Goldman, JPMorgan Sweat, as Sen. Levin Goes After Metals Commodity Brokers

NEW YORK (TheStreet) -- With his term about to end later this year, Senator Carl Levin is making one final push to bring Wall Street commodity trading under control. It is a subject he has been very passionate about over the last few years. Levin, who has chaired the Senate Permanent Subcommittee on Investigations for 15 years, has been a vocal in condemning Wall Street abuses since the 2008 financial crisis.

In 2011, Levin offered recommendations to the Commodity Futures Trading Commission to curb "excessive speculation in the commodity markets."

Levin is hoping to finish his two-year probe into energy and metals market abuses by Wall Street banks. According to sources, investigators from Levin's office have met with representative from Goldman Sachs (GS) and JPMorgan Chase (JPM).

"We are looking at the physical commodities issue. There may be one other [issues to investigate], but I don't want to say what it might be," Levin was quoted as saying.

The investigation began shortly after Coca-Cola (KO) and other large metal users accused Goldman Sachs of restricting the amount of metal they released to customers and inflating their prices. Wall Street over the last few years found a very lucrative market in both owning physical metal warehouses as well as delivering the commodities. By buying up the metals warehouses, the banks were able to determine how much metal they would release to customers and when.

The result caused prices to soar, and, according to Coca-Cola, resulted in Coke paying billions more than it should have.

The problem, Coke stated, "in particular is allowing the minimum amount of aluminum allowed by the LME -- 1,500 metric tons a day -- to leave its facilities, and that [Goldman] could remove much more, erasing supply bottlenecks and lowering premiums for physical delivery in the process."

According to Coco-Cola's strategic procurement manager, Dave Smith, "It takes two weeks to put aluminum in, and six months to get it out... The situation has been organized artificially to drive premiums up."

With recent large successes against banks for abuses during the financial crisis, these banks have begun to exit the commodity metals businesses. JPMorgan has sold its warehouses and Goldman is in the process of selling its holdings too.

The hearing is expected to start in mid-September when the Senate returns from its summer recess. Executives from both Goldman and JPMorgan are expected to appear.

Depending on how the inquiries go, Levin may cap his career with a big win. Investors should monitor the issue but are likely battle-weary with so many settlements lately. It may be prudent for Goldman and JPMorgan to settle now and try to move past another blotch on their reputations while investors are in a blase mood.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates GOLDMAN SACHS GROUP INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate GOLDMAN SACHS GROUP INC (GS) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, growth in earnings per share, increase in net income and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • GS's revenue growth has slightly outpaced the industry average of 2.9%. Since the same quarter one year prior, revenues slightly increased by 2.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • GOLDMAN SACHS GROUP INC has improved earnings per share by 10.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, GOLDMAN SACHS GROUP INC increased its bottom line by earning $15.47 versus $14.15 in the prior year. This year, the market expects an improvement in earnings ($16.80 versus $15.47).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Capital Markets industry average. The net income increased by 5.5% when compared to the same quarter one year prior, going from $1,931.00 million to $2,037.00 million.
  • The stock price has risen over the past year, but, despite its earnings growth and some other positive factors, it has underperformed the S&P 500 so far. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

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