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August 8, 2013

Getting Big Banks Out of the Commodities Business

A debate has broken out over whether the country’s largest banks should be allowed to own physical commodities, including the facilities used to transport, store and process these goods. This may be the strangest debate we have had about banking in the United States in the last five years, because the answer is completely obvious: it is a new and very bad idea to allow big banks to also dominate any dimension of the commodities business. It is also not sustainable politically, and the big banks will soon have to divest themselves of these activities.

The headlines are attention-grabbing and the investigations are substantive.Goldman Sachs is reported to be slow-walking aluminum out of warehouses that it controls. JPMorgan Chase is settling accusations that it manipulated energy prices and may also face pressure to get out of the metals and oil business more broadly. Big companies that buy aluminum, like MillerCoors,are not happy with the way banks have been operating, and these nonfinancial companies have an important political voice also. The political changes afoot may also affect Morgan Stanley and Barclays, which both have significant involvement in commodities.

Senator Sherrod Brown, Democrat of Ohio and a leader among those who want a safer and better run financial system, asked recently, “What do we want our banks to do, make small-business loans or refine and transport oil? Issue mortgages or corner the metals market?””

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Read Simon Johnson’s full Economix Blog post here

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