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 They may like each other, but the two men are antagonists in a
battle over whether Goldman can maintain its lucrative role in
physically trading stuff ranging from aluminum to coal to natural
gas to zinc.
Brown, 61, has been a critic of the role that banks, particularly
Goldman, play in commodities markets, accusing Wall Street of
driving up prices for businesses and consumers. Cohn, Goldman's No.
2 executive, met this month with lawmakers including Brown as well
as U.S. Federal Reserve officials to explain why a Wall Street
bank's presence in the commodities market is actually good for Main
Street.
The meetings with lawmakers and the Fed, which haven't been
previously reported, show how hard Goldman is fighting to hang on to
its commodities business.
"For more than 30 years, we have been helping our clients manage
commodity and other risks and we believe that experience has given
us an important perspective on the policy debate under way today,"
Goldman said in a statement.
Goldman reported $902 million in commodities revenues for 2013, up
from $492 million the prior year. The bank says those figures,
reported in accordance with U.S. Securities and Exchange Commission
rules, do not accurately reflect the way it runs its commodities
business.
Cohn's meetings come after consumers, including beer-can and
steel-railings manufacturers, prompted Brown to hold hearings on the
subject of banks and physical commodities through a congressional
subcommittee he oversees. Brown has also been considering whether to
bring bankers in front of the committee to publicly question their
role in the raw materials supply chain, sources said.
This week, Goldman said it began a process to sell one part of its
physical trading operations, a metals warehousing business called
Metro International Trade Services, that has been the center of
controversy over its influence on consumer prices.
The Metro sale announcement follows exits from physical commodities
trading businesses by top rivals including Morgan Stanley <MS.N>,
JPMorgan Chase & Co <JPM.N>, Barclays PLC <BARC.L> and Deutsche Bank
AG <DBKGn.DE-TK>. Though Goldman is selling Metro, it still would
like to hold on to other physical commodities assets. The bank is
counting on Cohn and other Goldman executives, including Chief
Executive Lloyd Blankfein, to persuade regulators and lawmakers not
to force its exit.
The Metro sale is meant to rid Goldman of a controversial holding
and appease regulators, said Kristofer Tremaine, a former
commodities trader and founder of a London-based commodity trade
finance fund.
Goldman wrote in April to the Fed in response to a call for public
comment about possible new rules on commodities trading. "The
letters we and many others sent to the Fed explain the importance to
the economy of managing commodity risk and we feel it is important
to continue talking with those in Washington who are open to
engaging on the subject," Goldman said in its statement to Reuters.
Being in the physical commodities market give banks insight into
supply and demand, potentially making trading more profitable.
Critics contend that Wall Street's involvement hurts consumers and
businesses, because banks can restrict the flow of material through
the supply chain to drive prices higher.
During their meeting, Cohn, 53, told Brown that the fears are
misdirected. In practice, he said, Goldman acts as an important
facilitator between buyers and sellers of commodities. Cohn argued
that the bank's role as an intermediary - with the ability to
maintain inventories, lend money, be patient with debts and provide
hedging products - actually helps the economy flourish, sources
said.
VICTORY FOR BEER
It could not be determined whether Cohn discussed the future of the
Metro business with Brown in their meeting. Following the
announcement, Brown put out a statement celebrating the potential
sale.
"This is good news for consumers, taxpayers, and manufacturers that
depend on aluminum," he said. "Banks should focus on core banking
activities rather than owning physical assets like warehouses,
pipelines, and tankers. Today's announcement is a victory for beer
and soft drink makers and for the safety and soundness of our
financial system."
Cohn did not respond to requests for comment, and Goldman Sachs
declined to make him available for an interview.
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Metro became the center of controversy after big consumers such as
MillerCoors LLC and The Coca-Cola Co <KO.N> accused warehouses and
their owners of exploiting London Metal Exchange storage rules to
boost rental income, distorting supplies, inflating physical prices
of aluminum and costing consumers billions of extra dollars
annually. The issue captured public and political attention last
year and the Department of Justice and Commodity Futures Trading
Commission are looking into the issue.
Another congressional panel, the Permanent Subcommittee on
Investigations, which has subpoena power, is also probing banks'
role in the commodities market. And the Fed is considering rules
that could restrict such activities, or make them less profitable by
requiring a capital surcharge on those it deems risky. Wall Street
executives say although the Fed has not said what it wants banks to
do yet, the regulator has raised the bar on banks explaining why
they should be allowed to stay in such businesses.
Cohn also met with Fed staff on his recent trip to explain Goldman's
position. One source close to Goldman said its outreach efforts to
senators such as Brown were important as long as the Fed is "being
hauled up in front of Congress."
A Fed spokeswoman declined to comment.
SOLIDIFY POSITION
If Goldman fends off new regulations, it could solidify its position
as the leading Wall Street bank in the commodities market.
Banks that have announced plans to significantly scale back their
commodities trading operations have cited regulatory pressure as
well as higher capital requirements that are denting profits. Wall
Street banks took in as much as $14 billion in commodities trading
revenue in 2008, but that figure declined to just $4.5 billion in
2013, according to data from the consulting firm Coalition.
Although Goldman is facing those same pressures, the business is
known to have been very profitable for it over the long term. In a
January earnings call, Chief Financial Officer Harvey Schwartz
described the business as "too important" to its clients to give up.
"The real victor in the mass exodus of the major banks from
commodity trading will likely be Goldman Sachs," Bernstein Research
analyst Brad Hintz said in a recent report.
Some rivals expect Goldman to feel compelled to exit physical
commodities trading. To be sure, Goldman's ability to stay in
commodities trading was grandfathered into the 1999 Gramm-Leach-Bliley
Act.
One senior Wall Street executive whose firm has decided to exit
those businesses said it would not be fair to banks that have gotten
out in anticipation of new Fed regulations. If Goldman is successful
in its push to remain in physical commodities, rivals will see it as
proof that the bank - known for its history of senior executives
moving to roles in policy and regulation - still enjoys a cozy
relationship with the government, the executive said.
"Sen. Brown is open to hearing the viewpoints of stakeholders
affected by legislation before the Banking Committee," said
spokeswoman Meghan Dubyak, in an email. "He hopes that even people
he disagrees with will find him knowledgeable, accessible, and open
to argument. But anyone the least bit familiar with him knows that
he has the same message to all audiences - banks should stick to
banking."
(Editing by Paritosh Bansal and John Pickering)
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