Given it is short work week due to Thanksgiving, this Newsletter focuses on just the two Senate hearings last week: the Banking Subcommittee hearing on regulatory capture at the New York Fed; and, the Permanent Subcommittee on Investigation hearings on physical commodity holdings of the taxpayer backed too-big-to-fail banks on Wall Street.

New York Fed President Under Fire At Senate Banking Hearing: It is hard to overstate the importance and influence of the Federal Reserve Bank of New York on the country’s economy, financial system and the standard of living of America’s families and workers.  It is the first among equals in the Federal Reserve System, which has responsibilities for monetary policy, promoting employment and financial stability.  Proving this, it was at the forefront of the financial collapse of 2008 and the bailout of Wall Street’s biggest too-big-to-fail banks.  Too often, however, the New York Fed appears to view its mission primarily, if not wholly, as promoting and protecting the biggest banks on Wall Street, as confirmed by a number of recent revelations and allegations about supervisory and regulatory practices and deficiencies.

As stated on Bloomberg TV and in a press release, Better Markets’ response to those egregious and repeated failings is to call for an independent thorough investigation of the New York Fed by a Blue Ribbon panel of experts and representatives of the public.  That is one important way to bring a measure of transparency, accountability and oversight to the overly secretive New York Fed.

Another very important way to do that is Congressional oversight, which Senator Sherrod Brown did last Friday at a hearing in his subcommittee of the Senate Banking Committee on “Improving Financial Institutions Supervision: Examining and Addressing Regulatory Capture” where the President of the New York Fed, William C. Dudley, was the primary witness.  Senator Brown, along with fellow Subcommittee Senators Jack Reed, Jeff Merkley and Elizabeth Warren, questioned Mr. Dudley about these matters as well as other regulatory issues. The full hearing can be watched in its entirety here, and highlights of the hearing can be viewed below:

WATCH: Senator Brown Questions The Failed Model Of The NY Fed

WATCH: Senator Merkley Questions The NY Fed On “Too-Big-To-Jail”

WATCH: Senator Warren Questions The Regulatory Practices Of NY Fed

Here is some of the media reporting and analysis on the hearing:

The New York Fed is Criticized on Oversight (New York Times)

Dudley Hearing Shows Fed on Defensive (American Banker)

Dudley’s Awful Metaphor and What it Means for the Fed (American Banker)

The Fed Just Acknowledged Its Too Big To Jail Policy (Huffington Post)

NY Fed Staff Still Too Cozy with Banks, Senate Panel is Told (Wall Street Journal)

Dudley Leaves Senators Unimpressed as Fed Scrutiny Rises (Bloomberg)

Senate Hearings Turn Fiery on Oversight of Big US Banks (Guardian)

Taxpayers-backed Too-Big-To-Fail Wall Street Bank’s Ownership Of Coal Mines, Oil Tankers And Other Physical Commodities Under Scrutiny By The Senate Permanent Subcommittee On Investiagtions: Who knew that taxpayer-backed Wall Street bank Goldman Sachs owned open-pit coal mines in Columbia, traded uranium in London and controlled warehouses full of aluminum in Detroit?  Not many and that’s just the tip of the Wall Street iceberg of ownership of physical commodities.  For example, Morgan Stanley, another taxpayer backed too-big-to-fail Wall Street bank at one point recently owned 100 oil tankers and 6,000 miles of pipelines as well as 55 million barrels of crude oil.  What do any of those activities have to do with banking as traditionally understood and why would taxpayers have to back such activities? 

Those questions and much more were the subject of hearings by the Senate’s Permanent Subcommittee on Investigations (“PSI”), led by Senator Carl Levin (D-MI) and Senator John McCain (R-AZ), which followed a two-year long investigation and resulted in a 400 page report, outlining the findings of the investigation as well as the recommendations, which urge the Federal Reserve Board to put limits on bank ownership of commodities.  At issue is whether the banks’ accumulation of commodities businesses presents unreasonable and potentially catastrophic risks, unacceptable conflicts of interest and market manipulation, and inappropriately cross the line between banking and commerce.  

The hearings are the last of a series of groundbreaking investigations into Wall Street misconduct by the PSI under the stewardship of retiring Senator Carl Levin, who conducted the definitive investigations of Wall Street and the Financial Crisis (Anatomy of a Financial Collapse), JP Morgan Chase’s $7 billion London Whale loss from trading complex CDS derivatives, and the facilitation of off-shore tax evasion by large banks.  The bipartisan hearings featured testimony from executives of the biggest too-big-to-fail taxpayer backed Wall Street banks (Goldman Sachs, JP Morgan Chase, and Morgan Stanley), their commodities customers and counterparties, and regulators from the Federal Reserve Board and Federal Energy Regulatory Commission (FERC).

The first day of hearings featured the questioning of executives from Goldman Sachs and its aluminum warehousing subsidiary Metro International Trade Services that covered a wide range of allegations of misconduct.  Specifically, Senator Levin interrogated the executives about the ways in which Metro may have manipulated aluminum prices by introducing artificial warehousing delays through shadowy deals with other firms like Deutsche Bank and Glencore.  Also at issue was whether Goldman maintains a sufficient “Chinese wall” between its commercial and trading units to ensure Goldman employees don’t receive insider information from its commodity affiliates.  During the second panel, which included commodities customers and counterparties of Goldman and the other big banks, an executive from Novelis, the aluminum manufacturer, stated that the Committee’s investigation had confirmed his worst fears of how banks, dealing in commodities, may be adversely affecting the markets.

The second day of hearings focused on the regulators responsible for overseeing bank commodities ownership, and featured Federal Reserve Governor Daniel Tarullo’s response to questions about what the Fed may do to address the risks posed by bank ownership of commodities.  In response to the Committee’s findings, Tarullo admitted that the current regulatory regime of banks’ commodity activities may indeed have significant gaps and hinted at steps the Fed may be considering to improve oversight.  Despite his recognition of the issues raised by the investigation, however, Governor Tarullo stopped short of endorsing the kind of clear limits recommended in the Report.  It should be noted that the Federal Reserve issued an Advanced Notice of Proposed Rulemaking in January that sought comment on what the Fed should do to address some of these concerns.  Better Markets’ comment letter on that issue can be read here.

Better Markets in the News:

New York Fed Is Criticized on Oversight: New York Times Dealbook by Peter Eavis 11/21/2014

Kelleher `Not Optimistic’ About Fed’s Big-Bank Review: Bloomberg TV: “In the Loop with Betty Liu” 11/21/2014

The Fed Under Goldman’s Thumb: Segarra’s Picture Gets Senate Hearing: Bloomberg News by Ian Katz and Jeff Kearns 11/21/2014

Articles of Interest:

Bill Black: Dudley Do Wrong Rejects Being a “Cop” and Embraces “Foaming the Runways”: Naked Capitalism by Yves Smith 11/24/2014

Levine on Wall Street: Schemes From an Italian Restaurant: Bloomberg View by Matt Levine 11/24/2014

Faith-Based Shareholders Prepare Day of Reckoning for Bank of America: The Wall Street Journal by Christina Rexrode 11/23/2014

The Week That Shook the Fed: New York Times by Gretchen Morgenson 11/22/2014

Goldman Fires Bankers After Getting Confidential Fed Info: Bloomberg by Michael J. Moore 11/20/2014

Senate Report: Banks Had Unfair Commodity-Market Advantages: The Wall Street Journal by Christian Berthelsen and Ryan Tracy 11/19/2014