WASHINGTON, D.C. — In a meeting today with Commodities Future Trade Commission (CFTC) nominees, U.S. Sen. Sherrod Brown (D-OH), Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, pressed Chris Giancarlo and Sharon Bowen on actions the CFTC can take to regulate financial holding companies’ (FHCs) ownership of physical commodities – like aluminum or oil. In July 2013, Brown first shined a light on the physical commodities operations at bank holding companies (BHCs) and has subsequently held two hearings examining the impact of commodity ownership on financial markets.
“Ohio manufacturers and consumers should not have the price of their gas, beer, soft drinks, or electricity driven up by Wall Street speculators,” Brown said. “There seems to be no clear benefit to the economy from banks owning assets like warehouses, tankers, pipelines, and coal mines. The CFTC must take a more aggressive stance to rein in these activities that threaten end users and consumers with higher commodity and energy prices.”
In January, Brown chaired a hearing of the Senate Banking Committee entitled “Regulating Financial Holding Companies and Physical Commodities.” The hearing examined the practices of federal regulators—like those at the CFTC—overseeing FHC’s ownership of physical commodities as well as those agencies role in regulating nonfinancial activities by BHCs. The hearing follows action by Brown in July 2013 that first shined a light on the physical commodities operations at bank holding companies. Brown called for immediate action to crack down on these activities and urged federal regulators to increase their oversight of nonfinancial activities.
In November 2013, the Board of the London Metal Exchange (LME) approved changes to its warehousing policy designed to cut lengthy warehouse waits that affected aluminum end users. This action followed an October 2013 letter Brown sent with Sen. Elizabeth Warren (D-MA) regarding the LME’s proposed changes to rules governing industrial metals trading.
By hoarding physical commodities, BHCs ultimately drive up the cost of everyday commodities and products like gasoline, canned soft drinks and beer, and electricity for Ohioans. 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.
According to a July 2013 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 cell phone." 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.
In order to address this alarming trend, Brown called for three steps of immediate action.
- The Federal 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 (CFTC) 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 like beer and soft drink companies.
- Congress must pass Brown and U.S. Sen. David Vitter’s (R-LA) The Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), legislation that would limit taxpayer and government support to these non-banking activities.