A two-year U.S. Senate investigation has concluded that the three largest Wall Street banks have recently engaged in “many billions of dollars of risky physical commodity activities,” causing a dangerous erosion of the traditional line between banking and commerce and exposing themselves to “significant” financial losses.
In a 403-page report on the commodity activities of Goldman Sachs, Morgan Stanley and JP Morgan Chase since 2008, the Permanent Subcommittee on Investigations said the banks have compiled huge commodity inventories, participated in outsize transactions and engaged in commodity-related businesses that “carried potential catastrophic event risks.”
“The United States has a long tradition of separating banks from commerce,” the report says. “The subcommittee’s case studies show how that tradition is eroding, and along with it, protections from a long list of risks and potentially abusive conduct.”
Among the banks’ activities, the panel cited Goldman’s acquisition of a uranium business that “carried the risk of a nuclear incident, as well as open-pit coal mines that carried potential risks of methane explosions.”
Earlier this year, the Federal Reserve indicated it was considering issuing a new rule-making to address the risks to the financial system caused by bank involvement with commodities. But the Senate report said the Fed has so far “taken insufficient steps to address” the problem.
The banks’ activities “could result in losses that exceed bank capital reserves and insurance coverage and thereby threaten the stability of the financial system,” committee chair Sen. Carl Levin told reporters Wednesday.
At a Senate hearing Thursday, Goldman Sachs executives denied that the bank’s aluminum business improperly influenced prices and that the firm’s traders had unfair access to commercially valuable nonpublic information.
But according to Bloomberg, Sen. Levin called Goldman’s transactions “merry-go-round deals” that had little other purpose other than moving aluminum around from warehouse to warehouse to influence how much customers paid for storage and financial products related to the metal.
In the case of Morgan Stanley, the Senate investigators found that its “oil storage and transport activities gave it access to information about oil shipments, storage fill rates and pipeline breakdowns” and that its effort to construct a compressed natural gas facility was “unprecedented for a bank or bank holding company.”