Tuesday 28, March 2023

This is from yesterdays ‘Money Stuff’ by Matt Levine. I can’t link to it, but you can sign up for the newsletter for free. You can get the posts via RSS, here. It’s worth it. Trust me!

Kicking the nickel

We talked last week about the discovery that some nickel belonging to JPMorgan Chase & Co., which it used to support nickel futures trading on the London Metal Exchange, was actually just rocks. The nickel — I mean, rocks — had been sitting in an LME-affiliated warehouse for years; its role in life was to support nickel futures trading, not to be turned into batteries or cars or whatever. “The nickel worked perfectly well for those purposes — JPMorgan’s derivative contracts traded and paid off normally — for years, even though the nickel was not in fact nickel, just bags of rocks,” I wrote. I went on:

And then one day a warehouse worker, like, stubbed his toe against JPMorgan’s nickel and was like “hmm that’s not the sound nickel makes when you kick it” and opened the bags and found rocks. And then the LME dutifully reported that some nickel was not nickel, and JPMorgan’s nickel warrants were transformed into rocks warrants.

In a footnote, I clarified that I was just imagining this scenario, and that “I have no idea how the fraud was discovered and never want to find out, unless the real story is funnier than this one.” Do I have good news for you! Bloomberg News reports:

The revelation that about $2 million of “nickel” on the London Metal Exchange was actually just bags of stones has thrown a spotlight on the sprawling web of warehouses and metal stashes underpinning the billions of dollars of derivatives traded daily on the LME.

Over the past week, warehouse staff from Busan in South Korea to Genoa in Italy have rushed to check tens of thousands of two-ton bags of nickel – in some cases, by literally kicking them.

The LME advised warehouse operators to wear steel toe-capped boots for safety, one person who received the instructions said. The rule of thumb: If it hurts when you kick it, it’s probably nickel.

The mass inspection, which also included more carefully calibrated checks like weighing and scanning the bags, came after the LME last week announced it had discovered “irregularities” in nine nickel contracts.

That is extremely satisfying. Isn’t high finance great? One day you are sitting at your computer using sophisticated software to trade millions of dollars of abstract financial contracts in milliseconds to bet on global macroeconomic conditions. Then your boss taps you on the shoulder and is like “hey sorry you have to leave the desk for a few days to go kick a few thousand bags of nickel.” No no no I’m kidding, the futures traders and nickel-kickers are different people, but they are all interconnected in the elaborate system of global finance, which requires both high-speed data networks and also steel-toed boots for safety.

Also:

There are two possible explanations: either the bags were already full of stones when they were first delivered into Access World’s Rotterdam warehouse, or someone sneaked into the warehouse to steal the nickel.

Access World is leaning toward the second theory, according to people familiar with the matter, because it has a record of the material being weighed when it first entered the warehouse.

See I would have assumed that stealing nickel and substituting rocks in transit would make a lot of sense, while sneaking into a warehouse to bring in rocks and take out nickel would be insane, but (1) what do I know and (2) I am desperate to see the movie of this.

The thing that doesn’t totally make sense to me is why kicking rocks doesn’t hurt! And, for that matter, why whoever substituted rocks for the nickel didn’t (for example) use nickle-plated sheets or bars of steel. The other thing that doesn’t makes sense to me is why nickel is so expensive compared to iron. They are practically next to each other in the Periodic Table, and so their binding energy per nucleon will be similar, so there should be loads of both in the earth. Well, there is in the core. I have no idea why the crust has less Ni than Fe (or even if that’s actually true).

‘That which can be securitized will be securitized’

This paper is Hyman Minsky, who died in 1996, predicting that Volker in his misguided attempts to control inflation by raising interest rates would result in banks ceasing to function as principals in the lending process. We all know about securitization now, because we’ve lived through the Global Financial Crisis, which it created. What I had not realized is that Minsky, in 1987 saw how it would all pan out. This is all explained here.

Banks, which we are constantly told are well regulated and bombproof now we’ve learned the lessons of the GFC, have shifted a lot of the risk off their balance sheet, but still manage to fail, even holding mainly US Treasury securities on the asset side of their balance sheet. I think that there are a lot of ‘shadow banks’ which will have a lot more trouble in the coming year. Probably, the biggest problem will be in private equity and maybe some of the more exotic ETFs ($ARKK, anybody)?