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 today.
“Historically Congress has acted when a few large firms exploited their advantage and sought to control too much,” Rosner said. 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 today 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.
Banks may get an unfair advantage because they can fund themselves from the Fed and insured deposits, according to some of today’s 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.
“There’s a subsidy that spreads out from anything having to do with the protection of too big to fail and deposit-taking in particular,” Harvey Rosenblum, executive vice president of the Federal Reserve Bank of Dallas, said in an interview. “It’s a continued abuse of the federal safety net to the advantage of the large financial companies and to the disadvantage of Main Street America.”
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.
“Existing public disclosure is woefully inadequate to understand and evaluate the nature and scope of U.S. banking organizations’ physical commodities trading and assets,” Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill, said in prepared remarks.