WASHINGTON - U.S. Sen. Sherrod Brown wants the Federal Reserve to put new limits on banks trading and owning raw materials after a hearing raised doubts about whether regulators really know what's going on at those units.
Brown, D-Ohio, Wednesday accused bank holding companies of engaging in "anti-competitive practices" by hoarding commodities such as aluminum, which in turn affects the prices that consumers pay for pop and beer.
The banks own physical commodities, such as aluminum warehouses or oil tankers. By hoarding the commodities, the holding companies drive up the cost of everyday products such as gasoline and electricity for Ohioans, the senator said.
"Big banks have found another way to game the system," Brown said during a news conference. "Beer producers are affected when Wall Street banks hoard commodities like aluminum."
The news conference came a day after Brown's subcommittee heard testimony that commodities operations owned by lenders are hurting customers and endangering the financial system. Brown plans another hearing in September where officials from the Fed and Commodity Futures Trading Commission may be asked to testify along with bankers.
"Should the public generally be forced to feel around in the dark to figure this stuff out?" Brown asked during the hearing.
The beverage industry has complained that banks and other warehouse owners are manipulating aluminum supplies and slowing deliveries to drive up the price. Costs were inflated by $3 billion worldwide in the past year, Tim Weiner, a global risk manager at brewer MillerCoors LLC, told the panel in prepared remarks. MillerCoors operates a large brewery in Trenton.
In Ohio, 62 beer breweries – including nine in Butler and Hamilton counties – directly employ 1,780 people and depend on aluminum packaging.
Beer companies "are paying tens of millions in higher prices and higher fees for aluminum" under a system involving the investment banks and the London Metal Exchange, Mary Jane Saunders, general counsel for the Beer Institute, an industry trade group, said at the news conference.
"The warehouses are offering aluminum producers financial incentives to sell through the metal exchange and then controlling the flow of aluminum from their warehouses," she said. Businesses "have to wait as much as 18 months to get what you paid for and you pay rent to the warehouse while you wait." This system has increased the cost of aluminum for everyone, Saunders said.
Goldman Sachs, the most profitable Wall Street securities firm before the 2008 financial crisis, posted a rebuttal to some of the criticism from Tuesday’s hearing on the company’s website. The firm said about 95 percent of the aluminum used in manufacturing comes from producers and dealers outside the London Metal Exchange warehouse system in which banks participate.
During Wednesday’s news conference, Brown said he was seeking three things:
• The Fed Reserve must issue clear guidance on permissible non-bank activities, and consider placing limitations on those that expose banks and taxpayers to undue risk.
• The Commodity Futures Trading Commission should crack down on anticompetitive practices and stop the bottleneck that allows the banks – which own the aluminum warehouses – to charge higher prices to end users such as beer and soft drink companies.
• Congress must pass a bill that he and Sen David Vitter, R-La., recently introduced. The Terminating Bailouts for Taxpayer Fairness Act would limit taxpayer and government support to these non-banking activities.
The Fed said last week that it’s reviewing a decade-old ruling that lets banks deal in physical assets like metal and oil, potentially putting commodity units of JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. in jeopardy. Witnesses at today’s hearing in Washington said financial regulators can’t effectively oversee units in industries that fall outside of typical banking or foresee the risks they pose to taxpayer-backed firms.
"To expect the regulators to understand the web of relationships that exist here is not rational," said Joshua Rosner, a bank analyst at New York-based Graham Fisher & Co. which advises clients on investments in the financial industry. Regulators failed similar tasks in the years leading to the 2008 financial crisis, he said.
Risks in banks’ commodities businesses can be managed by limiting them to frequently traded products and setting curbs on volume, Randall Guynn, head of the financial institutions group at law firm Davis Polk & Wardwell LLP, said at the hearing. Regulators can also require minimum amounts of capital and liquidity, he said.
"It would be the unusual bank examiner who understands the commodities markets, oil markets and oil tankers, and so forth, but they do have tools that they have used and can use to try to control this risk," Guynn said.
Barbara Hagenbaugh, a Fed spokeswoman, and Steve Adamske, a CFTC spokesman, declined to comment on the prospects of a future hearing.?Brown seeks Fed answers on raw material pricing »