A Senate subcommittee chaired by Sen. Sherrod Brown is investigating whether big banks are controlling the price and supply of physical commodities at the expense of the taxpayers who paid for the 2008 bank bailout.
At issue are bank holding companies – offshoots of Wall Street banks – that own physical commodities such as aluminum or oil. A 1956 law limited bank holding companies from engaging in commercial activities, but a 1999 law, combined 2003 regulation and other series of loopholes, changed that.
At a hearing of the Senate Banking Committee’s subcommittee on Financial Institutions and Consumer Protection Tuesday, Joshua Rosner, managing director of Graham Fisher & Co., said since 2003, the government and central bank have allowed an “unprecedented mixing” of banking and commerce.
The result could be that the next banking collapse impacts not only banks, but pipelines, electrical generating plants and other assets not thought to have anything to do with banking.
“Regulators remain unprepared,” he said. “Appreciate how difficult it is to oversee a bank holding company with $2 trillion in assets and businesses in 160 countries. Now add oil tankers, coal mines, electrical generating plants and zinc warehouses.
“As we’ve seen, even top bank managers can’t keep track of everything a big bank does. Before you know it, $ 6.2 billion is gone and the reputational damage is irreparable.”
Tim Weiner, global risk manager of commodities and metals for MillerCoors, the U.S. beer company, said his company has felt the effects firsthand. He said the aluminum used for cans is being held up in warehouses controlled and owned by U.S. bank holding companies, in some cases for up to 18 months. The company will buy aluminum, but then have to wait until the warehouses release the metals. “This does not happen with any of the other commodities we purchase,” he said.
“Just imagine a huge door marked ‘in,’ and a tiny door marked ‘out’,” he said.
Complaints about the issue led the Federal Reserve to announce it’s reviewing the ruling that allows banks to deal in physical assets such as metal and oil. The Commodities Futures Trading Commission may also be investigating, according to Reuters.
But some defend the practice. Randall Guynn, head of the financial institutions group at law firm Davis Polk & Wardell LLP, said that banks have “ancient roots,” with grain and salt being among the first forms of money in ancient Mesopotamia, Egypt, China, Japan and even the colonies that later became the United States.
“U.S. banks and other financial institutions have long been actively involved in the physical commodities markets,” he said.
He said while some – such as Rosner – believe that there’s risk to the economy, others, including Congress and the Federal Reserve, concluded otherwise.
“The benefit of allowing financial holding companies to engage in physical commodities activities were likely to outweigh their potential adverse effect,” he said.
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