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November 19, 2014 10:00 pm

Report blasts US banks physical

commodities operations
Gina Chon in WashingtonAuthor alerts

Bloomberg

Goldman Sachs, JPMorgan and Morgan Stanley exposed themselves to

catastrophic financial risks, environmental disasters and potential market
manipulation by investing in oil, metals and power plant businesses,
according to a Senate report.
The findings of the two-year probe by the Senate permanent subcommittee on
investigations said the banks involvement in physical commodities put them
in the same vulnerable position as BP, which has been hit with multiple
lawsuits and billions in fines as a result of the 2010 Gulf of Mexico oil spill.

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Imagine if BP had been a bank, said senator John McCain, the senior
Republican on the subcommittee. The liability from the oil spill would have
led to its failure, leading to another taxpayer bailout.
A 2012 Federal Reserve of New York commodities team review found that the
three banks and a fourth unnamed financial group had shortfalls of up to
$15bn to cover extreme loss scenarios, the report said. The Fed is
considering restricting banks physical commodity activities.
In addition to potential environmental disasters, the subcommittee said the
banks ownership or investments in physical commodity businesses gave them
inside knowledge that allowed them to benefit financially through market
manipulation or unfair trading advantages.
Executives of the three banks will defend their businesses in testimony on
Thursday before the subcommittee. The banks say they play a crucial market
making role for clients by providing financing, liquidity and hedging
capabilities, while also reducing market volatility.
They also argue that they are not liable for environmental disasters, as that
responsibility lies with the owner or operator of the resources or facilities.
The subcommittees review of Goldman Sachs focused on its Nufcor unit that
trades non-enriched uranium, Metro International Trade Services, a network
of metals warehouses in Detroit, and its coal operations. The bank is in the
process of winding down Nufcor and is selling Metro.

$15bn
Estimated maximum shortfall among four financial groups to cover extreme loss
scenarios

Metro was involved in moving aluminium from one warehouse to another in

what are known by critics as merry-go-round deals, which caused long
queues to take delivery of aluminium and raised prices for consumers and
companies, the report said. The bank also benefited from rental revenue.
It gave Goldman Sachs an inside position, said subcommittee chairman Carl
Levin of Michigan. We simply cannot allow a large, powerful Wall Street
bank to have the power to influence the price of a commodity essential to our
economy, especially when that bank is trading financial products related to
that commodity. We need to restore the separation of commerce and
banking.

In two deals reviewed by the subcommittee, 6,500 trips were made within the
Metro system. Customers such as the brewer MillerCoors, which uses
aluminium in beer cans, claimed the logjams inflated raw materials costs by
billions of dollars. Warehouse owners disputed this.
Gross fair value of physical commodity trading inventories

2009

2010

2011

2012

2013

Goldman
Sachs

$3.7bn

$13.1bn

$5.8bn

$11.7bn

$4.6bn

JPMorgan

$10.0bn

$21.0bn

$26.0bn

$16.2bn

$10.2bn

Morgan
Stanley

$5.3bn

$6.8bn

$9.7bn

$7.3bn

$3.3bn

Source: Consolidated Financial Statements for Bank Holding Companies, FR Y-9C Reports, Schedule HCD, Item M.9.a.(2).

Goldman Sachs also disputed the claims, saying that the owners of the
aluminium direct the moves of those resources from one warehouse to the
other, not the bank. It added that the owners, who are usually hedge funds or
other investment firms, are often taking advantage of different rules
governing the warehouses to reap financial gains.
Goldman said it makes investments in metals but it has strict conflict of
interest policies regarding those businesses and separation from other parts of
the bank.
Goldman Sachs did not engage in improper merry-go-round transactions,
it said. Metro always complied with owner instructions as to the movement of
metal, its activities complied with LME [London Metals Exchange] rules and
did not impact the cost that Americans pay for cans of beer.
The Morgan Stanley case study was based on its natural gas activities, and oil
storage and transport businesses. Until recently, the bank controlled over 55m
barrels of oil storage capacity, 100 oil tankers and 6,000 miles of pipeline, the
report said.
Morgan Stanleys involvement in oil and gas rivalled that of all giant oil and
gas companies, Mr Levin said.
Morgan Stanleys involvement in oil and gas rivalled that of all giant oil and
gas companies
- Carl Levin
Tweet this quote

More than 30 power plants owned by JPMorgan, and its copper activities and
trades were also studied by the subcommittee. Last year, JPMorgan had to pay
a $410m penalty to settle with the Federal Energy Regulatory Commission,
which accused the bank of manipulating energy markets at the expense of
consumers.
JPMorgan said it had sold a large portion of its physical commodities business
and going forward, it will focus those activities on financial derivatives. The
bank added that its commodities business followed all regulations and it also
had a strong risk management programme.
In its report, the subcommittee also criticised regulators for taking insufficient
action to rein in the banks commodity businesses. Federal Reserve governor
Dan Tarullo, who heads regulatory policy, is scheduled to testify in front of the
Senate on Friday.
RELATED TOPICS

US banks,
Federal Reserve USA,
Goldman Sachs Group Inc,
JPMorgan Chase & Co
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