After JPMorgan Chase & Co. (NYSE:JPM) announced its plans to exit physical commodities, attention is turning towards Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS).
Last week, JPMorgan Chase & Co. (NYSE:JPM) announced its plans to exit the business of owning and trading physical commodities after a U.S. Senate panel questioned whether banks are abusing their ownership of raw materials to manipulate markets.
David Sheppard of Reuters reports that following JPMorgan Chase & Co. (NYSE:JPM)’s recent announcement, the spotlight has now been focused on possible future actions of Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS).
Goldman Sachs focus of recent Senate inquiry
As reported earlier, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection, led by Ohio Democrat Sherrod Brown questioned whether commercial banks should control oil pipelines, power plants and metals warehouses.
In 2003, Citigroup obtained permission from the Federal Reserve to allow Citi’s Philbro unit to continue trading in physical energy markets. After Citigroup Inc. (NYSE:C) obtained clearance from the Federal Reserve, over a dozen other banks sought similar permission. After the financial crisis, Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) have also been subjected to the rules under the Bank Holding Company Act.
Goldman Sachs and Morgan are known as ‘Wall Street Refiners’
Reuters recently obtained letters exchanged between the banks and the Federal Reserve under the Freedom of Information Act. These letters indicate that both Goldman Sachs Group, Inc. (NYSE:GS) and Morgan are in discussions on conforming or divesting physical activities.
David Sheppard of Reuters says Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS), popularly called the ‘Wall Street Refiners’ have some advantage over JPMorgan Chase & Co. (NYSE:JPM), as their long history of operating in physical commodities as less regulated banks may provide them with ‘grandfathered’ ownership of physical assets.
However, David Sheppard reports that with just two months before a five-year deadline to expire for these two banks to conform their business activities to the Bank Holding Company Act, there are signs the Federal Reserve is still reviewing this position.
Goldman disposed; Morgan entrenched
David Sheppard notes Goldman has already disposed of many of its physical trading assets it owned in 2008, including last year’s sale of its power plant business Cogentrix to Carlyle Group LP (NASDAQ:CG).
However, Morgan Stanley (NYSE:MS) went deeper into physical oil trading, including acquiring its TransMontaigne Partners L.P. (NYSE:TLP) terminal and storage firm, ranked 17th largest by Forbes magazine. TransMontaigne also took up a 42.5 percent stake in a $485 million oil terminal near Houston.
In view of the contrasting situations, it remains to be seen how the ‘Wall Street Refiners’ brace themselves to handle the recent developments arising out of the Senate inquiry.