Lawmakers Cite Risk of Banks in Commodities in Bernanke Letter
Four Democratic lawmakers sent a letter to Federal Reserve Board Chairman Ben S. Bernanke asking if investments in the commodities business by Goldman Sachs Group Inc. and JPMorgan Chase & Co. (JPM) pose risks to the economy.
Representatives Alan Grayson of Florida, Raul Grijalva of Arizona, John Conyers of Michigan and Keith Ellison of Minnesota also asked Bernanke in the letter to explain the legal basis for allowing the banks to hold commodity-related assets.
“Goldman Sachs, JPMorgan and Morgan Stanley (MS) are no longer just banks -- they have effectively become oil companies, port airport operators, commodities dealers and electric utilities as well,” the lawmakers wrote in the June 27 letter. “This is causing unforeseen problems in the industrial sector of the economy.”
Morgan Stanley and Goldman Sachs are two of the largest commodities trading firms. Morgan Stanley has owned oil tankers and pipelines among its non-financial assets. Goldman started its commodities team when it bought brokerage J. Aron & Co. in 1981.
“Morgan Stanley’s physical commodities businesses predate our conversion to a bank holding company,” Mark Lake, a Morgan Stanley spokesman, said in response to the letter. Jennifer Zuccarelli, a spokesman for JP Morgan declined to comment, as did Andrew Williams, a spokesman at Goldman Sachs.
Goldman Sachs’s Chief Executive Officer Lloyd C. Blankfein, President Gary D. Cohn and Chief Financial Officer Harvey M. Schwartz all started in the firm’s J. Aron commodities subsidiary.
“We strongly believe that being in the commodities business is important to our clients and our client franchise,” Cohn said at a May 30 investor conference in New York.
The 10 largest global investment banks generated $6 billion in revenue from commodities trading last year, according to data from analytics firm Coalition Ltd. That’s less than half the $14 billion they produced in 2008. Morgan Stanley is one of the top three banks in revenue from commodities, according to Coalition.
The lawmakers said the banks have used the legal authority in the 1999 Graham-Leach-Bliley Act to “subvert the foundational principle of separation of banking from commerce. The act tossed out longstanding prohibitions of banks against commercial banks offering investment and insurance services.
‘‘Such a dramatic intertwining of the industrial economy and supply chain with the financial system creates systemic risk, since there is effectively no regulatory entity that can oversee what is happening within these sprawling global entities,’’ the lawmakers wrote.
The lawmakers asked Bernanke whether the Federal Reserve has been investigating the risks of allowing banks in these businesses, what data had been collected about the banks’ non-financial activities, and how regulators evaluate banks’ conflicts of interests between physical commodity businesses and derivatives trading.
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