Unlike Goldman Sachs and Morgan Stanley, banks such as JPMorgan and Citigroup had to seek an exemption from the Fed that deemed their physical commodities units complementary to their financial operations. That exemption, granted in 2003, was the first to come under the central bank’s review.
The Fed is conducting the review while U.S. lawmakers and regulators raise concerns that banks might abuse their various roles in commodities markets, such as by coordinating their trading platforms and ownership of materials or energy firms to influence prices and profit. Lawmakers and regulators also have questioned whether large banks integral to financial markets should own commodities businesses, such as oil tankers, in which accidents could undermine the firms’ stability.
“There’s a lot of problems with banks engaging in commodities and taking proprietary positions in commodities,” Senator Carl Levin, a Michigan Democrat, said in an interview. The Permanent Subcommittee on Investigations, which he leads, is reviewing banks’ involvement in commodities.
“Congress should reject the policies that allow for bank ownership and reverse the law,” Bart Chilton, a Democratic member of the Commodity Futures Trading Commission, said in an interview.
JPMorgan, whose commodities units are overseen by Blythe Masters, said in July it may exit businesses. The largest U.S. bank could sell or spin off holdings including warehouses, stakes in power plants and trading in materials such as gas and coal. The New York-based firm said it will continue trading commodity derivatives as well as storing and trading precious metals.
Morgan Stanley, whose commodities business is run by Simon Greenshields and Colin Bryce, owns electricity-generating facilities in the U.S. and Europe and markets electric power in the U.S. It also owns Denver-based TransMontaigne Inc., a petroleum and chemical transportation and storage company, and Heidmar Inc., based in Norwalk, Connecticut, which manages about 100 oil and chemical tankers.
Goldman Sachs, whose commodities trading unit is led by Gregory A. Agran in New York and Magid N. Shenouda in London, owns coal mines in Colombia, a stake in the railroad that transports the coal to port and part of an oil field off the coast of Angola. Spokesmen for both firms declined to comment.
After the Fed granted Goldman Sachs and Morgan Stanley the right to convert into banks in September 2008, the firms got five years to divest any non-financial businesses that didn’t comply with the Bank Holding Company Act. That deadline raised questions about whether the companies will be allowed to keep their physical commodities businesses.
Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill, said the five-year grace period to convert non-financial operations “strongly implies the Fed has to make that determination.” She wrote a draft report last year on banks’ roles in commodities and shared it with lawmakers.
“It would be really wise of the Federal Reserve to be more forthcoming on their thinking, their decision,” she said in an interview. “It is just frustrating that with all this public attention, the Fed feels impervious to that pressure, to just ignore.”