up your beer in 18 months.

These companies, did they not hedge their risk properly see echo they just didn't do their job well.

On the warehouse side itself.

Miller coors and others are screaming and pointing fingers, but maybe they just did not deal with the risk.

The deliveries have been the question.

As a former oil trader, i delivered on the mark and i delivered into the merck.

You had to make the transaction hole within 30 days.

Otherwise, you are in violation.

How is it that he's are going for hundreds of days?

It does not make sense.

That is ultimately the question.

There is also a minimum loadout weight that the warehouses have to apply to, but there is no maximum.

It is sort of like, whatever you can manage, you should do.

If they say, i'm eating your minimum, that is completely -- i'm meeting your minimum, that is completely legal.

But let's go back to the question about manipulation and to the argument of the advantage that you have in terms of how long it will get you -- it will take you to load out is worth something on your desk to the end-user.

Do the traders really talk to the operator-owners in detroit?

Is a good question.

Let me answer that for you.

As a commodities trader, you better believe it.

We saw this in the mortgage markets as well where we saw the integration of mortgage servicing with the trading desk.

The trading desks knew what the mortgage servicing arm was doing before the rest of the customers did.

It is hard to believe the answer is no.

The question is, where do we go from here?

The fed is starting to recognize that there are all sorts of risks involved in this.

There is a significant reputational risk.

For them, for the fed.

Right.

And there is also systemic risk.

Imagine if tomorrow there was a fertilizer plant owned by a bank, or an oil tanker owned by a bank, and there was a catastrophic problem.

What would end up happening is even if we knew ultimately was not large enough to sink the bank, there would be that moment of uncertainty where counterparties would probably start to back away until there was clarity.

That would mean that the fed would have to potentially step in.

The fed has become increasingly aware of this, and now they have a notice of proposed rulemaking, asking questions as to whether they should continue to allow the banks in these businesses.

I would suspect the answer will be absolutely not.

Who wind up taking their place?

It is a good arbitrage.

Someone will want to get in there.

The profitability has declined in the business.

But because the markets have not been so great.

Right.

Josh rosner, banking expert

This text has been automatically generated. It may not be 100% accurate.

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