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WASHINGTON/NEW YORK (Reuters) - Goldman Sachs Group Inc on Thursday took the lead in rejecting allegations by a U.S. Senate subcommittee that Wall Street banks were exploiting physical commodity markets to manipulate prices and gain unfair trading advantages.
In an often heated hearing before the Senate's Permanent Subcommittee on Investigations, Senator Carl Levin pressed bankers and executives on whether the company had inflated physical prices and curbed supplies of aluminum, adding billions of dollars in costs for consumers such as the U.S. Navy and beverage can makers.
Chris Wibbelman, president and chief executive of Metro International Trade Services LLC, the metals warehousing firm Goldman bought in 2010, defended his company's actions, saying it plays by the rules and contributes jobs to the Detroit area.
Levin, who chairs the subcommittee, directed many of his questions to Wibbelman and appeared frustrated at his testimony.
"Let me refresh your recollection," Levin said to Wibbelman in reference to a question about a business contract. After the Michigan Democrat read the document, he turned to the Metro CEO, raising his voice and said: "Does that help your recollection?"
The five-hour hearing followed the release on Wednesday of a detailed 403-page report that criticized how banks purchased and exploited huge commodity stockpiles.
The public airing of concerns about bank ownership of physical commodities and assets from pipelines to warehouses has renewed scrutiny of Wall Street's role in the market.
"This is clearly another case of putting banks on the defensive ...," said Michael Philipp, attorney and partner at Morgan Lewis's Investment Management and Securities Industry Practice in Chicago.
"I think this potentially puts pressure on the Federal Reserve, who has the power to permit banks to engage in physical commodities."
The session continues on Friday with officials from the Federal Reserve and U.S. power market regulators.
Experts agreed that the sessions may not have much impact in the long term.
The Federal Reserve has already signaled its intent to pursue regulation of banks and commodities. JPMorgan Chase & Co and Morgan Stanley, which also testified on Thursday, have both made major moves to get out of physical commodities.
Goldman was under particular scrutiny because it has maintained that commodity trading is core to its business, though it is in the process of selling Metro.
The hearing room was packed with bankers, lawyers and journalists. Star lawyer Abbe Lowell was there as well, retained by Goldman to assist with the two days of testimony, a spokesman for the bank said.
The hearing and report stem from a two-year investigation by the subcommittee into banks and their influence on commodities that shed light on two areas: the Fed's concerns about weakness of banks' ability to withstand a major catastrophe and Metro's multimillion-dollar payments to maintain long wait times and bolster income.
"If you like what Wall Street did for the housing market, you'll love what Wall Street is doing for commodities," Levin said in his opening remarks.
Republican Senator John McCain of Arizona, a member of the subcommittee, said Wall Street banks have taken "excessive risk, raised suspicions of market manipulation and gained unfair trading advantages" through their expansion into physical commodities trading.
Aluminum warehousing was in the spotlight after the report, based on 90,000 pages of bank and regulatory documents as well as 78 interviews and briefings, detailed six so-called "merry-go-round" deals that Levin said caused bottlenecks at Metro's Detroit warehouses.
Levin said longer queues led to rising physical premiums: "There's no doubt these six deals that you welcomed as a warehouse and Goldman approved had a direct influence on the length of queue," he said.
In questioning, Wibbelman said he was offering deals to customers according to the business climate.
About 80 percent of metal stored in Metro warehouses in and out of the London Metal Exchange's vast network is not subject to any queue and may be purchased by a customer through negotiations with the metal owner, Wibbelman said.
"There simply is no lack of availability for aluminum."
MillerCoors LLC, the U.S. arm of Molson Coors Brewing Co and SABMiller, has accused warehouses and their owners of inflating the prices of aluminum, and costing consumers billions of extra dollars annually.
"The investment in Metro was never part of Goldman Sachs' core franchise and has not been integrated into our commodities market-making activities," Jacques Gabillon, the head of Goldman's global commodities principal investments group, told the subcommittee.
Reporting by Michael Flaherty in Washington DC and Josephine Mason in New York; Editing by Bernard Orr, Paul Simao and Steve Orlofsky