Walter Rhett: How a Tenth of a Cent Becomes $5 Billion

[DemocratsForProgress]

“Pushing back on the direction of the political economy is vital to preserving government, whose costs and services can not be sustained by taxes alone.”

On a tenth of a cent over the course of four years, the New York Times estimated Goldman Sachs made $5 billion. Not in the market. Not in private accounts. Not in mergers, acquisitions, stock offerings, proprietary trading. Neither did that tenth of a cent or the $5 billion directly create new jobs. No.

This bizarre capital expansion took place in commodities. Aluminum. Its center wasn’t the bauxite mines of Guyana, Guinea, Vietnam or Australia. The main source of this mind-boggling wealth scheme lay in 27 long storage sheds along the Detroit River. Except for occasional barges and trains, it’s an abandoned, gritty area, an industrial wasteland with cheap rents, where aluminum ingots are stored. Behind near empty parking lots, a few giant forklifts unload and move the ingots back and forth with a skeleton crew.

The London Metal Exchange (LME) controls the spot price for aluminum, administering the market where buyers and sellers met to arrange contracts for supply and demand. These contracts have a premium added that is not a part of the market auction. It is always added to the market price. It’s small, very small. It’s the cost of storing refined aluminum in ingots, billets, wire rod, or other forms in LME-approved warehouses. The premium is time-sensitive; it increases the longer aluminum is stored. It doesn’t differ for each transaction, warehouse, or different storage times; the longest times determine the premium. It applies to every contract.

The story of how a tenth of a cent becomes $5 billion in three years begins when Goldman Sachs, one of the world’s largest investment banks, bought a global warehouse and logistics company, Metro International Trade Company, for an undisclosed price. An old rule of thumb says Goldman’s secrecy involved more than just being discreet, but Goldman’s purchase didn’t attract much attention...

More at: http://www.democratsforprogress.com/2014/01/15/how-a-tenth-of-a-cent-becomes-5-billion/

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