How the beer lobby fought Wall Street ... and won
It’s a case study in how a few American businesses with long-standing household names, and their D.C. lobbyists, can set in motion changes to a global market and cause some of the planet’s biggest financial institutions to alter their operations.
By Jamila Trindle
WASHINGTON — If you can make a complex disagreement over commodity pricing about beer, you probably should. That’s what beer lobbyists proved this year with a successful campaign that translated a fight about obscure commodities markets into something everyone can understand: the price of a can of beer.
In the spring, the Beer Institute, a trade group that represents big brewers including Anheuser-Busch and MillerCoors, ramped up their lobbying in Washington, D.C., to draw attention to the vagaries of the global aluminum market, claiming that big Wall Street firms were taking advantage of obscure metals regulations to drive up the prices.
“Wall Street megabanks should not be able to levy hidden taxes on Main Street beer drinkers,” as Sen. Sherrod Brown, D-Ohio, put it in August.
In the months since, lawmakers have called for banks to divest their commodities holdings, regulators and law-enforcement agencies have opened investigations, and the Federal Reserve floated the idea of making it more expensive for banks to own physical commodities.
Now, the London exchange that runs the aluminum market is changing its policies. It’s a case study in how a few American businesses with long-standing household names, and their lobbyists, can set in motion changes to a global market and cause some of the planet’s biggest financial institutions to alter their operations.
So, the aluminum market is a complicated place involving an exchange in London, warehouses all over the world, and buyers with disparate interests — some are investors, others are using the metal to make stuff.
Most of the aluminum bought and sold around the world keys off the price of derivative contracts on the London Metals Exchange, even though the exchange represents a relatively small portion of the market used mostly by bankers and investors.
The metal tied to those contracts is stored in a system of warehouses, some of which are owned by banks like Goldman Sachs and J.P. Morgan. Until now, the London Metals Exchange has only required the warehouses to move a relatively small amount of metal out every day, creating long waits that drive up the overall price.
Metal users have complained for years about banks’ and trading firms’ role in the London Metal Exchange’s warehouse system, arguing that storage owners create bottlenecks and artificially raise the prices they pay for metals like aluminum, but they failed to gain traction. Representatives from other companies that use aluminum had met with regulators who oversee derivatives markets at the Commodity Futures Trading Commission (CFTC) and were told the CFTC couldn’t help, in part because the exchange was based in London.
But that was before the metal users broke out the big guns — the beer lobby.
In the spring, the Beer Institute ramped up pressure on the London Metals Exchange (LME) to change its rules and started meeting with Senate staffers, catching the attention of Brown. On July 9, representatives from the Beer Institute, Miller Coors, the American Beverage Association and others met with different staffers at the CFTC. Suddenly they were told the agency did have some oversight over the London Metals Exchange after all, through a 2001 letter allowing the exchange to trade with U.S. customers.
The following week, the CFTC sent out letters to some warehouse owners telling them to preserve documents, in what turned out to be the beginning stages of an investigation. The Department of Justice later joined in.
At a hearing on July 23, Tim Weiner, a global risk manager with brewer MillerCoors, testified that the lengthy waits to get metal out of LME warehouses in Detroit added $3 billion to the cost of aluminum last year. Brown and Sen. Elizabeth Warren, D-Mass., used the hearing to raise broader questions about whether banks should own oil pipelines and metals warehouses.
Amid this scrutiny, J.P. Morgan said on July 27 it was putting its physical commodities operation up for sale. And on July 31, Goldman Sachs conceded to complaints from brewers and others, saying that it would provide immediate delivery of aluminum to warehouse customers.
Of course, there are forces other than the American beer lobby at work here, including the global commodities market. Part of the reason banks have moved to sell commodities businesses they loaded up on during the financial crisis has to do with falling prices.
And it’s unclear whether LME’s changes will be enough to appease aluminum users. Big Beer has yet to declare victory.
“The LME announced rule changes today are a move in the right direction, but we believe further reforms could be immediately implemented to return the LME to a proper, free-market function of global aluminum price discovery,” a spokeswoman for the Beer Institute said.