WASHINGTON, D.C. — Today, U.S. Sen. Sherrod Brown (D-OH), Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, held a hearing entitled “Regulating Financial Holding Companies and Physical Commodities to examine the practices of federal regulators overseeing financial holding companies ownership of physical commodities – like aluminum or oil. The hearing also examined the current oversight of the Federal Reserve System, the Commodity Future Trading Commission, and the Federal Energy Regulatory Commission has in regulating nonfinancial activities by bank holding companies. 

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 advance of Wednesday’s hearing, the Federal Reserve announced its proposal to seek public comment to address physical commodities activities at FHCs. In reaction to the Fed’s proposal, Brown released a statement calling the announcement ‘overdue and insufficient.’

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 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.

Those testifying at the hearing:

  • Mr. Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System [GIBSON TESTIMONY]
  • Mr. Vince McGonagle, Director, Division of Market Oversight, Commodity Futures Trading Commission  [MCGONAGLE TESTIMONY]
  • Mr. Norman Bay, Director, Division of Enforcement, Federal Energy Regulatory Commission. [BAY TESTIMONY]

Brown’s remarks as prepared for delivery:

I thank the witnesses for being here today, and thank you to Ranking Member Toomey for working with us on this important hearing.

For years, U.S. banking laws drew sharp lines between banking and commerce, and respected this separation.

In 1999, Congress weakened those lines, and over the last decade, regulators have been interpreting and implementing this law.

They have also had to adjust to the new and varied lines of business that financial institutions have expanded into.

As I have said many times, the six largest U.S. bank holding companies have 14,420 subsidiaries, only 19 of which are traditional banks.

Today, we will learn more about the rules for all of these non-banking activities, like trading commodities and owning physical assets, and how those rules are applied.

The Fed’s proposal yesterday is a timid step, it was too slow in coming, and there is still too much that we do not know about these activities and investments.

And we have yet to see U.S. regulators address concerns about the aluminum, zinc, and copper markets.

Though the London Metal Exchange or LME has adopted new warehouse rules, industrial end users are unconvinced that these reforms will address the problem, as premiums and queue lengths have only grown since they were announced.

We are also here to seek answers to some fundamental questions.

First, what is the appropriate role for banks in the commodities markets?

If their commodities activities provide benefits to customers, do those benefits outweigh the risks and costs of market manipulation and other harmful practices?

Regulators in the U.S. and Europe have either investigated, or settled with, institutions for manipulating rates in the Libor, silver, gold, electricity, and oil markets.

On Monday, it was reported that the FBI suspects that traders at one U.S. bank earned between $50 and $100 million through market manipulation by “frontrunning” interest rate derivatives orders by Fannie Mae and Freddie Mac.

Today, it was reported that the world’s largest foreign exchange dealer has suspended several traders suspected of manipulating currency prices.

That is one of at least 13 traders at four banks that have been suspended for activities that took place through a group known as “The Cartel” and “The Bandits’ Club.”

Tim Weiner from MillerCoors testified before this subcommittee in July that actions by banks in the aluminum market have cost that company tens of millions of dollars in excess premiums over the last several years, and cost aluminum users a total of $3 billion last year alone.

Second, why are banks allowed to own physical assets?

Most experts that have met with my office agree that there is no clear benefit to the economy from banks owning assets like warehouses, tankers, pipelines, and coal mines.

Even analyst Dick Bové, author of the book “Guardians of Prosperity: Why America Needs Big Banks,” has said that “banks went a little bit too far with the Fed’s authorization to get into the commercial side of [the] commodities business[.]”

If everyone but the banks agrees, then why are regulators allowing them to do it?

This subcommittee believes that the problem of “Too Big to Fail” is still with us.

Last year, Chairman Bernanke said “Too Big to Fail” is, “not solved and gone. It’s still here.”

Perhaps most importantly, the market believes that banks are “Too Big to Fail.”

Finally, what are the risks to our financial system, and entire economy, when “Too Big to Fail” banks engage in commercial activities?

The Fed’s proposal cites the Deepwater Horizon spill; an explosion of a Pacific Gas & Electric pipeline; an explosion at a natural gas plant in Middletown, CT; the tsunami and subsequent meltdown at the Fukushima Daiichi nuclear power plant; the derailment of a crude oil cargo train in Quebec; and older disasters like the Exxon Valdez and Three-Mile Island.

This morning, the Wall Street Journal reported that crude oil railroad shipments have dramatically increased, and that cities like Albany, Chicago, Denver, and New Orleans may be unprepared to deal with an accident involving this explosive substance.

Morgan Stanley’s CEO reportedly told employees that an oil tanker spill at one of its shipping units is “a risk we just can’t take.”

And it’s a risk that taxpayers cannot afford to take.

The ultimate question is who pays for mistakes or manipulation that occurs at financial institutions.

The answer should be these institutions, their executives, and employees.

It should not be customers or taxpayers – but too often that has been the case.

It is time for a change.

Thank you again to the witnesses, and I look forward to your testimony.