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US Banks Reprimanded for Influencing Commodities Prices

08 December 2014  |  2154 views  |  0

Wall Street Banks Usurp their Power to Unduly Influence Commodities Markets!

A two-year probe conducted by Republican and Democrat lawmakers from the Senate Permanent Subcommittee on Investigations has found several US banks culpable of major violations in the commodities markets. The report determined that some of the biggest banks, including Morgan Stanley, Goldman Sachs and J.P. Morgan Chase & Company stockpiled massive volumes of inventory in commodities like copper and aluminum. Beyond stockpiling inventories, these banks gained significant advantage over the financial system by participating in coal production, uranium and other volatile businesses. By participating in these activities, the banks jeopardized the entire financial system. By exceeding their permissible limits on commodity holdings, these banks went beyond their traditional business operations and engaged in highly risky activities that placed tremendous risk on these banks.

Oversight of Banking Activities on Commodities Markets

Lawmakers expect the Federal Reserve to make a decision to restrict the role of Wall Street in the commodities markets. The Federal Reserve Bank Governor Daniel Tarullo testified before the committee on Friday the 5 December 2014. As yet, there has been no comment forthcoming from the Fed. Representatives from the banks named in the report claimed that they do their best to minimize risks in all their commodities dealings. The banks denied usurping their power to gain an advantage in the markets. However, Morgan Stanley, Goldman Sachs and J.P. Morgan Chase & Company have subsequently reduced their commodities holdings in the wake of the ongoing investigations. The Senate Permanent Subcommittee on Investigations charges the Fed with not doing enough to prevent the banks from stockpiling commodities. Banks like J.P. Morgan currently holds assets well beyond permissible limits. At last count the bank’s commodities were listed at $17.4 billion back a few years ago (2012).

The Senate report also found that banks circumvented the 5% commodity holdings limit by finding inventive means of acquiring more commodities. Additionally, the report found that the Fed was unaware how many commodities were being held by the banks. Some of the methods used by the banks to hide their holdings of copper, aluminum and other commodities were definitional. Instead of defining assets like copper correctly, they defined copper as a precious metal which is clearly a misnomer. The reason that the banks categorized copper as a precious metal was to circumvent the 5% rule. The banks also maintained increased commodities holdings by assigning them to subsidiary companies and not holding them directly through the parent company. A big part of the problem with the banks is that they were not held to account in terms of capital requirements for their commodities trading. Without those measures in place, banks can easily put themselves and their clients at risk when they dabble in volatile commodities markets. At one point, Morgan Stanley held enough barrels of oil to power the entire US economy for 72 hours. Another important issue that the Senate report highlighted was that of the banks being involved in businesses that have nothing to do with their traditional operations. Changes to the commodities trading policies of Fed are underway, but no information is available as yet whether the Senate report’s recommendations have been heeded.

Bipartisan Effort Takes Wall Street to Task

Both the GOP and the DEMS are of the opinion that the Senate report provides clear evidence that something big has to be done to control Wall Street’s involvement in the commodities markets. A dual strategy has been suggested: diminishing Wall Street’s trading activities with tougher regulation and the implementation of control mechanisms to oversee the banks’ involvement in the markets. As far as the actions of the banks are concerned, everything has been deemed above board. In other words, no laws have been broken according to Senate insiders. However, that does not mean that loopholes don’t need to be closed or that oversight measures are currently inadequate. At this time, no matters have been referred to any law enforcement agencies for further processing. The main issues that legislators see pertain to the risks that these big banks place on the financial markets. Since banks are effectively toying with supply and demand, they have the power to manipulate market prices via supply and demand. By increasing the volatility in the markets, they are paving the way for increased profits for themselves.

 

Coffee Beans and Commodities Prices TagsTransaction banking

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