How Goldman Sachs is giving you the screw…

Nick Madden, VP/CPO, Novelis, Inc.

“The situation illustrates the perils of allowing industries to regulate themselves.”
— Nick Madden, Chief Procurement Officer, Novelis, Inc.

We all know about the 2007 Financial Crisis — and how it wiped out millions of jobs around the world, and we know where it began, the US Subprime and Unsecured Credit Markets.  Now that the crisis is over, many think that a lot of the rackets, many assume that tighter financial regulations are helping keep large financial institutions from screwing over the same people they boned over in writing and trading in extremely risky securities.

Wrong.

Goldman Sachs, since 2008, has been buying up MASSIVE amounts of one metal: aluminum, and storing them in warehouses everywhere, particularly in Detroit.  What are they doing with it?  Just sitting on it.

Why is this a bad thing?  Isn’t sitting on metal a good idea when it’s cheap?  Sure… always a good thing.  However, when you buy up so much of it, you’re affecting the world supply of it, not so much.  By reducing supply, you increase demand — and what happens when demand goes up and supply goes down?  Raise the cost.

In 2008, Goldman Sachs reported that they were storing 50,000 tons of Aluminum in warehouses and company owned property.  In 2010, that number increased to 850,000 tons.  At this time?  1.5 MILLION tons.   TONS.

Now, when companies want to buy aluminum domestically, as nations like China like to set prices at the state-level, companies will turn to domestic companies, like those owned by Goldman Sachs.  Because they control the aluminum, they can say “Sorry, we can’t get it to you that fast, we apologize,” when in actuality, they can delay delivery to drive up the price.  Indeed, subsidiary of Goldman, before purchasing, was able to supply aluminum to its end-users, was 6 weeks.  After the purchase and management rearrangement by Goldman, the wait is now sixteen MONTHS.

How much, you say?  What’s YOUR bottom line?

According to Cenk Uygur with The Young Turks, the price increase at this time, broken down per aluminum can of soda/pop, is one tenth of cent, per can — equivalent.  While that doesn’t sound like a lot of money to the end user, that makes a massive dent in the profits of the initial supplier, such as the Soda company, in this case, to buy and manufacture the soda cans.  At Goldman’s level, however,

With the average of US$90 million worth of aluminum cans (ALONE) used in the US, and tons and tons of aluminum used in house sidings, wheels in automobiles, automobile body, anything you can think of.  On average, that increase works out to be roughly US$2 per every 35 pounds of aluminum.  With the average automobile using 12 pounds of aluminum (The New York Times), that adds up to US$12 in additional cost — that didn’t come from anywhere other than artificially controlling the supply to demand — only by slowing down aluminum shipment… that it owns, and stores.

Bottom line, from the entire operation of aluminum storage and shipment control, Goldman Sachs’ cut of the operation: US$5 Billion over the last three years.  (Thanks again, to The New York Times for this figure.)

Madden’s quote at the beginning of this entry has a lot sharper a point on it now, doesn’t it?  What do you think?

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$11 Minimum Wage? Hmmm… YES, but…

English: Exterior of a Wal-Mart Supercenter in...

English: Exterior of a Wal-Mart Supercenter in Madison Heights, Virginia. (Photo credit: Wikipedia)

One of the labor-rights movements right now is calling for an $11/hour minimum wage in the United States — bringing the per-hour cost of labor much closer to a living wage figure.  While I completely agree that a double digit minimum or a living-wage should be a goal, I see several problems with this.

The first I see is the small business.  Small business owners often don’t make a lot of money, particularly when they first start out — often taking what’s left after all the bills are paid, and that’s NOT assuming the company has some sort of “rainy day fund.”  Small business owners may find such a surge in output to employees that they may find little money left in the till after the bills and payroll are made.  This would be unfortunate.

The second, I see being much more sinister and calculated.  We already know “Big Box” companies like Wal-Mart and Meijer have a reputation for dolling out hours “just below” full-time to avoid having to pay their employees’ health care, or other benefits, but get almost the same benefits of having a full-time labor force.  Often very underpaid, they wind up having to go on forms of assistance to get medical care.  While it’s arguable and readily easy to assume that a company like Wal-Mart could fairly easily absorb such a rise in wages, my fear is that they will cut hours.  All of a sudden, the 38-hour employee finds himself at 27 hours.  Or worse, the full-time 40+ hour a week person finds himself at 30 hours, and now, his or her benefits cut as a result.

However, COSTCO, the Big-Box retailer that’s known for paying it’s employees very handsomely, enjoys a successful and relatively happy workforce, with a CEO who, while underpaid compared to his CEO-brethren, still lives a very comfortable life.  I feel he deserves recognition as such in any such a debate.

Is this pure conjecture — surely.  But is it out of the realm of possibility?  I don’t think so.  Big-Box retailers in general are known for looking for ways to cut costs while keeping productivity high.  My fear is a wage increase could make an already lame situation much worse.