Modern Wealth: The Commodities Shuffle
[In] 27 industrial warehouses in the Detroit area[,] a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.
This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal.
Law professor Saule T. Omarova explains the legal basis for large bank holding companies engaging in such activities:
Historically, one of the core principles of U.S. bank regulation has been the separation of banking from commerce. Several statutes – including the National Bank Act of 1863, the Bank Holding Company Act of 1956, the Gramm-Leach-Bliley Act of 1999, and even the Dodd-Frank Act of 2010 – affirm this foundational principle, which generally prohibits banks and bank holding companies from conducting commercial (i.e., non-financial) activities.
Notwithstanding these statutory restrictions, however, large U.S. bank holding companies – notably, Morgan Stanley, Goldman Sachs, and JPMorgan – have since the early 2000s been moving aggressively into the purely commercial businesses of mining, processing, transporting, storing, and trading a wide range of vitally important physical commodities. And, equally surprisingly, it is virtually impossible under the current system of public disclosure and regulatory reporting to understand the true nature and scope of these institutions’ commodity activities.
Yves Smith notes that Kocieniewski’s article “goes into considerable detail” as to how prices may be manipulated. Apparently the Fed is now “reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.” I hope they carefully consider Omarova’s concerns about this incursion of banking into commerce. Given the FERC’s recent talks regarding accusations of energy price manipulation at JPMorgan, regulators need to look very carefully at BHCs’ influence on commodity markets. As Omarova concludes, “these developments in banks’ activities raise fundamental theoretical and conceptual questions about the very nature and social functions of financial intermediation.”
This is part of a series on troubling practices at financial institutions. Prior posts include:
1. Audit Trails: The Corporate Surveillance We Need.
7. Lies and Libor.