Senate Report Criticizes Goldman and JPMorgan Over Their Roles in ...
A two-year Senate-led investigation is throwing back the curtain on the outsized and sometimes hidden sway that Wall Street banks have gained over the markets for essential commodities like oil, aluminum and coal.
The Senate's Permanent Subcommittee on Investigations found that Goldman Sachs and JPMorgan Chase assumed a role of such significance in the commodities markets that it became possible for the banks to influence the prices that consumers pay while also securing inside information about the markets that could be used by the banks' own traders.
Bankers from both firms, along with other industry executives and regulators, will testify about the allegations at hearings on Thursday and Friday.
The hearings will cover everything from the conditions at a Goldman-owned coal mine in Colombia to the airline fuel arrangements that Morgan Stanley struck with United Airlines.
The report provides an unprecedented level of detail about the enormous global operations the banks have built up in recent years since politicians and regulators lifted long-time curbs on banks owning physical commodities and infrastructure.
The investigators found that regulators have struggled to respond to expanding ambitions of the banks to get involved in every aspect of the production and sale of commodities.
Some banks, including JPMorgan, have recently been pulling back from the commodities markets, partly in response to the public scrutiny of the activities and partially due to the shrinking profits in commodities businesses. But Goldman Sachs, and some others have stated a desire to maintain their roles.
The chairman of the Senate subcommittee, Carl Levin, Democrat of Michigan, said that the current rules were not adequate to stop the problems.
'We've got to get banks out of this kind of business because of the risk to the economy and the possibility of manipulation,' Mr. Levin said in an interview on Wednesday.
The 400-page report made public on Wednesday evening included case studies on nine different commodities in which banks have taken big positions, including the 100 oil tankers and 55 million barrels of oil storage that were owned by Morgan Stanley, and the 31 power plants owned by JPMorgan at one point.
The subcommittee discussed several reasons that these commodity operations could create problems. The potential for price manipulation and the unfair advantage that banks can gain in these markets were among the top concerns expressed by Senator Levin and Senator John McCain, the top Republican on the subcommittee.
But both senators also echoed previous warnings that the the enormous holdings of oil, uranium and other hazardous materials could expose the banks to significant legal liability that could, in turn, lead to runs on the banks.
'Imagine if BP had been a bank,' Senator John McCain said on Wednesday, referring to the Deepwater Horizon oil spill that for which BP has had to pay billions of dollars in damages. 'It could have led to its failure and another round of bailouts.'
JPMorgan Chase's payouts started Tuesday when the bank struck a $410 million settlement with a regulator over allegations that its traders manipulated electricity markets.
Regulators have allowed banks to buy companies that trade in commodities, resulting in huge profits for the banks and higher prices for consumers.
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