Wall Street's Commodities Profit Threatened As Federal Reserve Launches Review

The Federal Reserve said late Friday it is revisiting a landmark ruling that allowed big banks to enter the lucrative commodities business, raising the specter that banks may be banned from the highly profitable activity.

Goldman Sachs, Morgan Stanley, JPMorgan Chase and other large financial institutions have the most to lose, given their revenues from investing in and trading commodities, such as oil and aluminum. Representatives for the three banks declined to comment.

The Fed's statement follows a Huffington Post story this week that detailed how a coalition of beer brewers, automakers, Boeing and Coca-Cola has accused big banks, including Goldman and JPMorgan, of anti-competitive behavior in the aluminum market, fueling regulatory concerns on both sides of the Atlantic. The allegations also have prompted a Senate probe into Wall Street's expansion into the commodities business, as concerns multiply over whether the broader economy is being hurt by banks using important raw materials for trading.

"The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies," the central bank said in a one-sentence statement.

That 2003 ruling, which involved Citigroup and its Phibro commodities trading unit, ushered in a decade of bank-friendly rulings from the Fed that allowed an increasing number of large financial groups to enter and dominate commodities trading. Approved in part by then-Fed governor Ben Bernanke, who now serves as chairman, the ruling allowed bank holding companies for the first time to trade physical commodities.

In the following years, bank revenues from trading commodities soared, fueled by increasing global demand led by emerging markets such as China and India that required more oil, metal and other raw materials. Ten leading global banks have generated nearly $50 billion off their commodities business over the last five years, according to Coalition, a financial data provider.

JPMorgan, Goldman and Morgan Stanley last year were the top three global banks in commodities revenue, Coalition said. Ten major banks generated some $6 billion in commodities revenue last year.

In a sign of its influence on bank balance sheets, Gary Cohn, Goldman president and chief operating officer, said in May: "Many more of our clients today have commodity exposure than they ever had before, or they ever realized they had."

"It's important to our business," Cohn added.

But banks' involvement in the commodities trade has angered some of their customers, who argue that some banks are manipulating markets to boost their own profit.

Sen. Sherrod Brown (D-Ohio) is scheduled to convene a Senate Banking Committee hearing on Tuesday during which MillerCoors and experts critical of banks' involvement in physical commodities activities and infrastructure assets such as storage facilities and pipelines are likely to rail against banks like Goldman and JPMorgan, which own large warehouses that store aluminum and trade derivatives contracts tied to commodity prices. Randall Guynn, a prominent financial services attorney at law firm Davis Polk & Wardwell, is set to represent financial groups.

The issue MillerCoors is set to highlight involves bank ownership of metals warehouses, where companies such as MillerCoors store aluminum for beer cans. In recent years, industrial companies have complained about long waits to move their aluminum out of warehouses to plants, or to settle contracts with purchasers of the metal. The waits have led to lucrative rental income for the banks that own the warehouses.

Bart Chilton, a Democratic commissioner on the Commodity Futures Trading Commission, said earlier this week that he was "becoming increasingly concerned that prices are being impacted by warehousing bottlenecks."

"We need to work to ensure that markets are fair and that prices are based on supply and demand fundamentals," Chilton added.

The showdown over aluminum between industrial companies and Wall Street comes as some Fed officials worry about banks' involvement in activities like storing and transporting physical commodities. The Fed has broad authority over banks' activities, and researchers at the Federal Reserve Bank of New York, citing news reports, previously have speculated that the Fed may crack down.

Officials familiar with the Fed's supervision of financial groups have said the agency is struggling to figure out how to oversee such businesses, given that they are not a traditional banking activity.

Lawmakers have taken note, and a group of House Democrats wrote the Fed last month asking the regulator whether it could properly oversee commodities activities.

In addition to its review of its 2003 decision, the Fed also is weighing whether to allow Goldman and Morgan to continue operating key commodities businesses involving storage units, tankers, pipelines and other activities. The two banks received an exemption in 2008, when they converted to bank holding companies at the height of the financial crisis. The exemption is scheduled to run out in autumn.



President Obama Drinking Beer