Odd Lots - Counterfeiting Scandals Keep Slamming the Commodities Market

Episode Date: June 1, 2023

Earlier this year, it emerged that the London Metals Exchange had been holding a bunch of bags filled with stones instead of the nickel needed to back trades for major commodities players, including Trafigura. Before that, commodities trader Mercuria was given painted rocks instead of the copper it was supposed to take delivery of. In short, the commodities world is no stranger to fraud. But what is it about the business of trading, moving and storing commodities that makes it so susceptible to scandal? In this episode, we speak to repeat Odd Lots guests and commodities collateral specialists Mercury Group CEO Anton Posner and President Margo Brock, about some recent episodes of counterfeiting in commodities world, why they seem to keep happening, and what could be done to prevent further instances from occurring.See omnystudio.com/listener for privacy information.

Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing in subject to risk vanguard marketing

corporation distributor. Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Oddlots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, have you ever heard of something called the tablet of A. Nasser? I'm going to mispronounce that because my ancient Mesopotamian isn't up to scratch, but the tablet of A. Nassar. 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 4,000 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 one of our episodes ever. I like this one. I like this one. I like where you're going. I'm trying to bring the historic context. But okay, so written on this tablet was a business complaint against this guy, A. Nassar, 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 it. So 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 uniform 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 famous 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, which are 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 it in an electronic screen, and then the actual commodity. The two are supposed to match or relate late in 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 LME, discovering

that it had a bunch of rocks instead of nickel backing some of its contracts. And this kind of was a major talking point in commodities world. Yeah, we recently did that interview with 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. It involves like heists and scams and deceptions and fraud. And 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 Oddlots guests at the moment, Mercury Group CEO Anton Posner, and Mercury Group C-O, Margo Brock. Thank you so much for coming back on All-Thots. Thanks for having us. Thank you. Great to be hearing. 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 Bank. But what exactly do you guys do in the field of collateral management? Sure. Yeah, I'll take the lead on that one, Tracy. And first, I'd just like to say also that Cuneiform reference you made, they're still fighting it out in court in Athens. Their errors 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 Cuneiform keyboard on my iPhone. So what we do, 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, 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 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 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, counting bundles of aluminum ingots and warehouse for banks to verify what's there. And even to the point where we have, through our

subcontractor partners, flying drones to measure the height, an angle of repose of stockpiles of coal, for example, to verify approximately how many tons are in stockpile for banks that are financing dry bulk 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 a 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. Like what's like... Can we do coal instead? Or coal. Because I do actually have some coal. Yeah. Yeah. 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 Cole, 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. 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. I mean, it could be to the point of sending a surveyor out, taking samples, sending it to a pre-agreed laboratory that has. has 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 finance here. 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 not pass muster

in terms of a secure collateral. We'll say there are a lot of squirrels that have made nets within the coal pile. Exactly. Exactly. The biomass that's mixed in. Exactly. Right. 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 anthracite to put 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 theory. And yet what we've seen recently is numerous examples of people fooling the auditors, people fooling the inspectors, sometimes in kind of a using ways with painted rocks and things like that. So what's going on there? Yeah. Yeah, I mean, there's a lot of opportunity for fraud at all levels, all the facets, right, that of this process. As you said, going back, you know, to the Phoenicians, right, in their complaints. So there's no, 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 Trafigura mess there with a thousand containers of what appears to be steel discs or fake nickel. Then there was other examples. Hinliang scandal in Singapore, for example, where you had the warehouse bin that was storing the petroleum oil in

this case was issuing documentation to multiple financiers for the same exact stocks. That's a situation or wasn't the supplier that was the problem, but rather the facility that was doing the storage, 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? It's like, oh, this is the way we've always done it. This is the way we've always done it.

And then someone figures out how to enter into that relationship that's existed for, long time, like maybe the first time Tracy pledges are called to me like I do a big inspection, but by the 10th 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 longstanding 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 accountable. You stop, you know, looking at what you have. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute.

Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality. isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists,

analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk, Vanguard Marketing Corporation distributor. They say abs are made in the kitchen. Cool, but who is time for three hours of meal prep and a fridge full of Tupperware? That's why I started using Factor. Factor delivers fresh, never frozen, ready to eat meals that are dietitian designed for balanced science-backed nutrition.

No prep, no cleanup. Just heat, eat, and move on. I've got gym days, work days, super long days, and Factor keeps me on track without slowing me down. It's real food, great flavor, and the kind of meals that actually support the work I'm putting in. talking chicken pesto, steak with veggies, roasted salmon, meals that feel like they were cooked for you, not by you. So, yeah, abs might be made in the kitchen. But thanks to Factor, I don't have to be in the kitchen. Right now, get 11 meals, free shipping, and free sides for life. Hurry, this offer won't last long. Go to FactorMeals.ca and use code fuel. That's 11 meals,

free shipping and free sides for life, but only with the code fuel at Factormeals.ca. Factor, Canada's number one ready-to-eat meal delivery service. So here's a really basic question because I, you know, we all read a little bit about the Trafigura 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 on the nickel situation, I'm sure, is, uh, untouchable at this point in terms of ability to to transact with other anyone else really at this point but he also but he also got half a billion dollars so he's fine yeah he's fine is that there's no like real obvious recourse against trefiger is pursuing you know we don't certainly don't know the yeah ins and outs of trefiger we're not we're not involved in that so to be clear on that right so we're we're reading what transpired you know from news reports right but uh we you know it looks like they're

pursuing legal avenues to go after them. But that's going to be long and drawn out. Just to be clear on nickel, and I think this is something, you know, 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. Do you see it? And so everything, what would be an ideal form of auditing? I can't imagine like you open every bag, but like what are best practices. Okay. Yeah. Again, it becomes that randomized audit, that randomizing. 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, too, 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're going to probably counterfeit, if taking the time to do it, you're going to be doing $100 bills. right, rather than focusing on counterfeiting dollar bills. Right. Nickel. So in bags, high value.

Right. And there's really been two different types of fraud on it. And one is the Indian one that Trafalgar 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 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, right, paperwork, the documents that go along with the shipment are fairly easy to forge, right? So the quality certificates that went along with that nickel coming out of India or the paperwork, let's take the Henley-Long situation in Singapore, right, the documentation, the warehouse receipts, the holding certificates that went to the banks to show that that there was ownership, right? Can, are you? just printed off a computer signed and stamped, it's fairly easy to make these documents and send them along. So it's the doc, the paperwork is only as good as the counterparty that's drawing it up. So it's the old trust but verify premise, as Margo said, right? You're 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 at, but 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. Right. Over pledges. And over pledges it. 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 because it's go back to the, to the Qingdao scandal in China, 10 plus years ago, I believe, where the Western warehousing companies, LME warehousing companies, and China doesn't have London Metal Exchange warehouses.

So these are the same companies that had subcontracted warehouses in Qingdao, storing copper and other metals. and the warehouseman there, there was a couple of warehouses in Qingdao that were subcontracted by the, by the LME warehousing companies, and they were in cahoots with some of the local traders there to double, triple, quadruple pledge the stocks of copper to multiple banks. So they'd say, right, you've got a 10,000 tons of copper cathode sitting in there. and the local warehouse been 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 with them. So they thought, the Western warehousing companies or the large Elimee warehousing companies thought that they were, that their Chinese subcontractor was doing the right thing

and being honorable, but it was really handing out paper left and right for the same stack of metal. And I would say if Joe is looking to finance Tracy's coal, you don't want to do it on Tracy's property because Tracy retains control of it. Oh, like the physical. 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. Oh, 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 or being complicit in breaking the law if they were sending it out to multiple. Which is what happened in Chingtown. Got it, got it. And Mark, Margo 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 facility that's controlled by the entity. that's benefiting from the financing, right? So as Margo said, that's always a more complicated collateral management approach.

Then you have to have regular inspections, verify that when the inspector's not there, is that material being taken out, right? We were, we did a similar project for inbound steel slab going into a rolling mill in Ohio. 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 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 company. We had to send in inspectors regularly to verify what was there. 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 an interesting situation. I found fraud. Yeah, it's a good one. 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 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 happened 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-pludged. Sorry, explain that an overlay of reports. What does that mean? Just taking both inventory reports, both daily declarations to each of the banks. And doing them side by side to look and start realizing that we had a handful of coils that were. pledge to both banks. So out of curiosity, how much was that slab and the coil's worth? And the reason I ask is because this seems like a lot of work and very granular. High 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 paperwork, the least bureaucratic price. And process to go through because this all seems like quite a lot. Yeah, this, the value of the slabs is a few hundred bucks a ton and then they were, when they were rolled into coils, they were added value at that point. So you add on another hundred bucks a ton. I'm certainly not a steel pricing expert, right? But that was just to give you an approximate value. But, you know, Tracy, we're seeing, just on your question, right, we're seeing banks that bailed

out of commodity trade finance because of these problems. A.B. and Amro, B&P 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 traders, 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 sill disaster, right? Oh, yeah. using the word disaster there. Yeah, because I don't think of that in the same category.

So how is green sill fit into the story? And green still pretty basic, it boils down for the most part to an entity, green sale capital that was too close with one of the steel producers. They were financing trades that involved the steel producer, the bank that the steel producer owned was heavily involved in that. It was trade receivables, right? It was trade receivables based on- But also future sales.

Oh, right, yeah. So, insulating their future sales and borrowing against them. And now you don't even have anything to secure that sale. Right, okay. And fake invoices that were presented to Greensell to finance, and Greensell was backed by Credit Suisse, and we know where Credit Suisse is out these days. So none of this worked out well for-

The number of ratings. Credit Suisse stepped on over the year. Yeah, exactly. I mean, this was one of, you know, massive, you know, massive strike against against the bank. And of course, now look where they are, right? And it's merged into EBS. But, you know, this was a situation. As Marka mentioned, the future receivables, which was never made clear to Credit Suisse and their investors in the funds that were backing Greensill that they weren't financing physical sales. They were financing theoretical sales. I mean, when you read what transpired there. I think 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 any stretch. Yeah, 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 in the news and becomes a scandal that we talk about once every two years, that it must be like a big enough challenge for the industry that some banks like this is not worth. If you talk about like, how big are we talking about here? Yeah, we've seen, you know, with AB and Amaro and B&P Paraba getting out, they were two

major, two banks that had a major presence in the physical commodity, physical commodity trade. So it's left banks that are left in it, I-N-G, Rabobank, Brown Brothers Harriman here in New York, of course, JPMorgan Chase and so forth, but it's left a dwindling number of banks that have the appetite for getting involved in physical commodity trade finance in this way. Look at what happened with on the Traffigura, part of this story, and certainly again, not an expert in exactly what happened, but Citibank bailed out of financing those nickel trades with that particular supplier. I think it was about a year before, maybe before the problem became evidence.

So there must have been some red flags that were coming up and city was keen enough to be able to extract themselves from that prior. That left Trafagora in a situation where we saw they went to 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 company money that ended up getting caught up in the mess at this point too. So it leads to the question of if a major company like Trafalgarra 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? Why? 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 with less lenders and less participants in the field, right, it's concentrated that risk into a smaller group of entities that are willing to banks, the financiers that are doing this type of this type of business. So I think that there's some credence to that. But it ultimately goes back still to the quality, right? If we're talking about financing

aluminum coming out of Alcoa smelter, it's not quite the same. as what Trafiguera got got hooked into or the problems with the, you know, fake copper, painted bricks and so forth. This was not, this metal was not coming out of a, out of, you know, an Elkoa, Rio Tinto level of producer and counterparties. So the minute you're 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 risk management.

And I think that's really where the problem is where we see regularly not that desire to go as far as they need to. They say abs are made in the kitchen. Cool, but who has time for three hours of meal prep and a fridge full of Tupperware? That's why I started using Factor. Factor delivers fresh, never frozen, ready to eat meals that are dietitian designed for balanced science-backed nutrition. No prep, no cleanup. Just heat, eat, and move on. I've got gym days, work days, super long days, and Factor keeps me on track without slowing me down. It's real food,

great flavor, and the kind of meals that actually support the work I'm putting in. We're talking chicken pesto, steak with veggies, roasted salmon, meals that feel like they were cooked for you, not by you. So, yeah, abs might be made in the kitchen. But thanks to Factor, I don't have to be in the kitchen. Right now, get 11 meals, free shipping and free sides for life. Hurry, this offer won't last long. Go to factormeals.ca and use code fuel. That's 11 meals, free shipping, and free sides for life,

but only with the code fuel at factormeals.ca. Factor, Canada's number one ready-to-eat meal delivery service. Thinking about buying the right home, but not sure when? What if you had the right design, the right lot and finishes at the right price? Not someday, but right now. Register at Democrathomes.com and get everything. you want right now. Can we talk about gold?

The internet loves the occasional story about gold theories. Like all the gold. Gold conspiracy theories. Yeah, all the gold that's in Fort Knox is actually a brick and is painted. No one is inspected in 50 years. You know, you just like see this constantly, constantly. What kind of regular inspections are? A, is there a 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 how is a gold inspected? Yeah. Gold is not something that we get involved. We don't get involved in precious metals. So caveat with that, that being said, what are the inspection companies that we work closely with? They have to fly somebody down to the Cayman Islands every once in a while to go into the bank vaults and check out the gold stockpiles. Doesn't it? I thought that was fantastic too. Anton's applying. Yeah. He likes the Cayman Islands. I love Kaman.

I just wanted 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, 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 IMF like sells gold to another entity, like the gold is put on a like a.

Yeah, what is pallets. Yeah, pallet. They just put them around. Yeah. But anyway, I was like standing. standing next to the gold and I like sort of scratched a little bit of it myself. And a couple pieces of dust like fell and I like sort of freaked out. But then he put it in his pocket.

No, it didn't. It didn't go on the floor. But I was like, oh, like that gold is something. That must be a federal crime. Yeah, I was like, yeah. I was just like, I was just like, I just like, statute of limitations has expired. This is true.

This is true. A few little pieces of dust felt through. I sure if we got freaked out that that was even possible. So somewhere there was a golden gift with just like a little, I don't know. Anyway. Yeah. Statue of limitations. Yeah.

I was freaked out. I didn't take anything. That's fantastic. Yeah, we see them pulling movies, right? Pulling the gold around in these big pallets with these pulleys. And not to dive too deep into gold because it's not our area of expertise, right? But same principles, right? If you're flying down to the Cayman Islands and you're going to inspect gold in this story, in this particular case, one of the major global banks that was financing,

the gold there in a vault in the Cayman's. I'm not sure what level of how far they took, they way. 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. Yeah. Oh, what is on the table? You brought props. Yeah, I thought we were going to, yeah, what is, so we. Exactly. What is, 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 a count and is only one step in a process. Well, actually, you brought a couple more. And so I guess part of the story could be you sample this one or this one, but not that one. Like how common is stuff like that? Because that actually is not that different from even conceptually the salad oil scandal, right? Which is like, you have this layer of something legitimate. So talk to us a little bit about. out 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.

It's kind of exactly what you said. You make those outer layers look to be the right material. Yeah. 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 there broken down and pull out all of them and I want to look inside the bags in the middle. Don't forget about the middle. That's where we all, you know, it's like the middle of the mashed potatoes where you hid your vegetables as a kid. I'm envisioning like a movie in which someone is convinced there's a fraud and just goes through this like and just tearing up bag after bag and still like they're all the james. Well, they slowly go insane. And then they slowly go and say 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.

And warehouseman doesn't carry it, but certainly whoever is perpetrating that potential fraud. I think this goes to what Margo said earlier, too, about the repetition, the comfort, right? If the inspector that flies 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. Someone that has ulterior motives can 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 you. your example of the steel slabs. What happened after you discovered that? Do you start talking to the counterparties? Do you make a claim for 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 very well. The favored counterpart. 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. Yeah. Some bank favoritism to play that. Yes, yes. So 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. And, but, but, 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 a bit of the corrective action for the checks and balances. Let's make sure they're there. It's where they say it is and it truly exists.

After Margo would identify, I think it might have been the second time that it happened, because it wasn't just once, the larger, larger bank, the first time I ever heard the phrase, the derisking team got involved and they withdrew themselves. The de-risking, that's when you know you're in trouble when the de-risking team is involved. Exactly. It thought the same thing. Like, Margo, just said that the de-risking team is extracting. I'm imagining like a SWAT team that just like comes in through the windows. Yeah, it's a military action, right? And they come in. It never ends well for you. But yeah, that bank wound down their involvement in that trade after Margot's discovery,

which was the right thing to do is just getting sloppy, you know, at that point. Can you talk a little bit about liquids and just even 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 are liquids still tricky? to verify in some cases.

Liquids are not an area that were involved. Got it. So 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 ships officers, merchant marine officers. So we had our time learning in school about taking samples in a tanker and so forth with so forth.

But I don't think that there's anything. It's still the same basic principles of representative samples, not just going to the top layer, but doing a thorough inspection and having and also vetting of the facility that's storing it, ensuring that that facility is vetted properly and that the ownership and the management and the procedures are tight and intact and the 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 may. 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 trade receivables. That must be a thing. But what kind of advancements are people talking about? As you said, right, certainly the ability to use drones to measure physical dry bulk stockpiles is an advancement. It gives a far more accurate picture of 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 as materials withdrawn. The blockchain and electronic bills of lading, right, and so forth, it all helps. But still, it goes back to Trafalgarra, right? all of the paperwork was perfect. So the paperwork, whether it flew, whether it moved via blockchain or went via FedEx, it was still perfect. The metal wasn't, right?

So blockchain's not going to prevent that. It might catch some other problems. Garbage and garbage out, right? Exactly. You can just track it better. You can track the garbage better. Track the rocks better. What about even more basic solutions?

And I'm sure there's a really obvious. 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 they, you know, making noises about we're going to start doing things maybe slightly differently in order to avoid all of that. Who are talking about this term right? I mean, 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 aware. They know they can't guarantee. Right. I'm warehousing this is copper, but I'm not a metallurgist. I have 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 24 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. Yeah. 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 approaches on that liquid versus hards 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 going to 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 where there's like soybeans. or corn or something like that would be my guess. But I guess for like the ones 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 of time. The warehouse has this. And you as a participant on one side of the trade rent time, I guess, from the warehouse for

that inspection. Is that basically how it works? And so like to transact in 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 when 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 higher costs for storing higher value. The risk is higher. The incidence of theft are higher, you know, with those type of commodities. So yes, there is going to be more costs in dealing, dealing 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 nickel apparently. Yeah. Copper also has been a big, big one, right? Yeah. Something that's higher value. So that's what piques 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 enough and it's really big and heavy. So people don't move it. Unwieldly, right? Small and expensive.

is where you want to go. Exactly. Gold bricks. Precious jewels. They're classic for a reason. Exactly. 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 or 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 weren't even into the belly of the beast yet. 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. It makes 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.

Can you walk through the mechanics of why does too much water reduce toe size? We end up with the water is moving too fast in 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 the towboats had to navigate little water in so many places.

They couldn't take the big toes. And they couldn't be filled up as much, right? Right. Yeah, we had to have them really, really light. A typical toe, like on the main line, tow on the river would be tugboat pushing. It's been he's like 30 bar. So it gives you a perspective, right?

So reducing that from a 30 barge. Yeah. So we are over that hump now. We're getting back into normal flows and more normal 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 Mississippi River, so north of St. Louis like up toward up through up to Minneapolis. So, you know, that'll get back to normal.

But, yes, it's low water. High water. Is it ever the perfect? What's the perfect level of water in the Mississippi for the barge business? Oh, my goodness. I don't know. It happens like twice a year. I don't know where a moment that's going to happen this year.

Fair enough. All right. Well, Anton and Margo, we really appreciate you coming back on all thoughts. Thank you so much. That's fun. We appreciate in rocks, too. Always fun. Yeah.

Thanks so much. Thank you so much. So Joe, I really enjoyed that conversation. I got to say, I feel like we need to do an odd lots on location where we follow the guy who's 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 even goes back to some of our conversations that we had with Javier Blas last year. Like it's sort of like commodities seems very uncorporate compared to the rest of the finance industry. And this is like another reminder of that. Totally. And it's kind of weird when you think that it's the basic building blocks for so much of our world. And yet it still seems to be this sort of like, I'm going to mix my metaphors here, but swashbuckling wild west. Piracy, gray areas, all of these things in which like you just sort of assume that like large corporations would have like squeezed all that out. 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 counterparties, use warehouses with very stringent risk control measures. And yet that also seems extremely time consuming and expensive and bureaucratic. So 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 LME, you just don't expect it to have any issues. 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 gold in Fort Knox and you scratching it and say you didn't accidentally touch it. You were checking. I was checking. I was checking. I was checking. Did everyone a service? I have confirmed for everyone that at least one gold bar that was in the basement of the New York Fed in 1998 when I took a field trip there was real gold. Public service, not crime.

I have done my part. I have done my part. Thank you. 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 Alloy. You can follow me on Twitter at Tracy Allo. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. follow our producers on Twitter, Carmen Rodriguez, at Carmen Armin and Dashel Bennett at Dashbot, and check out all of the Bloomberg podcasts under the handle at podcasts. And you can stream Bloomberg Originals on Apple TV, Roku, Samsung TV, and more, and tune in on Bloomberg TV at 10 p.m. Eastern.

And for more Oddlots content, go to Bloomberg.com slash Oddlots, where we have a blog, we post our transcripts, we have a weekly newsletter, and we have a Discord where you can go check. 24-7 with other Odd Lots listeners. It's really fun. Discord.g.g. slash oddlots. Go check it out. Thanks for joining. Thanks for watching. Thanks for listening. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines, in-depth analysis, and big interviews.

All the stories that hit home on your days off. I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context examining what happened in the markets and the world. That on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting

at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart radio app, Apple podcast, or wherever you get your podcasts.