The U.S. Congress should rein in banks’ ability to own and trade raw materials or risk another financial collapse, Joshua Rosner of Graham Fisher & Co. said at a Senate subcommittee hearing.
“Historically Congress has acted when a few large firms exploited their advantage and sought to control too much,” said Rosner, a bank analyst whose New York-based firm advises clients on investments and regulation in the financial industry. If no action is taken, “we’re destined to view 2008 as the first financial crisis and not the worst.”
The Federal Reserve said last week that it’s reviewing a decade-old ruling that lets banks deal in physical assets like metal and oil, potentially putting commodity units of JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. in jeopardy. A Senate Banking Committee subcommittee is hearing whether laws and regulations that have allowed banks to own, store and transport raw materials are hurting competition and endangering the financial system.
Critics “don’t provide a shred of evidence to support the view that these potential dangers are likely to be realized,” Randall Guynn, head of the financial institutions group at law firm Davis Polk & Wardwell LLP, said at the hearing. “The connection between banking and commodities is not a new development.”
The panel is led by U.S. Senator Sherrod Brown, an Ohio Democrat, who is among lawmakers and regulators who say banks can drive up prices when they control both the physical products and the financing. Senator Jeff Merkley, an Oregon Democrat, said the arrangement may allow banks to “put a thumb on the scale” to influence supply and demand, and bet accordingly.
Banks may get an unfair advantage because they can fund themselves from the Fed and insured deposits, according to some of the witnesses, and Brown said he’s concerned that lenders may be put at risk when volatile commodity markets move against them or disaster strikes one of their operations.
“What do we want our banks to do? Make small-business loans or refine and transport oil? Issue mortgages or corner the metals market?” Brown said at the outset of the hearing. “Taxpayers have a right to know what’s happening and to have a say.”
The beverage industry has complained that banks and other warehouse owners are manipulating aluminum supplies and slowing deliveries to drive up the price. Costs were inflated by $3 billion worldwide in the past year, Tim Weiner, a global risk manager at brewer MillerCoors LLC, told the panel in prepared remarks.
Goldman Sachs, the most profitable Wall Street securities firm before the 2008 financial crisis, posted a rebuttal to some of the criticism on the company’s website. The firm noted that about 95 percent of the aluminum used in manufacturing comes from producers and dealers outside the London Metal Exchange warehouse system in which banks participate.
The 10 largest Wall Street banks generated about $6 billion in revenue from commodities in 2012, including $1 billion from dealings in physical materials, according to data from analytics company Coalition. Goldman Sachs ranked No. 1, followed by New York-based JPMorgan.
Morgan Stanley, Goldman Sachs and JPMorgan are the biggest Wall Street players in physical commodities. Goldman Sachs held $7.7 billion of commodities at fair value as of March 31 and New York-based Morgan Stanley had $6.7 billion, according to regulatory filings. JPMorgan had $14.3 billion in physical commodities as of March 31, according to a filing.
None of the banks disclose how much revenue or profit comes from commodity trading or break out the contribution from physical assets.
“My point is we really do need to get more specific data, more specific information,” Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill, said at the hearing. Allowing banks to control raw materials “has enormous implications for the rest of our economy and the rest of our country.”
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