WASHINGTON, D.C. — Following today’s announcement by JPMorgan that it plans to sell its physical commodities business, U.S. Sen. Sherrod Brown (D-OH), Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, released the following statement:
“Today’s news is a welcome development, but this does not let regulators off the hook,” Brown said. “The Fed, CFTC, and others must enact robust reforms to Wall Street’s physical commodities activities and do more to protect end users and consumers of aluminum and other materials.”
At the confirmation hearing for Commodities Future Trade Commission (CFTC) nominees in early March, Brown urged the CFTC to take additional steps to regulate financial holding companies’ (FHCs) ownership of physical commodities – like aluminum or oil. This follows a January hearing of the Senate Banking Committee entitled “Regulating Financial Holding Companies and Physical Commodities” that Brown chaired which 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.