Hello, and welcome to another episode of the Odd Blots podcast.
I'm Tracy Alloway and I'm Joe Wisenthal.
Joe, have you ever heard of something called the tablet of a Naser? I'm going to mispronounce that because my ancient Mesopotamian isn't up to scratch, but the tablet of a Nasser?
No.
Never.
This became like a big internet meme. There were lots of jokes about it, but it was basically this tablet, this old Mesopotamian tablet I think it was like four thousand years old with cuneiform written on it. People sometimes talk about it as the world's oldest business complaint.
You know, not only have I never heard of this tablet, I'm actually struggling to like figure out what the next thing you're going to say is that connects it to this episode that's coming up.
This is the most random intro to.
What I like.
I like this one. I like where you're going.
I'm trying, I'm trying to bring historic context. But okay, So written on this tablet was a business complaint against this guy, a Nasser, who was a copper trader in ancient Mesopotamia and his customer had written a complaint basically saying, you promised me a certain amount and type of copper, you gave me lesser quality copper, and I am upset and you have to do something about that.
So I get this is okay. Now I get how this makes sense. And I guess this is like a phenomenon throughout history that if you're buying actual physical stuff, there is a question of you enter into a contract, did you actually get the stuff? Is the stuff that the stuff that the person said they were going to give you? Is it actually what it is? Is it real?
That's exactly it?
And how do you check beforehand to see whether or not the stuff that you're going to be getting is the stuff that was promised to you. These are ancient, ancient problems. And the weird thing is it seems like the commodities world hasn't actually progressed that much from cuneiform tablets written on stone to what we use today, which is mostly paperwork.
I remember an episode we did with Dan Davies several years ago, and we talked about the salad oil scandal. The fame is one where the guy like filled up those tanks filled with water and then put a thin layer of oil, and they came and they checked and they're like, oh, these tanks are oil, and he was able to borrow against them. Warren Buffett made a bunch in the crash of all the entities that were associated
with it. But this stuff always fascinates me because I think these are the stories where there's something different between just the lines we see on the chart, these abstracted version of commodities versus like the actual handling of the real thing.
Right, there's the financialized commodity, the line that you see on an electronic screen, and then the actual commodity. The two are supposed to match or relate, but they're not one way or another. But they're definitely not the same thing. And recently, one of the reasons we wanted to do this episode is there have been a series of scandals in commodities land that have to do with collateral management.
So the big one that springs to mind is Elemy discovering that it had a bunch of rocks instead of nickel backing some of its content, and this kind of was a major talking point in commodities world.
Yeah, we recently did that interview with us CME chief Terry Duffy, and he seemed to acknowledge that there's like something about Nichols specifically that makes it susceptible to this sort of deception. But we didn't really get into the details. But this is just so fascinating that involves like heists and scams and deceptions on the fraud and it's just as you say, it's throughout history. So I'd love to learn more about how this business works.
Yeah, why does the commodities world seem so sort of ripe for these types of scandals. I'm very pleased to say that we have truly the perfect guests. We are going to be speaking with multi time, a lots guests at the moment. Mercury Group CEO Anton Posner and Mercury Group Coooh, Margo Brock, thank you so much for coming back on all thoughts.
Thanks for having us.
Thank you great to be here.
So the last time we talked, I think we were talking about the barge business and what was going on in the Mississippi River. But walk us through your approach to collateral management because this is a space that you play in. I think you do some business for major players such as the big banks, but what exactly do you guys do in the field of collateral management.
Sure, yeah, I'll take the lead on that one trace. Again, First, I'd just like to say, as that canneiform reference you made, they're still fighting it out in court and Athens. Their errors are still has not been resolved, so it's still going on.
We can litigate it right now.
Yeah, exactly, it's continuing. So yeah, that's why I have conneiform keyboard on my iPhone. So what we do We, as you mentioned, we work for several major banks that are involved in physical commodity finance and trade. In addition to trading companies and producers and commodities, a certainly a strong focus on metals and steel and raw materials that
go along with it. On the collateral management front, we perform audits and inspections at facilities for banks and financiers that are financing physical commodities to do some initial vetting work, finding out the procedures, diving into the everything from the ownership and the procedures and the personnel that are involved in issuance of documentation to who's going to be the primary point of communication, how are they keeping track of who owns what? And so forth. That is the pre
work that's done preliminary ahead of a finance deal. And then once there are physical commodities in place, we're doing jobs like having auditors go out and count physical metal accounting bundles of aluminum, ingots and warehouse for banks to
verify what's there. And even to the point where we have, through our subcontract or partners, flying drones to measure the heights an angle of repose of stockpiles of coal, for example, to verify approximately how many tons are in stockpile for banks that are financing drybulk commodities like that.
I have a question before we get into like the various frauds and deceptions, why do we take like a very sort of simple, sort of vanilla instance of how trade would work. Like suppose Tracy has a bunch of oil and she wants to pledge it borrow some money from me, and I would need to make sure that she actually has the oil and she actually.
Oil.
Is the old story, right.
Yeah, Tracy is coal. She doesn't want she wants to borrow against it, get some liquidity for it. I say, yeah, I want to. I'm happy to lend against your coal. Tracy, but I need some proof that it's there. She goes to you, what's like the basic steps of the process. What do you produce for me?
Sure the you know, initially, and we work with our clients, with our bank and trading clients to determine what level they want to go down, how far they want to go down the rabbit hole in terms of analyzing, okay, I mean you could could be the point of sending a survey or out taking samples, sending it to a pre agreed laboratory that expertise in that particular commodity to
verify the quality that's there. Of course, the quantity inspection is important, right, verifying that the quantity matches what Tracy's declaring to the bank or the financier. So verifying the quality the volume, and then also verifying and working to ensure that the facility that it's being stored at Tracy's house in Connecticut may may not past monster in terms of a secure collateral.
Squirrels that have made exactly within.
The exactly the biomass that's mixed in exactly right, So so ensuring that right. And we have clients that sometimes don't want us to go that deep. Sometimes it's just volume. But we're not taking samples for qualities and so forth. So we're our initial approach with a one of our clients that hire us for collateral management services is determining how far how far down they want to go.
I was going to ask how much of this depends on the sample size, because it seems like an easy thing for me to do if I was worried about the quality of my coal is I don't know, I would get a really nice piece of anthracite from somewhere else and say here, here's a sample of my coal.
Sure.
Yeah, Well, most importantly, if you're going to draw samples, it's going to be randomized, and you're going to have a certain percentage of the cargo that has to be sampled. If it's quite a large stockpile of coal, you know you're going to want a lot of representative samples from different sides, different angles, top bottoms, and quite so people can't pick the most attractive piece of anthracites run out there. So it really does depend on the parcel size that you're talking about.
I mean, you've just laid out how it's supposed to go in the theory, and yet what we've seen recently is numerous examples of people fooling the auditors, people fooling the inspectors, sometimes in kind of amusing ways with painted rocks and things like that. So what's going on there?
Uh? I mean there's a lot of opportunity for fraud at all levels, at all all the facets right that of this process. As you said, going back you know to the Phoenicians right in there in their complaints. So there's no nothing, nothing much has changed except the methods of which communication has. But you know the things that could go wrong where you had the recent traffic Aura mess uh there with a thousand containers of what appears
to be steel discs or fake nickel. And then there was other other examples that Henleyong scandal in Singapore for example, where you had the warehousemen that was storing the petroleum oil in this case was issuing issuing documentation to multiple financiers for the same exact stocks. You had a that's a situation where it wasn't the supplier that was the problem, but rather the facility that was doing the storage, which which has been a problem.
Well, so I was going to ask and it's the sort of perfect your answer, because I was going to add on to Tracy's like, do entities become vulnerable when they work with the same counterparties over and over again and just sort of like drop their guard essentially, like, oh, this is the way we've always done it. There's the way we've always done it. And then someone figures out how to enter into that relationship that's existed for a
long time. Like maybe the first time Tracy pledges are called to me, like I do a big inspection, but by the tenth time, like, yeah, I know you're good for it. But is that when fraud starts?
Absolutely, because you get complacent and you let your guard down, like anything else in life. So these long standing relationships that have always just run on autopilot, and someday some guy has a great idea of how he's going to fool the system and make money. So yeah, I think you have to keep the guard up. You have to have your checks and balances in place from the beginning of that relationship straight through to the end.
That's why they exist.
Once you drop your checks and balances, that's when you stop being a.
Of all use that you know, looking at what you have, so Here's a really basic question because I you know, we all read a little bit about the traffic Era and LME scandal, but everyone was focused on those very big names for obvious reasons. But what happened to the alleged fraudster? Do they just disappear with the money? I imagine their business of commodity shipping and producing is pretty moot at that point, right.
Yeah, the producer in India, and on the Nickel situation, I'm sure is untouchable at this point in terms of ability to transact with other anyone else really at this point.
He also but he also got half a billion dollars, so he's fine.
Yeah, And there's no like real obvious recourse against.
The trafficker is pursuing. You know, we don't certainly don't know the ins and outs of right, We're not we're not involved in that, so be clear on that. Right. So we're we're reading what transpired from news reports, right, but we you know, it looks like they're pursuing legal avenues to to to go after them, but that's going to be long and drawn out.
It just to be clear on Nickel, and I think this is something Terry Duffy when we talk to him, he's like, there's something about nickel. It's that it's in bags, right, Like some metal is like stacked you see it, and so everything what would be an ideal form of auditing. I can't imagine open every bag, but what.
Is opening some bags?
Okay?
Yeah, again it becomes that randomized audit, that randomized sampling, and you do have to you have to look and you have to go in and say, let's you know, it's all stacked in the warehouse, let's break some down, Let's pull it out, and let's just at a minimum open the top of the bags and look in.
Also is going to say two Nickel is a much more higher value metal versus aluminum, let's say, or zinc. So it's like counterfeiting. If you're going to counterfeit bills, you can probably counterfeit if taking the time to do what you're going to be doing one hundred dollars bills, right, rather than focusing on counterfeiting on dollar bills.
Nickel so in bags high value.
And there's really been two different types of fraud on it, and one is the Indian one that traffic Goor is involved in is during shipment. So by the time it lands where it's headed, the last containers are already afloat and everything, all the documents are presented and everyone's been paid, so they haven't had the opportunity to open doors on that very first container that's shipped to even look and find their fraud. So that fraud you have to really concentrate on combating at load.
And then there's the fraud of the rocks that were.
In the nickel bags, and that was in warehouse for years and years, but again nobody.
Opened up the bags there.
So there's you know, like Anton said, it's a system as old as time, and there's so many points within that system where fraud can happen and theft happens and the opportunities present themselves.
So just on this note, I mean, my impression is that one of the issues here and one of the reasons why the commodities world is susceptible to this type of fraud is, you know, not just that you can fake nickel by using some rocks put in a bag, but also so much of it relies on paperwork and you know, invoices and trade receivables and things like that. Can you talk a little bit about why that is and how endemic it is in your line of business.
Sure on the paper referring to the paperwork side rate paperwork. The documents that go along with a shimment are fairly easy to forge, right, So the quality certificates that went along with that nickel coming out of India, or the the paperwork. Let's take the Henleyong situation, right, the documentation, the warehouse receipts, the holding certificates that went to the to the banks to show that that there was ownership, right, can are just printed off off a computer, signed and stamped.
It's fairly easy to to make these documents and send them along, So it's the doc The paperwork is only as good as the counter party that's that's drawing it up. So it's the old trust. But verify premise, as Margo said, right, taking representative samples, not just you know the paperwork really really is to go along with a but it has to be part of a part of the bigger process.
Right. So obviously one way of fighting fraud is, as you say, go in the bags, rip open a bunch, do samples. The other way to engage in fraud that you've sort of hinted up and haven't talked about as much. Is Tracy comes to me asks for money against her call, but also does it for like six or seven entities over pledges. So what are some of the checks that you do or that a party should do to avoid or prevent multiple pledged collateral.
Yeah, and this is a it's a tougher one. Yeah, because let's go back to the to the ching Dao scandal in China ten plus years ago. I believe where the Western warehousing companies LM warehousing companies in China doesn't have Linda Metal Exchange warehouses. So these are the same companies that had subcontracted warehouses in ching Dao storing copper
and other metals, and the warehouse been there. There was a couple of warehouses in ching Dao that were subcontracted by the LEM warehousing companies and they were in cahoots with some of the local traders there to double triple, quadruple pledge these of copper to multiple banks. So they'd say, right, you got a ten thousand tons of copper cathodes sitting in there, and the local warehouse ban was issuing warehouse
receipt to multiple multiple banks. And financing entities for that same stack of copper, unbeknownst to the warehousing company that was contracting contracting with them. So they thought the western warehousing companies or the large lumy wareusing companies thought that they were that their Chinese subcontractor was doing the right thing and being honorable, but was really handing out paper left and right right for the same stack of metal.
And I would say, if Joe was looking to finance Tracy's coal, you don't want to do it on Tracy's property because Tracy retains retains control of it.
And that's going to be Yeah, that's going to be step number one.
I want your call somewhere where I have a trusted third party controlling it and hopefully issuing only one warehouse receipt on it, so.
It would be the warehouse. So in the process of getting that confirmation, it would be the warehouse sort of vouching for it, and then it would be on them. It would be on the warehouse, like would be the one breaking the law, being complicit and breaking the law if they were sending.
It out to right, which is what happened in Chindawn got it.
And Marker brings up a really good point, and often we've had multiple conversations over the years about providing collateral management services for stock retained at a customers or at a at a facility that's controlled by the entity that's getting that's benefiting from the financing. Right. So, as Margo said,
with that's always a more complicated collateral management approach. Then you have to have regular inspections verify that when the inspector is not there, is that material being taken being being taken out right? We were We did a a similar project for inbound steel slab going into a rolling
mill in Ohio. This and the bank that we were working for on that one was financing the steel slab, but it was on the property of the rolling mill, and then the bank would would have possession of the slab but also the coils steel coils that were rolled from that slab afterward. That meant we had to send in Mercury or predecessor predecessor company. We had to send
in inspectors regularly to verify what was there. Did they did the mill take more slabs than they were supposed to from the stock that was that was dedicated to that particular bank And in one case, Margo uncovered interesting situation.
Fraud and it was only detected simply because we were working on behalf of both banks that were financing the slab and the ultimate hot rolled coil that were coming out of the slab. So at the end of each day there was a pledge list of you know, we've we've removed this much slab from your inventory by you know, specific piece number, and to balance out the value, you now have this stack of coils and these are the
numbers of your coils. And this happens on a daily basis, and all those reports came to us and basically it was a simple overlay of reports and we started identifying coils that were double pledged.
Sorry explain that an overlay of reports? What does that mean?
Just taking both inventory reports, both daily declarations to each of each of the banks, oh and doing them side by side to look and start realizing that we had a handful of coils that were pledged to both banks.
So out of curiosity, how much was that slab and the coils worth? And the reason I ask is because this seems like a lot of work and very granular risk, right, granular high risk, and I kind of wonder, I wonder about the incentive structure here. If there are commodities dealers out there who basically say, this is a risk we're willing to take. We're going to find someone, you know, a warehouse or whoever with the least amount of paper work,
the least bureaucratic process to go through. Because this all seems like quite a lot.
Yeah. This the value of the slabs a few hundred bucks a ton, and then they were when they were rolled in. The coils were added value at that point, So add on another one hundred bucks a ton. I'm certainly not a steel pricing expert, right, but but that was just just to give you approximate value. But Tracy, were seeing just on your question, right, We're seeing banks that bailed out of commodity trade finance because of these problems.
Ab an Amorro being Paraba a couple of years ago announced that they were getting out of a lot, some significant portion of their physical commodity trade. It's left a smaller group of trader of banks that are willing to get involved in this at this point, which has opened up the door to some of the some of the less scrupulous ones take the Green Cell disaster right using their disaster.
There, Yeah, because I don't think of that in the same category. So yeah, different yea, So how is green all fit into the story?
And Green still pretty basically it boils down for the most part to an entity Green Seal Capital, that that was too close with one of the steel steel producers. They were financing trades uh that were that involved the steel producer. The bank that the steel producer owned was was heavily involved in uh.
In trade receivable, trade receivable, but also future sales.
Yeah, so you don't even have anything to secure.
That set right, So and fake invoices that were presented to Green Salt to finance, and Green Salt was backed by Credit Swee and we know where Credit sweez is at these days, so none of this worked out well.
For the number of credit stepped over the exactly.
I mean, this was one of you know, massive uh you know, massive strike against against the bank. And of course now look where they are, right and it's merged into ubs. But you know, this was the situations Marko mentioned the future receivables which was never made clear to Credit Sweee and they are investors in the funds that were backing Green sell that they weren't financing physical sales,
they were financing theoretical sales. I mean when you read what transpired there, you know, I think, you know, our teenage kids could have figured out that this was a bad deal.
So it's one thing to be a future receivable, and a future sale may one day become a receivable, but it's clearly not the same thing by an exactly you
mentioned the banks have gotten out of this business. So this is not just like that's interesting to me because that implies it's not just the occasional idiosyncratic thing that pops up on the news and becomes a scandal that we talked about once every years, that it must be like a big enough challenge for the industry that some banks like this is not do you talk about like how big are we talking about here?
Yeah, we've seen, you know, with EB and AMRO and BNP Paraba getting out there were two major, two banks that were major had a major presence in the physical commodity uh physical commodity trade. So it's left the banks that are that are left in it. I N G. Rabobank, Brown Brothers, Harriman here in New York of course, UH JP Morgan Chase and so forth. But it's left a dwindling number of banks that have the appetite for getting
getting involved in physical commodity UH trade finance. And in this way, look at what happened with on the Trafficura part of this part of the story. And certainly again not an expert and exactly what happened, but City Bank bailed out of financing those nickel trades with that particular supplier.
I think it was about a year before, maybe before the problem became evident, So there was must have been some red flags that were that were coming up, and City was was keen enough to be able to extract themselves from that prior that left Trafficura in a situation where we saw they went to non some non traditional secondary finance entities to mitigate their risk. They weren't using
their own money for purchasing that nickel. They were using trade finance trade finance company money that that ended up getting caught up in the in the mess at this point too. So it leads to the question of if a major company like traffic Aura can't get bank level interest rates to finance this, and they're going to the secondary lenders, right that are much higher cost.
Why right, Well, I've seen some people draw a not very subtle connection between like, Okay, the regulators put in additional rules around trade financing because it's a risky business for the banks. So a bunch of banks pulled out. Now you have a smaller body of players, some of varying qualities, and this might be one reason why we're seeing more scandals because you don't have as much credit, you don't have as big an ecosystem as you did previously. Is there any truth to that claim?
Yeah, yeah, the certainly without with less lenders and less participants in the in the field, right, it's it's concentrated that risk into a smaller group of entities that are willing the banks, the financiers that are that are doing this type of this type of business. So I think that there's some credence credence to that, but it ultimately
goes back still to the quality. Right, if we're talking about financing aluminum coming out of an Alcoa smelter, it's not quite the same as what traffic Goura got got hooked into, or the problems with the uh, you know, fake copper painted bricks and stuff. This was not this metal was not coming out of a out of you know, an al Co or Rio tin level of producer and
counter parties. So the minute you're going getting involved in entities that are that may not have quite the level of reputation as these major major producers have, you need to start ramping up your level of collateral management and oversight and uh and risk risk management. And I think that's that's really where the problem is, where we see regularly not not that desire to go as far as they need to.
Can we talk about gold? The internet loves the occasional story about gold theories like all the gold gold, Yeah, all the gold that's in Fort Knox is actually a brick and if painted, no one is inspected in fifty year. You know, you just like see this constantly, constantly, what kind of regular inspections are a is there gold? Is
there gold fraud? Is that a thing that exists in terms of this is not gold or something painted or that someone moved it out and no one has checked the warehouse, and uh, how is gold inspected?
Yeah? Gold, gold is not something that we get involved. We don't get involved in pressure spunels. So caveat. With that that being said, uh, what are the inspection companies that we that we work closely with? They have they fly somebody down to the Cayman Islands every once in a while to go into the bank vaults and check out the gold, doesn't it. I thought that was fantastic.
Applying to say, I've never admitted this before. I was I did this field trip.
I thought you were going to say you're a gold bug.
No. I did this field trip to the New York fed when I was in high school. And they brought us down to the gold vault and it was pretty cool, and they showed us how like often like when one entity like the I m F like sells gold to another entity, like the gold is put on a palette locker. But anyway, I was like standing next to the gold and I like sort of scratched a little bit of it myself and a couple of pieces of dust like fell that like sort of freaked out.
But then he put it in his pocket.
No, it didn't turn it on the floor.
But I was like, oh, like that gold is that must be a federal crime.
Yeah, I was just like, statue of limitations has expired.
This little pieces of dust fell throughout. I forgot freaked out that was even possible. So somewhere there was a golden get was just like a little I don't know anyway, Yeah, limitations, I freaked out. I didn't take any of that.
Yeah, they see them pulling movies, right, pulling pulling the gold around and these big palettes with these pulleys, and not to dive too deep into gold because it's not our ear of expertise, right, But same principles, right, if you're flying down to the Cayman isons and you're going to inspect gold old in this story, in this particular case, one of the major global banks that was financing the
gold there in a vault in the Caymans. I'm not sure what level of how far they took they went as far as taking samples and setting into a lab for analysis and so forth, or if it was just a simple counting. But when you get into a simple counting of gold bars, then you're just counting them, you're not verifying that they're actually gold, and you might end up with something you know that like is on that table over there.
I thought we were gonna Yeah, so exactly what what what is our takeaway from this problem.
Yeah, the takeaway is that I can count that as one, but it doesn't mean that it's one bar of gold one brick of gold, right, So just doing account and is is only only one.
Story actually brought more And so I guess part of the story could be.
This one.
How common is stuff like that? Because that actually is not that different from even conceptually the Celling oil scandal, right, which is like you have this layer of something legitimate. So talk to us a little bit about like just sort of like the way some of this can get concealed if like the you know, the top layer or something like that is.
Legit exactly what you said, you make those outer layers look to be the right material, and then it's the onus is on someone to be responsible and look inside, right, Yeah, look inside that stack and see is it what you
think it is all the way through? Right? And again that's just like I said, you know, early on you talked about the nickel and maybe you do have to get into the warehouse and occasionally say I want that lot they're broken down and pull out all of them, and I want to look inside the bags in the middle.
Don't forget that about the middle. That's where we all you know, it's like the middle of the mashed potatoes.
Here your hdge of vegetables as a kid, like a movie in which someone is convinced there's a fraud and just goes through this like and just tearing bag after bag and still like they're all, well, they slowly go and sane, they know there's fraud.
And they finally get carted out for the warehouse but has the right to charge for for the labor and time to move all that stuff. So and warehouseman doesn't carry but certainly whoever is perpetrating that potential fraud. I think this goes to what Margo said earlier too about the the repetition the comfort. Right if the inspector that flies down down to the Cayman Islands to go inspect for the bank shows up once a month and he does the same thing and doesn't dive too deep, you know,
potential thief at that point. Could someone that says ulterior motives could say, you got to mix it up. We know that he's never going to go beyond just the first first layer, right.
So one thing I wanted to ask is how often maybe two questions how often does commodities fraud go hand in hand with insurance fraud? Because I imagine a lot of these dealers must have some insurance in place, although I did read about Mercuria, I think, which thought it had insurance and then it turned out that that insurance was also fraudulent. And then secondly, secondly, just going back to your example of the steel slabs, like what happened
after you discovered that? Do you start talking to the counter parties? Do you make a claim for a loss? How does it all work?
Settling that became easy in that we went back to the facility. We went back to the steel mill and said, you know, we've found a problem and you are double pledged, and how are we going to rectify this? And they looked at it and they said, okay, we're going to rescind that report and republish it. And they said, you know, citing it was just a clerical error, which it could
have been. And they definitely focused on what was the more high profile, important bank that you would all know favored counterparty, yes, who they really needed to make sure they stayed in their good graces.
They said, don't touch that report and don't tell them anything. The bigger one with the bigger line.
Is who got to keep the double pledged coils, and they the secondary bank got a new list. But we did have in that instance someone on site so we could dispatch them at any point to go out with the list and say, I need you to verify these coils.
And that's what you do.
You go out and you say to the warehouse owner or the facility where it's being stored, this is the cargo. I want a spot check. Tell me on your report where it is, and now let's go find it.
And that's what you know. That's a bit of the corrective action for the checks and balances.
Let's make sure there it's where they say it is and it truly exists.
After Margo, it definitely think it might have been the second time that it happened, because it wasn't just once the larger, larger bank. First time I ever heard the phrase the d risking team got involved and they withdrew themselves de risking.
That's when you know you're in trouble.
Yeah, exactly thought the same thing like Margot, so that the de risking team is extracted.
I imagining like a swat team that just like comes through the It's definitely it's a military action, right, and it never ends well for you.
But yeah, they that bank wound down their involvement in that trade after Margo's discovery, which was the right thing to do. Is just getting sloppy, Uh, you know at that point.
So can you talk a little bit about liquids? I mean, just even I started talking about the salad oil scandal, did anything change fundamentally after that in terms of how inspections are done? Because that was pretty clever. The oil floats to the top water underneath. But like, did anything fundamentally change? And our liquids still tricky to verify in some cases.
M liquids are not an area that were involved, Yeah, were involved in so take it. Take it with a grain of salt, right in this case, or a dash of olive oil. But yeah, liquid sampling and so forth something that we Margo and I were both ship's officers, merchant marine officers, so we uh had our time learning in school about taking samples in a tanker. Yeah, and
uh and so worth with so forth. But I don't think that there's anything It's still the same basic principles of representative samples, not just not just going to the top layer, right, but doing a thorough inspection and having and also vetting of the facility that's storing it, ensuring that the facility is vetted, vetted properly, and that the ownership and the management and the procedures are tight and intact,
and the counter party counterparty risk. But the sampling physical sampling of when it comes to liquid commodities, I think is something that hasn't changed in the past few thousand years, and it's just a matter of how thorough it's done and if it's done in the right way.
So speaking of change, I mean we started this conversation talking about that Mesopotamian tablet and the complaint about copper quality. It does seem like a lot of this hasn't technologically advanced. But talk to us about what is happening on that front. Because you mentioned drones surveying coal, I imagine ancient Mesopotamia did not have the benefit of drones. I'm certain there happened dozens if not hundreds of people on LinkedIn pitching
blockchain for siles. That must be a thing. But what kind of advancements are people talking about?
As you said, right, certainly the drone. Ability to use drones to measure physical dry bulk stockpiles is an advancement. It gives a far more accurate picture of what's what's there versus a versus an eyeballing an estimation, right, which would be another form of doing that or verifying very complicated verifying of the weight of everything that's gone into that stockpile, but that can change any day. Was materials withdrawn?
The blockchain UH, and electronic bills of lading right, and so forth, it all helps, but still it goes back to traffic goura right. All of the paperwork was perfect. So the block paperwork, whether it flew h whether it moved via blockchain or went via via FedEx, it was still perfect. The metal was it right, So blockchain is not going to prevent that. It might catch some other problems.
But garbage and garbage out right, like exactly, you can just.
Track it better. You can track.
What about?
What about even more basic solutions? And I'm sure there's a really obvious and simple reason why you couldn't do this, But for instance, the nickel in the bags, could you like put it in plastic bags or glass jars so you could see.
It, Yeah, something more visible.
Well, I'm assuming the bags that are used are for longevity.
Oh, I see right.
Glass is going to add weight, harder to handle, so that's not really too feasible. But different bags.
I don't know.
But what are the warehouses saying about this? Are are they, you know, making noises about we're going to start doing things maybe slightly differently in order to void all right?
I mean that's where is the liability and who's authenticating what that material is? If the warehouseman is merely storing it, they're saying their receipts will say said to contain. You know, I'm declaring I'm annoyante, right, I'm ware housing this as copper. But I'm not a metallurgist. I've not been part of the buy and sell on this. I'm merely the guy who's building you put this in. So I'm just saying, those twenty four stacks are there, and they are purported
to be this. Maybe we've weighed them and we can authenticate the weight of the units, but I can't guarantee that it's copper or at a different level, you're saying it's you know, a certain quality and it's truly a different quality. I certainly can't authenticate that, but there are you know, you can certainly hire people to come in and do whatever is the right level of scrutiny for
the commodity. Obviously, all commodities have different different approaches on that liquid versus cards versus soft commodities and so forth, and the warehouse can play a role in that for a hired service, for whatever reliability they're willing to take on.
Yeah, I was gonna say because you mentioned that earlier, So on some level, I imagine there are some commodities in which there's not much fraud, probably because it's just cheap and bulky and there's not much I don't know, there's probably not much point in putting something fake for thos like soybeans or corn or something like that would be my guest. But I guess for like the ones where that are more susceptible to fraud, that take more time for someone to go in and do representative samples,
et cetera. Is there a de facto like, you know, higher risk premium that traders in these markets pay. They're paying for the warehouse at the time. The warehouse has this and you as a participant on one side of the trade rents time, I guess for the from the
warehouse for that inspection. Is that basically how it works, and so like to transact into some of these commodities, whether it's like a nickel that for reasons because of the bags or whatever, they're valuable and not visible, like you ultimately like have to pay more to transact in these commodities.
Certainly you know from an insurance standpoint where you're getting an all risk cargo insurance which is typical policy when you're moving and storing goods and commodities like this, that the insurance premiums are going to be significantly higher for higher value goods. Goods like that. The facilities themselves will often look at the warehousing companies facilities will often look at at higher costs for storing higher value The risk is higher, the incidents of theft or higher, you know
with those type of those type of commodities. So yes, there's going to be more costs in dealing dealing with you know, with that with higher value commodities for sure.
One thing I wanted to ask before I forget, is there a commodity that is particularly well suited to fraud.
I think I think nickel apparently.
Yeah, copper also has been a big, big one, right, Yeah.
Something that's higher value. So that's what peaues interest because it's a great thing to steal and resell. Copper can go on the secondary market quite fast. Aluminum nobody steals aluminum.
Nobody cares.
It's not worth it's not worth enough, and it's really big and heavy, so people don't move it.
Heavy, unwieldly, right, small and expensive is where you want to exactly.
Gold bricks, they're a classic for a reason.
Okay, that makes sense.
So we would be remiss if we didn't also ask you, while we have you here, what's going on with the Mississippi River and the barges, because the last time we spoke to you, I think it was back in August, yeah, September, there was a drought. There wasn't enough water in the river and so people were having difficulty getting the barges where they needed to be. Now we've heard some stories that there's too much water. What's going on that?
I think the last time we spoke, we were we weren't even into the belly of the beast jet.
It got worse before it got better. It was pretty epic last year what we saw.
And it was what most people haven't seen in a lifetime of doing river business.
It's just been that long.
The river is always cyclical, and we do see drier periods, and we do see periods where we get a lot of the you know, this time of year, we get a lot of runoff from the mountains from snow and makes it way its way all the way down the Mississippi. And so that is a classic feast or famine, and both of them present similar challenges where we have to reduce the toe size. Navigation is harder, and as an overall, the river just slows down and trade slows down.
See can you walk through the mechanics of why does too much water it reduced to size?
We end up with the water is moving too fast and a lot of instances and they will take down the toe sizes just to keep better controls. That's when you start seeing toes break apart. Whereas in the fall we were on smaller toe sizes because we had to the towboats had to navigate little water in so many places.
They couldn't take the big toes, so.
They couldn't be filled up as much right, because they were right.
Yeah, we had to have them really really light.
And a typical tow like on the mainline toe on the river would be tugboat pushing spending as like thirty barges. So give you a perspective, right, So reducing that from a thirty barge.
Yeah, so we are.
We're over that hump. Now we're getting back into normal flows and more normal water.
Size and water depths.
So that puts the river at a better speed and we get back to some normal traffic for a bit.
You mentioned, Tracy, but the high water situation was in the upper Misissippi rivers in the north of Saint Louis, like up toward through up to Minneapolis. So you know that'll get back to normal. But yeahs it's low water.
Is it ever the what's the perfect level of water in the Mississippi for the barge business?
Oh?
Yes, I don't know what happens like twice a year.
I don't know.
I don't know where a moment that's gonna happen this year?
Fair enough?
All right, Well, Anton and Margo, we really appreciate you coming back on odlots. Thank you so much. We appreciate your thoughts too.
Always fun.
Yeah, thanks so much, Thank you so much, guys. So Joe, I really enjoyed that conversation. I gotta say, I feel like we need to do an odd lots on location where we follow the guy flying down to the Cayman Islands to check on the gold.
I love that idea. Yeah, actually do an inspection, you know what I was thinking about. And I guess it's even goes back to some of our conversations that we had with Javier Bloss last year, Like it's sort of like commodities seems very unincorporate, yeah, compared to the rest of the finance industry, and this is like another reminder of.
It, totally.
And it's kind of weird when you think that it's the basic building, yes, for so much of our world, and yet it still seems to be the sort of like I'm going to mix my metaphors here, but swashbuckling, wild.
West, Yes, piracy, gray areas, all of these things in which like you just sort of assumed that like large corporations would have like squeezed all that out. Yeah, crime is kind of hard in many digital realms at this point, but it feels like when there's physical stuff like crime finds a way.
But the other thing I was thinking is it does feel like there's a sort of clash of incentives here where you want to encourage people to use the best counter parties, use warehouses with very stringent risk control measures, and yet that also seems extremely time consuming and expensive and bureaucratics. You could see why people might want to switch to others.
And I guess that also, like to the original point, like a warehouse, like the element, you just don't expect it to have any issue, and then that is ultimately the mental bias. I suppose that the fraudsters take advantage of if you can get in somehow into the most reputable entities where people feel like nothing bad is going to happen here. So you could see how it's sort of like this, like I don't know, cat and mouse game.
Speaking of mental bias, you need to shift your take on the golden Fort Knox and you scratching it and say you were you didn't accidentally touch it. You were checking, I was checking, checking, check, and we did everyone.
For everyone that at least one gold bar that was in the basement of the New York Fed in nineteen ninety eight when I took a field trip, there was real gold service.
I have done my part.
I have done my parts.
Thank you for the reframe.
All right? On that note, shall we leave it there?
Let's leave it there?
All right?
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.
And I'm Joe Wisenthal. You can follow me on Twitter at the Stalwart. Follow our producers on Twitter Carmen rod ree Is at Carmen Arman and dash Ol Bennett at Dashbot. And check out all of the Bloomberg podcasts under the handle at podcasts.
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