Shocking but true: Wall Street’s too-big-to-fail banks, all backed by the US taxpayer, are big players in the commodities markets. Yep, in addition to their massive commodity derivatives activities, they are also actively engaged in owning, storing, transporting and otherwise playing around with physical commodities, all to maximize profits and almost always at the expense of consumers, i.e., Main Street.
One way to find out more about this is at 10am tomorrow the Senate Banking Committee Subcommittee on Financial Institutions and Consumer Protection will hold a hearing entitled “Examining Financial Holding Companies: Should Banks Control Power Plants, Warehouses, and Oil Refineries?”
The hearing is timely – indeed, overdue – as reports of Wall Street banks manipulating, distorting and pillaging the physical commodities markets have filled the news lately. For example, the New York Times, Bloomberg, and the Financial Times (not once, not twice, but three times) are all reporting that the big banks’ manipulative trading of everything from aluminum and copper to electricity has provoked the ire of manufacturers and regulators alike. The blog Naked Capitalism also has a lengthy piece provocatively titled “How Goldman Made $5 Billion By Manipulating Aluminum Inventories (And Copper Is Up Next)”, which dissects some of Wall Street’s more egregious misdeeds.
How can these so-called banks be doing all this? As Reuters, Bloomberg and others note, in 2003 the Federal Reserve Board (the primary overseer of our nation’s biggest banks) overturned a long-standing tradition of prohibiting banks from trading physical commodities, ostensibly because the banks’ claimed that commodities had all of a sudden become “complementary” to banking. This rationale had long been used to allow banks to trade bullion metals like gold and silver, but was now inexplicably applied to everything from industrial metal to jet fuel. That’s right: jet fuel is supposedly “complimentary” to banking, at least in the warped world of the Fed and Wall Street.
The result was, predictably, massive disruption to those markets, as banks with huge resources and cheaper financing than traditional merchants – yet no real economic incentives to serve the needs of actual producers and consumers – turned the commodity markets into a giant casino. At long last, the Fed appears to be reconsidering its mistake. And the hearing tomorrow should give them a much-needed push in the right direction.