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“Speculation Lawsuits” Attacked by NY Times

Forbes columnist Daniel Fisher wrote this piece about a New York Times article concerning “speculation lawsuits”

The New York Times had an expose Friday about academics who — stop the presses! — supplement their university salaries by doing consulting work on the side. The problems with this story by reporter David Kocieniewski have been amply described by Felix Salmon over at Reuters (among other things, the Times reporter buried the fact that a University of Illinois expert highlighted in the story doesn’t even work for the business school that received all that tainted commodities-exchange money).
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As I read Kocieniewski’s story, however, I was thinking of something else. His attack on University of Houston Professor Craig Pirrong seemed so strident, so highly engineered, that it resembled something I might hear in the courtroom — or maybe coming out of the mouth of a lawyer or public-relations person trying to undermine a witness in an important case.

Pirrong’s views aren’t all that controversial if you believe in free markets, and are skeptical that any one person or firm can manipulate the prices of widely traded commodities like oil, natural gas or aluminum. But they are infuriating to populist politicians who want to blame everything that goes wrong in the economy on greedy international bankers — and lawyers who make millions off of class actions designed to play on similar sentiments with potential jurors.

So I did some poking around. Kocieniewski’s last expose was a virtually indecipherable (to me, anyway) piece in July about how the vampire squids at Goldman Sachs were manipulating the price of aluminum by moving it around in warehouses the bank controlled in Detroit. Once again, the reporter left out some information readers might find illuminating, including the fact that aluminum prices fell steadily during most of the time he described, from a peak of $1.20 per pound in May 2011 to a current price of less than 80 cents, according to Kitco. Whoever was making money on aluminum, it wasn’t the people who stored it in warehouses over that time period hoping prices would rise. (Aside: Goldman made money the old-fashioned way, by charging rent, just as commodities giant Cargill Cargill discovered in the late 1800s after losing its shirt trading grain in the pits of Chicago.)

I remember thinking then that the article read like the kind of thing lawyers throw a reporter’s way before they file suit, just to prime the pumps of public opinion. And sure enough, less than two weeks later Superior Extrusion filed a class action in federal court in Michigan against Goldman and the London Metals Exchange, mirroring the allegations we’d read in the Times piece. Behind that lawsuit was the New York firm Lovell Stewart Halebian Jacobson, which describes itself as “the premier class action law firm for prosecuting claims involving commodity price manipulation and price fixing.”

The aluminum lawsuit is only slightly more comprehensible than the Times story that preceded it. It at least acknowledges that aluminum prices fell during most of the proposed class period from February 2010 to July 2013. It accuses Goldman and the LME of profiting anyway, by storing excessive amounts of aluminum in Goldman’s Detroit-area warehouses and dribbling it out onto the markets at artificially low rates.

This is an old, familiar story. Remember the Soviets railing against “speculators” who hoarded grain and caused famine to spread across Russia? Apparently Goldman was doing the same thing in Detroit, partly by offering a $250 per ton “incentive” for aluminum dealers to use its warehouses. How that squares with Goldman making monopoly profits on its rent isn’t explained, since “incentive” means the same thing as “discount.”

The lawyers do have an explanation for why all that stockpiled aluminum didn’t just draw in metal from other parts of the country. After all, in a modern economy, things called trucks and trains can haul commodities to a market with an excess of demand, just as long as the price premium in that market exceeds the cost of transportation. Ah, but Goldman was smarter than that. By running its scheme, which somehow involved shuttling aluminum from warehouse to warehouse within Detroit, it inspired warehouse owners in other cities like Baltimore to do the same thing.

The key piece of evidence: Aluminum in storage in warehouses outside of Detroit only fell 50% during the economic recovery, from the huge inventories that built up during the financial crisis, while the lawyers at Lovell Stewart Halebian believe it should have fallen more. Meanwhile aluminum stocks actually rose in Detroit.

“This large contra-economic trend increase has restrained and trapped such a large portion of the available U.S. supplies of aluminum that it has been inflating aluminum prices since 2010,” the lawyers say, leaving to the readers’ imaginations how much more than 33% prices should have fallen amid a recovering economy and reborn auto industry in Detroit.

Read the rest here.

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