Banks’ Commodity Trade Exemption Should Be Revoked, Chilton Says

U.S. lawmakers should revoke an exemption that lets Goldman Sachs Group Inc. and Morgan Stanley own commodity warehouses and other assets, Commodity Futures Trading Commission member Bart Chilton said.

The Wall Street firms, converted to bank holding companies during the 2008 credit crisis, benefit from “extraordinary treatment” under the exemption included in a 1999 law, Chilton said in remarks prepared for a speech tomorrow to the Michigan Agri-Business Association.

“Congress should not only do away with the statutory exemption that has been used by Goldman and Morgan, but also do away with the ability of the Fed to allow any commodity-related ownership by the banks,” Chilton said. The Federal Reserve should reverse decisions allowing banks such as JPMorgan Chase & Co., Citigroup Inc. to trade physical commodities, he said.

The 1999 Gramm-Leach-Bliley Act has exemptions for certain commodities units that previously weren’t allowed under the 1956 holding company law. One was for businesses that the Fed could determine were complementary or incidental to the bank’s financial activities.

Another exception was for firms that became banks after 1999 and had physical commodities businesses that predated Sept. 30, 1997. That rule is relevant because Goldman Sachs and Morgan Stanley didn’t become bank holding companies until 2008.

Other banks have been permitted to expand into commodities markets under a 2003 Fed decision and subsequent ones. The central bank said in July that it’s reviewing the policy amid Senate scrutiny of whether such involvement allows Wall Street firms to control prices.

Falling Revenue

Commodities revenue at the 10 largest investment banks fell 25 percent in the first half of this year, putting those units on pace for the worst annual performance in more than five years, industry analytics firm Coalition Ltd. said in August. Revenue fell to about $2.7 billion in the first six months from $3.6 billion in the same period of 2012, Coalition said Aug. 5 in an e-mail.

The CFTC subpoenaed Goldman Sachs and JPMorgan documents relating to their warehouses for aluminum and other metals, two people with knowledge of the probe said in August. The agency requested documents dating to the start of 2010 about the banks’ commodity warehouses, according to the people. Glencore Xstrata Plc, which owns warehousing business Pacorini, also received a subpoena, another person said.

Brewer MillerCoors LLC, manufacturer Encore Wire Corp. and other metal users have complained about long queues and artificially high prices at the warehouses, particularly for copper and aluminum.

“Maybe it’s just me, but I don’t think the American public wants banks owning grain elevators, electric companies, large warehouses or shipping and distribution interests,” Chilton said in the speech.