Some interesting thoughts and factoids from Robert Wilmers’ annual letter:
Last year, a consumer beverage company — a user of aluminum — provided testimony to the Senate Committee on Banking, Financial Institutions and Consumer Protection about bottlenecks artificially limiting supply. Of the 37 Detroit-based storage sites that control 70% of the available aluminum in North America, 29 are owned by a large U.S. bank. A media investigation pointed out that delivery times out of the warehouses have increased from six weeks to 16 months since the bank bought the warehouses in 2010, coincident with the fact that the institution earns 48 cents per ton, per day, for storing the metal. It is little wonder that industrial users are outraged by bank ownership of parts of the supply chain for commodities. When put in this light, it seems directly at odds with the interests of producers and, in turn, consumers.
In a case that goes beyond banking, a prominent expert in the tire industry in 2011 called for a discussion on speculation in raw materials at a Group of Twenty (“G20”) meeting, and noted that speculative activities by financiers in industrial markets drove shortages and price volatility at the expense of financing the real economy. He observed a quadrupling of prices for natural rubber during a time frame when recessionary pressures on the auto industry that uses more than 65% of rubber production would have suggested a moderation in pricing. Indeed, in 2010 the trading volume of natural rubber equated to 156 times the annual industrial consumption. Such an imbalance between industrial use and speculative trading volume naturally leads to price volatility, which is seldom desirable for manufacturers.
Students of financial history will be aware that speculative trading in the broader sense takes place beyond the confines of the banking industry and has a dark past with no bounds on the extent to which players will go to extract profits. The U.S. experienced one of the most severe and extensive droughts in at least 25 years between May and August of 2012, which led to shortages and in turn to increases in the prices of corn, soybeans, and other inputs in the food supply chain. During the midst of this crisis, a director at a major non-bank trading house remarked on an investor conference call, “The environment is a good one, high prices, a lot of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities.” The reaction from a former United Nations employee — an expert in global food trade was that they are “making money from other people’s misery caused by the drought.” This institution, the world’s second largest public commodity trading conglomerate, with a 60% market share in zinc, 50% in copper and 22% in aluminum, was founded by one of history’s most successful American commodities traders, and a fugitive who was on the “FBIs most wanted list.” In 1983 he was charged with 65 criminal counts including trading oil with Iran during the American hostage crisis and tax fraud — “the biggest tax evasion case in U.S. history.” This company has been implicated in numerous controversial practices around the world, allegations including accounting manipulation to evade taxes in Zambia, kickbacks within the United Nations oil-for-food program in Iraq, human rights violations and environmental pollution in Colombia and the Democratic Republic of the Congo, as well as aluminum price fixing in the United States. One wonders how different are such acts from those of terrorist financing, which banks have been deputized to help detect and prevent.
Examples such as the aforementioned raise the question of whether we can have a safer financial system when these types of institutions exist, inside or outside the system. Policy makers face difficult choices when trying to decide where to draw the boundaries of the financial system. However, irrespective of the decisions they make, banks have to be very cognizant of the contents of our balance sheet lest we risk losing our position as stewards of the financial industry. When participants in our industry choose to engage in speculative activities that produce financial gain by competing with institutions with a long history of questionable behavior, guilt by association is only logical. It does little to convey the position of strength and stability that the U.S. financial system seeks to achieve. Such speculative trading activities, whether inside or outside the banking industry, center on making profits from the market by exploiting visibility into customer order flows, taking advantage of market imperfections, obscuring otherwise transparent market prices, and controlling parts of the commerce supply chain. Participants in such activities benefit from longer delivery delays, higher prices, volatility and shortages. What manufacturer or supplier of goods to the real economy does not seek predictable supplies, faster delivery times, and stable prices that ultimately benefit their customers? Suffice it to say that speculative trading activities are at odds with commerce, the facilitation of which is the very function of banking — not to mention the bad publicity it brings at a time when we are trying to rebuild trust in our banking system. Limiting such activities and unwarranted ventures by banks would do much to make the banking system safer and, equally important, more reputable.