From The Irish Times, Saturday, July 27th, 2013
I was reminded recently about a classic tale of greed and excess in the world of high finance, a narrative that exposes the moral turpitude so prevalent among bankers and brokers, and the high cost of the grotesque inequality that too often results from the machinations of modern capitalism.
I’m talking, of course, about Trading Places, that quintessentially 1980s classic comedy in which Eddie Murphy and Dan Aykroyd played an impoverished street hustler and a rich broker whose lives are swapped around by a pair of conniving, commodities trading brothers.
A recent episode of the economics podcast Planet Money reality-tested the film, interviewing some traders to see how convincing the movie was – I was delighted to discover that not only was the plot quite feasible, but also that I wasn’t the only person who found their scheme, something about shorting the frozen concentrated orange juice market, quite impenetrable.
It turns out that there was a planned sequel to Trading Places which involved Eddie and Dan buying up an aluminum, sorry, aluminium warehousing company, drastically disimproving the service, causing long delays in delivery times, and taking advantage of loopholes in commodities regulations to effectively corner the aluminium market, making billions in the process. I can almost envision the scenes with Dan Aykroyd haplessly driving forklifts to the wrong warehouse and Eddie Murphy turning up at the London Metal Exchange pretending to be some African aluminium magnate with that trademark schtick of his that seems a bit offensive now.
If that sounds like a daft plot for a movie, well, you’d be right. As it happens, the dysfunctional warehouse ruse wasn’t the plot of a never-made Trading Places sequel – it is in fact the plot of an insanely convoluted get-rich quick scheme dreamt up by some giant brains at Goldman Sachs, and it has made the firm billions of dollars in the past three years, at the expense of everybody who uses aluminium. Which is all of us, basically.
According to an exhaustive investigative report by David Kocieniewski in the New York Times, Goldman bought up a company called Metro International Trade Services in 2010, one of the biggest “aluminum” traders in the US, and took charge of 27 warehouses in the Detroit area. “Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses,” Kocieniewski writes. “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.” Customers who used to wait an average of six weeks for their metal to be delivered now have to wait an absurd 16 months.
Of course, commodities exchanges operating how they do, and Goldman being what it is, the whole farrago is basically a byzantine trading ploy. According to Izabella Kaminska in the Financial Times, the billions are being made not just by delaying the delivery of aluminium, but by taking advantage of something called “contango”.
I’m hoping I’m not the only person who has never heard of the concept of contango before – my guess would have been a genre of Andalusian mandolin music – but in fact it’s “the normal situation in which the spot or cash price of a commodity is lower than the forward price”. I could go on, but even the dumbed-down explanation is so eye-glazingly complicated it makes the denouement of Trading Places seem about as confusing as Fair City.
Needless to say, none of this is illegal because since 2003 US regulators have permitted financial institutions to trade in physical commodity markets, but the costs are very real – aluminium is everywhere, in every can of fizzy drink and every car and every piece of electronics, and we’re paying more for it because of this scheme and others like it. Goldman isn’t adding any value to our cans of Coke or Bulmers, far from it, but every time you hear that “pfffft” sound when you crack open a can, remember that they’re extracting their fraction of a cent.
The companies that make the drinks that go in those cans have had enough, and a US senate committee hearing this week heard all sorts of arguments from Coca-Cola and MillerCoors demanding that the big Wall Street firms shouldn’t be allowed to own warehouses and pipelines and the like.
But there’s something particularly poignant about the Goldman aluminium example – these big warehouses are in Detroit, a city whose shocking decline culminated in its recent attempt to declare bankruptcy. For so long, Detroit was home to America’s most defining industry, with assembly lines churning out automobiles, but now it’s home to deliberately dysfunctional warehouses, with delivery trucks effectively going nowhere, in never-ending circles.
The productiveness of factories has been replaced with the wastefulness of high finance. As an allegory for the absurdity of modern capitalism, as it is now practised, it’s nigh-on perfect. Perhaps they should make that Trading Places sequel after all.
‘Trading Places 2’: The Aluminium Warehouse Caper
From The Irish Times, Saturday, July 27th, 2013
I was reminded recently about a classic tale of greed and excess in the world of high finance, a narrative that exposes the moral turpitude so prevalent among bankers and brokers, and the high cost of the grotesque inequality that too often results from the machinations of modern capitalism.
I’m talking, of course, about Trading Places, that quintessentially 1980s classic comedy in which Eddie Murphy and Dan Aykroyd played an impoverished street hustler and a rich broker whose lives are swapped around by a pair of conniving, commodities trading brothers.
A recent episode of the economics podcast Planet Money reality-tested the film, interviewing some traders to see how convincing the movie was – I was delighted to discover that not only was the plot quite feasible, but also that I wasn’t the only person who found their scheme, something about shorting the frozen concentrated orange juice market, quite impenetrable.
It turns out that there was a planned sequel to Trading Places which involved Eddie and Dan buying up an aluminum, sorry, aluminium warehousing company, drastically disimproving the service, causing long delays in delivery times, and taking advantage of loopholes in commodities regulations to effectively corner the aluminium market, making billions in the process. I can almost envision the scenes with Dan Aykroyd haplessly driving forklifts to the wrong warehouse and Eddie Murphy turning up at the London Metal Exchange pretending to be some African aluminium magnate with that trademark schtick of his that seems a bit offensive now.
If that sounds like a daft plot for a movie, well, you’d be right. As it happens, the dysfunctional warehouse ruse wasn’t the plot of a never-made Trading Places sequel – it is in fact the plot of an insanely convoluted get-rich quick scheme dreamt up by some giant brains at Goldman Sachs, and it has made the firm billions of dollars in the past three years, at the expense of everybody who uses aluminium. Which is all of us, basically.
According to an exhaustive investigative report by David Kocieniewski in the New York Times, Goldman bought up a company called Metro International Trade Services in 2010, one of the biggest “aluminum” traders in the US, and took charge of 27 warehouses in the Detroit area. “Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses,” Kocieniewski writes. “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.” Customers who used to wait an average of six weeks for their metal to be delivered now have to wait an absurd 16 months.
Of course, commodities exchanges operating how they do, and Goldman being what it is, the whole farrago is basically a byzantine trading ploy. According to Izabella Kaminska in the Financial Times, the billions are being made not just by delaying the delivery of aluminium, but by taking advantage of something called “contango”.
I’m hoping I’m not the only person who has never heard of the concept of contango before – my guess would have been a genre of Andalusian mandolin music – but in fact it’s “the normal situation in which the spot or cash price of a commodity is lower than the forward price”. I could go on, but even the dumbed-down explanation is so eye-glazingly complicated it makes the denouement of Trading Places seem about as confusing as Fair City.
Needless to say, none of this is illegal because since 2003 US regulators have permitted financial institutions to trade in physical commodity markets, but the costs are very real – aluminium is everywhere, in every can of fizzy drink and every car and every piece of electronics, and we’re paying more for it because of this scheme and others like it. Goldman isn’t adding any value to our cans of Coke or Bulmers, far from it, but every time you hear that “pfffft” sound when you crack open a can, remember that they’re extracting their fraction of a cent.
The companies that make the drinks that go in those cans have had enough, and a US senate committee hearing this week heard all sorts of arguments from Coca-Cola and MillerCoors demanding that the big Wall Street firms shouldn’t be allowed to own warehouses and pipelines and the like.
But there’s something particularly poignant about the Goldman aluminium example – these big warehouses are in Detroit, a city whose shocking decline culminated in its recent attempt to declare bankruptcy. For so long, Detroit was home to America’s most defining industry, with assembly lines churning out automobiles, but now it’s home to deliberately dysfunctional warehouses, with delivery trucks effectively going nowhere, in never-ending circles.
The productiveness of factories has been replaced with the wastefulness of high finance. As an allegory for the absurdity of modern capitalism, as it is now practised, it’s nigh-on perfect. Perhaps they should make that Trading Places sequel after all.