Big banks are threatening the economy by running mines, power plants, oil trains and other commodities businesses, a new Senate report finds.
The report was released Thursday afternoon ahead of a two-day hearing on banks and physical commodities held by the Senate Permanent Subcommittee on Investigations.
The committee, headed by retiring Sen. Carl Levin, D-Mich., details in the 400-page report the far-reaching involvement of big banks into the business of commodities, and concludes that reform is needed to prevent abuse of consumers and the threat of a financial crisis.
Bank involvement in commodities includes Goldman Sachs employees running a uranium business and delivering uranium to nuclear power plants, Morgan Stanley managing an oil transportation and storage network, and JPMorgan Chase running dozens of power plants. The businesses expose banks to unusual risks, the subcommittee found.
“Wall Street’s massive involvement in physical commodities puts our economy, our manufacturers and the integrity of our markets at risk,” Levin said in a statement announcing the report. “It’s time to restore the separation between banking and commerce and to prevent Wall Street from using non-public information to profit at the expense of industry and consumers.”
The report calls for regulators to take a number of steps to limit banks’ involvement in commodities, including by reaffirming the traditional separation of banking from commerce and defining size limits and capital ratios for banks’ commodities businesses.
One main finding of the report is that banks used holdings of physical commodities to “manipulate” financial markets and create profits at the expense of consumers.
In particular, it focuses on Goldman Sachs’ ownership of Metro International Trade Services, a Detroit-based warehouse company that contains the largest aluminum stocks in the United States.
Under Goldman Sachs’ ownership, the report finds, Metro performed a number of complicated moves, involving moving aluminum from one warehouse to another and keeping drivers waiting to receive shipments, that ultimately boosted the price of aluminum. Those maneuvers “have likely added billions of dollars in costs to a wide range of aluminum users, from beer makers to car manufacturers to defense companies that make warships for the Navy,” the report says.
But the report also makes clear that the threats are not just to consumers, but to the financial system as a whole.
Managing businesses such as coal mines or oil transportation exposes banks to catastrophic risks that lie beyond regulators’ supervision, the report finds.
Banks wouldn’t be positioned to withstand the $42 billion loss that BP incurred as a result of the Deepwater Horizon explosion, the report notes, even though they are involved in similarly risky businesses.
The bipartisan report has been two years in the making, and has involved Senate aides scouring more than 90,000 pages of documents from Goldman Sachs, JPMorgan, Morgan Stanley, the Federal Reserve and other government agencies.
Representatives of Goldman Sachs, JP Morgan and Morgan Stanley will have a chance to defend their companies before the committee Thursday.
