What's up guys and welcome to wall street millennial today we're doing a story about a major goldman sachs scandal from 2013. goldman sachs is one of the most prestigious firms on wall street. They make billions of dollars every year in a broad range of financial services, from investment banking to securities trading. It is not uncommon for senior bankers at goldman to make more than 10 million dollars in total compensation in one year.

However, not all their profits come from legitimate means. Goldman sachs has a long history of questionable business practices and market manipulation. Today, we're looking at one of the most shocking scandals from 2010 through at least 2013 goldman sachs ran a massive manipulation scheme in the aluminum market. That cost consumers to the tune of 5 billion in this video we'll go over how they did this, how it was exposed in goldman's history of market manipulation.

This video topic was chosen by our channel members. Members get access to our videos one day in advance and get to vote on some of our video topics. In 2010, goldman sachs purchased detroit based metro international trade service for 550 million dollars. Metro operated, logistical warehouse is used to store, aluminum and transport them to industrial customers.

It might seem weird for an investment bank to buy an aluminum warehouse company, but goldman had a plan to massively increase its profitability. The plan worked and by 2013, the warehouses were bringing in annual revenues of 250 million dollars every year. This is more than half the price of what they paid for the company just three years prior. How is this possible? Goldman didn't have any experience operating warehouses, so they had no way of improving its revenue or profitability via traditional means to understand goldman's scheme.

We first have to understand how the aluminum market works. Aluminum is used in a broad range of industrial processes from automobiles to aluminum cans. However, much of the aluminum supply is controlled by hedge funds and other investors who speculate its price movements. When a hedge fund owns aluminum, they often pay an investment bank such as goldman sachs, to store it physically in a warehouse on their behalf.

After acquiring metro, goldman sachs paid their hedge fund clients to store their aluminum in metro's 27 warehouses. By doing this, goldman was able to increase metro's market share significantly by 2011, they controlled roughly 25 percent of the us's aluminum supply in their warehouses. Now that they had such a high market share, they had the power to start manipulating aluminum prices. Aluminum prices are calculated as a base price plus a premium.

The premium is calculated based on how many days the aluminum sat in the warehouse, thus the longer the aluminum stays in metro's warehouses. The more goldman makes off the premium. Because of this, there is a perverse incentive for warehouse operators to hoard the aluminum for longer than necessary to artificially drive up the premium. To prevent this, the london metal exchange, which regulates the aluminum trade, required each warehouse to ship out at least 3 000 tons of aluminum per day.

However, goldman sachs found a loophole because metro owned 27 warehouses. They could ship the aluminum from one metro warehouse to another. This way they can technically comply with the 3 000 tons per day requirement, while still keeping the aluminum in their warehouses for artificially long periods of time before goldman bought metro. The typical wait time was just six weeks after goldman bought it the wait times increased tenfold to more than 60 weeks.

This dramatically increased the premiums that they charged to the end customers and profited goldman to the tune of hundreds of millions of dollars per year. In 2011, sophisticated aluminum buyers, including coca-cola started, to notice the premiums charge from metro's warehouses were abnormally high and stopped sourcing. Their aluminum from metro, however metro's market share, was so great that goldman's manipulation increased premiums across the entire market. There was no escape goldman's scheme.

Increased. The effective aluminum prices across the board, it is estimated that the price increase added about 12 dollars to the price of an aluminum body car. While this doesn't seem like a lot. Aluminum is such a widely used commodity that the accurate price increase for consumers is estimated to be 5 billion dollars between 2010 and 2013.

noticing. The unusual price increases from metro coca-cola went to the london metals exchange to report possible manipulation. However, the lme said that metro was technically compliant with the regulations. The loophole of shifting aluminum between metro's own warehouses was completely permissible.

It seems odd that the regulator would allow such a blatant loophole, but it makes sense when you look at who owned the london metal exchange or the lme. At the time the lme was controlled by a board of the bank's industry, participants in the metals trading industry. The board included big banks that traded medals, including none other than goldman sachs goldman sachs and other banks were in charge of regulating themselves. This explains how the regulations were made in such a way that goldman could get away with this absurd loophole and manipulate the markets.

Aluminum buyers sued goldman sachs for the manipulation that they orchestrated, but in 2015 they were dropped from the lawsuit with no legal liability in 2016, under new leadership, the lme fined metro 10 million dollars for their manipulation. This is a small appearance compared to the hundreds of millions of dollars that goldman made from the scheme. Furthermore, goldman sold metro before the fine was levied, so goldman got away with their manipulation scot-free. The aluminum scandal was not the first manipulation that goldman was exposed, for there is a long list of instances of market manipulation, insider trading, legal compliance, failures, involvement in sovereign debt disasters and predatory mortgage lending practices that they have been implicated in.

One of those such behaviors is their manipulation of stock prices relating to ipos and research. Analyst reports carried out by goldman around the year 2000 goldman sachs started, putting out extremely favorable research reports for a company called exodus. Communications exodus was an internet provider company for dot-com businesses that wanted to take advantage of the rise in the internet. They were basically one of the picks and shovels placed for the dot-com bubble of 1999.

by early 2000. The tech bubble had already peaked and was on the way down. However, goldman sachs continued advocating for its clients to buy the stock of exodus, even as exodus customer base was dwindling and clearly on the decline. In fact, goldman was so adamant about buying exeters that it gave exodus their highest stock rating possible at the time.

Exodus was still beloved by investors who played the stock just like the highest fliers of the dotcom bubble. However, when the bubble bursts in pets.com and many of their other commercial customers went under exodus's, business model or lack thereof crumbled only a couple years after goldman stock exodus filed for chapter 11 bankruptcy, all there was to be remembered for was a wild roller coaster. Ride that day, traders and trigger happy investors used to try out their trading skills in the months and years leading up to april 2003. The sec was in the midst of a broad sanctioning of many of the us's biggest investment banks for illegal activities during the tech bubble, but one of the most significant lawsuits brought by the sec was against goldman sachs.

On april 28 2003. They announced that they had settled with goldman sachs for research, analyst conflicts of interest in the press release. They said that goldman sachs had violated laws and regulations set by the sec. The new york stock exchange, the new york attorney general.

What is now the nasdaq and other regulatory authorities? According to the press, release goldman sachs actively aligned its stock research division with its investment, banking division or ibd. These two businesses are supposed to be completely independent in any brokerage firm. For obvious reasons, you don't want someone advising investors to buy the stock of a certain company while at the same time helping that same company to market its ipo for an example within goldman. However, their research analysts were required to answer questions from the firm, such as how can you work more effectively with the investment banking division to exploit opportunities available to the firm as a result of the company aligning research and investment banking activities? It was found that research was involved in 82 percent of all one business solicitations.

Additionally, when goldman pitches investment banking services to companies, they sometimes would implicitly suggest that if the company did business with goldman as opposed to another bank, their stock would receive favorable coverage from goldman's equity research division. This caused several instances of goldman analysts publishing recommendations that were unwarranted or exaggerated, such as the case with a nearly bankrupt exodus communications. As a result of the settlement, goldman sachs agreed to pay over 100 million dollars in penalties to both regulators and their research report. Clients goldman also agreed to certain structural reforms within the firm, including disclosure reforms, employee compensation reforms, disclosure about whether or not the company is doing investment, banking business with the same stock they're covering in research reports and adopting an independent monitor to watch over the company's future.

Behavior, however, as a hundred billion dollar company at the pinnacle of the investment banking industry, these settlements were nothing more than a slap on the wrist and didn't end up doing much to deter them from illegal behavior in the future, but manipulating stock prices through research reports. Wasn't the only thing that goldman did to take advantage of the dot-com bubble? They also directly manipulated the price of red-hot ipos during the height of the bubble for their own profit and for their clients. Profit. In 1999, goldman sachs took the online toy company called etoys public through an ipo at the time it was the fifth largest ipo in history.

Although the company did only about 35 million dollars in revenue in comparison, competitor, toys, r us had a smaller valuation but much larger revenue of 11 billion dollars, taking advantage of the hype and investor exuberance at the time, goldman sachs severely underpriced. The ipo, while giving its closest investment banking clients allocations to the ipo shares immediately after the ipo, the stock price quadrupled allowing goldman's clients to flip the shares for massive profits. Two years later, the company was bankrupt. However, it wasn't until 10 years later that it was brought to light just how far goldman's crimes went throughout the years following etoy's bankruptcy.

E-Toys's creditors filed lawsuits against goldman for underpricing, the ipo by underpricing. The ipo goldman robbed the young company of valuable capital. That could be used to build up the business instead, that money went to other goldman clients such as hedge funds, that were allocated chairs and were able to flip them for massive, quick profits. It turns out that goldman sachs asked for and possibly received, kickback bribes from those institutional clients who benefited from the e-toys ipo.

Those clients willingly complied with goldman's demands, because they all knew that it would mean access to future ipos, which golden would similarly undervalue. However, the exact details of the particular etoys ipo were put under seal and thus our understanding of just how far goldman went to underprice the ipo and how much money they were able to make from it is still limited. However, is generally accepted in the industry that similar things happen in the investment banking world to this day. Alright guys that wraps it up for this video, if you like the content, make sure to smash that like button and subscribe for future videos also make sure to check out our second channel wsm research, where we post dd on high growth stocks in the meantime.

Thank you guys so much for watching and we'll see you in the next one wall, street millennial signing out.