Working With God's Aluminum

A couple of years ago Goldman Sachs’ CEO Lloyd Blankfein was on TV almost every day promoting the good his company does for the economy. One of his less fortunate phrases in his otherwise highly articulate defense of his firm was that Goldman was “…doing God’s work.” I imagine he meant Goldman was engaged in doing things of which they could be proud rather than running a charitable enterprise, but it was an expression that stuck, such is life in today’s soundbite world.

Banks are fundamentally about aiding capital formation. This includes directing savers to sound investments that will preserve the purchasing power of their capital, and helping companies fund themselves with appropriate amounts of debt and equity capital. All of the trading, wheeling and dealing, M&A activity and fee generation ultimately comes down to the business of moving capital efficiently from those who possess it to those who can use it more profitably.

Given this calling, it is no doubt with some discomfort that on Saturday Mr. Blankfein and his colleagues confronted a New York Times article that described how their ownership of aluminum warehouses in Michigan was adding to the cost of anything that uses aluminum (which includes everything from soda to airplanes). When highly sophisticated managers of capital take on the business of holding inventory of raw materials, their natural inclination towards exploiting any arbitrage results in huge aluminum ingots being shuffled around the warehouse with no apparent purpose beyond increasing their cost to the buyer. For reasons not entirely clear, holding aluminum in a series of warehouses can be more profitable than delivering it, since longer storage time adds to the price paid by the buyer and therefore, ultimately, the consumer.

There’s still too many bankers, and maybe banks, who just don’t get it. The long, steady growth in financial services that began in the early 1980s and culminated with the Crash of 2008 brought with it a great deal of unnecessary trading and arbitrage that didn’t support the basic business of capital formation (see paragraph #2, above). The reasons for the financial crisis are varied and substantial blame lies with regulatory failures (poor oversight of mortgage lending) and poor public policy (over-investment in housing). But banks weren’t totally blameless, and the type of story highlighted above is just why Main Street thinks so little of Wall Street.

Where’s the judgment at that company, for someone to wonder whether managing an aluminum ingot warehouse so as to extract additional profit from just about everybody else was what banks are for?

In my upcoming book, Bonds Are Not Forever: The Crisis Facing Fixed Income Investors, I link the growth in financial services with the growth in debt and pose the question, is more banking really good for the rest of the economy? Goldman Sachs is certainly not all bad, but in this one vignette they have tossed a little more ammunition to those who believe that when it comes to Wall Street less is certainly more.