The sub-committee that was chaired by Senator Carl Levin, from Michigan noted that the massive involvement by Wall Street in physical commodities put the American economy, manufacturers and the integrity of the market at risk. The findings of the sub-committee are contained in a 396-page report that will shed light on the ongoing debate about the breakdown of the traditional barrier between commercial activities and banking.
Separation of Banking from Commerce
Some of the details included in the report are the activities of such banks like Morgan Stanley, JPMorgan Chase, and Goldman Sachs. One of the details includes the controversial management by Goldman Sachs of the warehouses that store most of the warranted aluminum in the US. These details are bound to further the debate on whether such activities could harm businesses and consumers and provide a back-door channel for manipulation of the commodity markets.
According to the chairman of the sub-committee, it was time to restore the separation between banking and commerce, and to prevent Wall Street from using non-public information to profit at the expense of industry and consumers.
“Banks have been involved in the trade and ownership of physical commodities for a number of years, but have recently increased their participation in new ways,” said Sen. John McCain, R-Ariz. “This subcommittee’s hearing is an opportunity to examine that involvement, determine whether it gives rise to excessive risk, and identify potential causes for concern that warrant further oversight by Congress and financial regulators.”
Goldman Sachs not Alone
It turns out that it was not Goldman Sachs alone that had been doing this. JPMorgan Stanley had amassed physical commodity holdings that were equal to about 12% of its Tier 1 capital, while declaring far less to regulators. The report also discloses that, until recently, Morgan Stanley controlled 55 million barrels of oil storage capacity, 100 oil tankers, and 6,000 miles of pipeline, while also working to build its own compressed natural gas facility and supply major airlines with jet fuel.
Details are also provided about Goldman’s ownership of a uranium trading company and two open pit coal mines in Colombia. When one of the mines was shut down last year due to labor unrest, Goldman’s Colombian subsidiary requested military and police assistance to end a human blockade — before paying the miners with $10,000 checks to end the protest.
The bipartisan sub-committee made several recommendations some of which are: –
- Federal bank regulators should reaffirm the separation of banking from commerce, and reconsider all of the rules and practices related to physical commodity activities in light of that principle.
- The Federal Reserve should issue a clear limit on a financial holding company’s physical commodity activities; clarify how to calculate the market value of physical commodity holdings; eliminate major exclusions; and limit all physical commodity activities to no more than 5% of the financial holding company’s Tier 1 capital. The OCC should revise its 5% limit to protect banks from speculative or other risky positions, including by calculating it based on asset values on a commodity-by-commodity basis.
- Regulators should strengthen financial holding company disclosure requirements for physical commodities and related businesses in internal and public filings to support effective regulatory oversight, public disclosure, and investor protections, including with respect to commodity-related merchant banking and grandfathered activities.
- The Federal Reserve should establish capital and insurance minimums based on market-prevailing standards to protect against potential losses from catastrophic events in physical commodity activities, and specify the catastrophic event models used by financial holding companies.
- Financial regulators should ensure that large traders, including financial holding companies, are legally precluded from using material non-public information gained from physical commodities activities to benefit their trading activities in the financial markets.
- The Commodity Futures Trading Commission (CFTC) and Securities Exchange Commission should treat exchange traded funds (ETFs) backed by physical commodities as hybrid security-commodity instruments subject to regulation by both agencies. The CFTC should apply position limits to ETF organizers and promoters, and consider banning such instruments due to their potential use in commodity market corners or squeezes.
- The Office of Financial Research should study and produce recommendations on the broader issue of how to detect, prevent, and take enforcement action against all entities that use physical commodities or related businesses to manipulate commodity prices in the physical and financial markets.
What do you think of the behavior of Wall Street bankers? Comment below!
Image from Shutterstock.
Last modified: March 4, 2021 4:41 PM