WASHINGTON (MarketWatch) — Allowing financial holding companies to have increasing control over physical commodities such as aluminum and oil could give them too much power over producers and manufacturers, several experts told a Senate subcommittee Tuesday.
The Financial Institutions and Consumer Protections subcommittee hearing addressed a recent investigation by The New York Times regarding Goldman Sachs ownership of aluminum warehouses. Goldman says it is not deliberately creating aluminum shortages. Read Goldman’s response here.
The holding companies’ control is raising prices for producers such as MillerCoors, the Coca-Cola Co., and car manufacturers, said Timothy Weiner, a commodities risk manager at MillerCoors, in his testimony. MillerCoors is jointly owned by Molson Coors TAP and SABMiller.
‘These bank holding companies are slowing the load-out of physical aluminum from [warehouses] to ensure that they receive increased rent for an extended period of time,” Weiner said.
But financial companies are not just controlling aluminum warehouses. Copper, oil, energy, solar power and energy warehouses are also largely controlled by big banks, said witness Joshua Rosner, managing director of financial research firm Graham Fisher & Co.
While a 1956 law constrained banks to “banking activities” and restrained banks from owning physical commodities, a 1999 law allowed banks to extend their reach into loosely defined “financial activities,” said Saule Omarova, associate professor of law at University of North Carolina Chapel Hill.
Ohio Democratic Sen. Sherrod Brown, chairman of the subcommittee, said the 1996 change meant “Congress finally tore down the wall. Over the next six years, the rules became looser and looser.”
Rosner said he was concerned that the consolidation of financial power in large banks has been building for years. In 2003, the Federal Reserve allowed Citi to purchase nonfinancial assets, he noted, and in 2005 J.P. Morgan Chase to purchase physical commodities business, relaxing the limitations of “financial activity.”
Commodity assets and activities “raises potentially serious public policy concerns,” Omarova said, advocating for greater disclosure from banks.
But Randall Guynn, a partner in the New York law firm Davis Polk and Wardwell, said this is nothing new and is not against the law. The Federal Reserve did not go “rogue” and the banking activities are not “radical” or unexpected.” Gynn said.
“This has been going on a long time that banks have engaged in various levels of physical commodity dealing,” said Pennsylvania Republican Sen. Pat Toomey, adding that the profitability of commodity handling “might actually diminish risks rather than enhance risks.”
While senators acknowledge that bank ownership of commodities might have some positive effects on consumer prices, they questioned how Congress and the Fed should balance regulations on large banks moving forward.
“These institutions are so complex, dense and opaque that they are impossible to fully understand – the six largest US. bank holding companies have 14,420 subsidiaries, only 19 of which are traditional banks,” Brown said.