WASHINGTON, D.C. – During a Senate Banking Committee hearing, U.S. Sen. Sherrod Brown (D-OH) raised concerns over alarming new reports of bank holding companies (BHCs) controlling the price and supply of physical commodities. The hearing entitled, “Examining Financial Holding Companies: Should Banks Control Power Plants, Warehouses, and Oil Refineries?” examined the practice of bank holding companies (BHCs) owning physical commodities – like aluminum or oil – and the effect on consumers and manufacturers.
Historically, BHCs have been restricted under the Bank Holding Company Act (BHCA) from engaging in commercial activities. In recent years, BHCs have utilized a number of waivers and loopholes in the law, with occasional sign-off from federal regulators, to expand business operations into physical commodities and energy. Today’s hearing shed light on the industry’s practices and focused on the high costs manufacturers and consumers pay because of artificially high prices driven by Wall Street banks.
According to a recent article in the New York Times, many Wall Street megabanks hoard commodities and financial products and thereby drive up prices for consumers and manufacturers. The practice also creates a potential for anti-competitive market behavior and manipulation. The New York Times reports, "The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone." While the United Sates once separated banking from traditional commerce, today’s banks are now allowed to engage in a variety of non-financial activities, such as owning oil pipelines and tankers, electricity power plants and metals warehouses. Today, the six largest U.S. bank holding companies have 14,420 subsidiaries, only 19 of which are traditional banks.
Witnesses at the hearing included: Saule T. Omarova, Assistant Professor at University of North Carolina at Chapel Hill School of Law [view testimony] ; Randall D. Guynn, Partner, Davis Polk Wardwell LLP [view testimony] ; Josh Rosner, Managing Director, Graham Fisher & Company [view testimony] ; and Tim Weiner, Global Risk Manager, Commodities and Metals, MillerCoors, LLC [view testimony] . To read the testimony of each witness, please click here.
Full text of Brown’s statement, as prepared for delivery, is below.
Thank you Ranking Member Toomey for joining me in holding this hearing, and I thank the witnesses for being here.
In 1913, former Supreme Court Associate Justice Louis Brandeis voiced concerns about the growth of trusts in the United States:
“Investment bankers … became the directing power in railroads, public service and industrial companies through which our great business operations are conducted ... They became the directing power also in banks and trust companies … [D]istinct functions, each essential to business, and each exercised, originally, by a distinct set of men, became united in the investment banker. It is to this union of business functions that the existence of the Money Trust is mainly due.”
Today, large, complex, opaque, and diverse corporations are no longer called “trusts.”
Instead we have “financial holding companies” – large conglomerates combining banks, trading firms, energy suppliers, oil refiners, warehouses, shipping firms, and mining companies.
How did we get here? For years, our nation had separated banking from traditional commerce. But in 1999, after years of eroding that protection, Congress finally tore down the wall.
Beyond just combining commercial banking with insurance and investment banking, banks were now allowed to trade in commodities and to engage in a variety of non-financial activities.
Four years later, the Federal Reserve enabled the first Financial Holding Company to trade in physical commodities.
The justification for allowing this activity is a familiar one: other companies were doing it, and banks were at a competitive disadvantage.
Over the next six years, the rules became looser and looser.
Goldman Sachs, in its own words, now “engage[s] in … the production, storage, transportation, marketing and trading of numerous commodities, including crude oil products, natural gas, electric power, agricultural products, metals, minerals (including uranium), emission credits, coal, freight, liquefied natural gas and related products[.]”
This expansion of our financial system into traditional areas of commerce has been accompanied by a host of anti-competitive activities: speculation in the oil and gas markets; inflated prices for aluminum and potentially copper and other metals; and energy manipulation.
It has also been accompanied by important and troubling questions. Do the benefits of combining these activities outweigh the harm to consumers and manufacturers?
Can regulators or the public fully understand these large, complex financial institutions and the risks to which these firms are exposing themselves – and the rest of society?
Are the laws and regulations sufficiently stringent and transparent, and are regulators enforcing them aggressively enough? And what do we want our banks to do – make small business loans or refine and transport oil? Issue mortgages or corner the metals market?
There has been little public awareness of, or debate about, the massive expansion of our largest financial institutions into new areas of the economy.
That is, in part, because regulators have been less than transparent about basic facts, about their regulatory philosophy, and about their future plans.
Most of the information that we have has been acquired by combing through company statements in SEC filings, news reports, and conversations with industry.
It is also because these institutions are so complex, dense, and opaque that they are impossible to fully understand – the six largest U.S. bank holding companies have 14,420 subsidiaries, only 19 of which are traditional banks.
Their physical commodities activities are not comprehensively reported – they are buried deep within various subsidiaries like their Fixed Income, Currency & Commodities units; asset management divisions; and other business lines.
Their specific activities are not subject to transparency and are often buried in arcane regulatory filings.
Taxpayers have a right to know what is happening and to have a say in our financial system, because taxpayers are the ones who will be asked to rescue these megabanks yet again – possibly as a result of activities that are unrelated to banking.
I thank the witnesses for being here, and I look forward to their testimony.