Big banks have made an aggressive push into the aluminum market, and, through some tricky accounting maneuvers, inflated the metal's cost to reap billions of dollars.
By buying up pieces of the aluminum supply chain, banks have managed to artificially raise the material's price by exploiting one crucial stop on its journey to becoming a can of beer in your local grocery store. Though the increase is fairly modest — it accounts for just 10 percent of a can's end cost, according to the New York Times — it has earned big banks more than $5 billion in the last three years alone.
Here's how it goes down, from the Times:
The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers' aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.
This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.
Tyler Clay, a forklift driver who worked at the Goldman warehouses until early this year, called the process "a merry-go-round of metal." [New York Times]
Industry regulations require that a given amount of metal be moved daily to prevent hoarding and market manipulation. Simply hauling the aluminum from one warehouse to another technically meets that requirement without actually putting anything into circulation.
When Goldman bought one metal storage company, the wait time between a consumer purchasing aluminum and receiving it was six weeks, on average. That wait has leapt to 16 weeks, according to the Times. The extended wait drives up the price of aluminum not just in the places where it is held by Goldman, but across the entire market, since there is then less product to meet the same level of demand.
The extended delay, combined with the Byzantine way metal prices are determined, has helped the cost of aluminum to double since 2010, according to the Times.
Banks have made similar efforts to buy into other commodities markets in recent years. But with the aluminum market, they're adding a cost to a product Americans hold quite dear: Beer.
After falling steadily for about 15 years, canned beers began to make a comeback in the U.S. in the last decade. In 2011, over half of all beer served in the U.S. came in a can.
Small brewers could acutely feel the brunt of aluminum's shifting price. After initially avoiding cans because of their connotation as a vessel for cheap, generic beer, craft breweries have begun to embrace the can. Brooklyn's Sixpoint Brewery, for one, distributes almost exclusively in cans.
That's why beer brewers, in tandem with Coca Cola and other companies like automakers that use a lot of aluminum, are asking the Senate to investigate the alleged aluminum price manipulation. A rep for MillerCoors is set to testify to the Senate Banking Committee this week, and is expected to "lash out at banks like Goldman and JPMorgan" over their aluminum operations, according to the Huffington Post.
As Mother Jones' Kevin Drum noted, the whole process is legal, for now, thanks to an exemption that has allowed investment banks to scoop up commodities businesses outside the financial sector. MillerCoors and others want Congress to close that loophole and spare the consumers the added costs that they say are passed on.
"Many of us already view the financial industry as little more than a gigantic shakedown of the American public," Drum wrote. "But even so, there are still days when we can be dumbfounded by the sheer scale and gall of their machinations. Today is one of those days."