Morgan Stanley Oil Tankers Raise Market Power Concern at Hearing

Morgan Stanley’s involvement in an oil tanker business, petroleum transportation service and crude markets raised concerns at a Senate hearing today that the owner of the world’s largest brokerage wields too much market power.

Morgan Stanley’s ownership stake in tanker operator Heidmar Inc. and fuel distributor and marketer TransMontaigne Inc. could be giving the bank an advantage over others trading oil, Sherrod Brown, an Ohio Democrat and chairman of the Senate’s Subcommittee on Financial Institutions and Consumer Protection, said in a hearing. Brown’s panel took testimony at the meeting on whether banks should control commodities assets.

“You scale back the number of those tankers delivering oil, and you’re also in a position to wager on oil prices,” Brown said. “Is that a concern to you?”

The subcommittee’s meeting came as the Federal Reserve reconsiders whether banks including Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. should be allowed to store, transport and trade raw materials. Goldman Sachs alone has contracts for fuel from least five U.S. refineries, totaling 586,200 barrels a day in capacity, while JPMorgan had a stake in power plants across the U.S. last year with a generating capacity of almost 8,000 megawatts, federal filings show.

Oil Tankers

Morgan Stanley’s involvement in oil tanker, distribution and trading businesses raises “serious concerns,” Randall Guynn, head of Davis Polk & Wardwell LLP’s financial institutions group, said at the hearing in response to Brown’s question. “Obviously, if they have market share and abuse it, I suppose that could be a problem.”

Regulatory agencies exist to investigate potential abuses of market power, Guynn said.

“Unlike the 19th century, we have the Sherman Act now,” he said. “If there are any gaps in regulation, I would’ve thought that a legitimate thing to look at and make sure that any sort of bad behavior did not occur.”

The Sherman Act prohibits business activities that federal regulators deem to be anticompetitive.

Lauren Bellmare, a spokeswoman for Morgan Stanley in New York, declined by telephone to comment on the company’s petroleum assets.

Guynn said federal policy makers shouldn’t curb banks’ involvement in commodity markets as nothing has proven their activity is risking the stability of the country’s financial system. The public benefits of their participation, such as increased competition, liquidity and efficiency, outweigh the potential adverse effects, he said.

Asset Ownership

Morgan Stanley has a minority interest in Heidmar, whose clients include some of “the world’s best-known oil and energy companies,” according to Heidmar’s website. Its infrastructure group bought the Southern Star Central Gas Pipeline in the U.S. Midwest in 2010. TransMontaigne has petroleum terminals across the U.S.

Units of Goldman Sachs, Citigroup Inc. and Bank of America Corp. owned power plants across the U.S. that generate renewable energy such as solar and wind, according to 2012 plant ownership data compiled by the Energy Information Administration, the Energy Department’s statistical arm.

A Citigroup subsidiary had a 25 percent ownership stake in three wind power farms in Minnesota and New Mexico, the EIA data show. Banc of America Leasing & Capital LLC owned solar power plants in Oregon and California.

Physical Markets

Stripping banks of their energy assets would handicap them in physical markets, where they trade with refiners, pipeline operators and producers, who often own infrastructure and carry supplies that dwarf theirs, Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by telephone yesterday. Should banks be pushed out of the markets, less regulated hedge funds would probably step in to take their place, he said.

“You’re probably just going to get the people at the big banks joining hedge funds to do it,” Flynn said. “You’ll move some of this stuff into the dark markets, and that’s another concern.”

A disaster at a bank-owned commodities asset would be “catastrophic” to the reputation of the company and the Federal Reserve, Joshua Rosner, managing director at Graham Fisher & Co., said at the hearing. An incident such as a major oil spill would trigger calls for more collateral, cut liquidity and require the government to step in and stabilize systemic risk to the financial system, he said.

Rosner told the subcommittee today that commodity risks should be kept out of the nation’s banking systems and warned that the failure of bank-backed commodities would threaten the flow of money and “bring the financial system to a standstill.”

“We’re destined to view 2008 as the first financial crisis and not the worst,” he said.

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