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Wall Street Banks Face Threat From Restored Commodities Barriers

By Mani
Updated on

The U.S. Senate Banking Committee is set to question today banks’ investments in physical commodities assets.

Wall Street Banks Face Threat From Restored Commodities Barriers

Should commercial banks control oil pipelines?

The Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection, led by Ohio Democrat Sherrod Brown questioning whether commercial banks should control oil pipelines, power plants and metals warehouses, according to a Reuters report.

Last Friday, the Federal Reserve reportedly reviewed the 2003 decision that permitted regulated banks to trade in physical commodity markets.

Citi was the first to obtain permission

In 2003, Citigroup Inc. (NYSE:C) obtained permission from the Federal Reserve to allow Citi’s Philbro unit to continue trading in physical energy markets. After Citigroup obtained clearance from the Federal Reserve, over a dozen other banks sought similar permission.

Normally, banks are prohibited under the Bank Holding Company Act to engage in non-financial activities such as trading in physical commodities. However, banks are permitted to trade in paper derivatives. After the financial crisis, top investment banks such as Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) have also been subjected to the rules under the Bank Holding Company Act.

Potential rebuilding of wall

The Fed’s review of its decision to permit banks to store, transport and trade raw materials signals a potential rebuilding of the wall between banking and commerce.

The top 10 largest Wall Street banks have derived about $6 billion in revenue from commodities in 2012, including dealings in physical materials and related financial products.

Michael J. Moore of Bloomberg feels the move into physical commodities exposed the biggest banks to additional risks and allegations of price manipulation, creating potential legal liabilities and threatening to damage their reputations.

Wrong accusation – Goldman clarifies

Some consumer groups have been critical of the sway that banks can exert on commodity markets by owning key pieces of infrastructure.

According to a Reuters report, big aluminum consumers like MillerCoors are set to tell the Senate Committee that the banks’ control of metal warehousing firms has driven up industry costs by as much as $3 billion.

Following the spate of reports, Goldman Sachs has clarified that the bank holds physical commodity operations as investments including Metro International Trade Services, the warehousing company that the bank bought in 2010. Goldman Sachs indicated that the recent reports have wrongly accused Metro of deliberately creating aluminum shortages and incorrectly asserted that Metro moves aluminum from one warehouse to another to earn more rent fees.

Goldman Sachs Group, Inc. (NYSE:GS) clarified that it is the owners of the metal who direct warehouse operators to dispose of stored metal or transport metal from LME-approved warehouses to warehouses outside the LME system to meet their own needs or objectives.

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