WASHINGTON — Significant risks to the nation’s financial system and to taxpayers are the potential consequences of continuing to allow the country’s largest financial institutions to own commodities units that store and ship vast quantities of metals, oil and the other basic building blocks of the economy, several witnesses warned a Senate panel on Tuesday.
The ability of those bank subsidiaries to gather nonpublic information on commodities stores and shipping also could give the banks an unfair advantage in the markets and cost consumers billions of dollars, the witnesses said.
The Senate Financial Institutions and Consumer Protection subcommittee convened the hearing to explore whether financial companies — the banking goliaths like Goldman Sachs, JPMorgan Chase and Morgan Stanley — should control power plants, warehouses and oil refineries.
Although Congress removed post-Depression-era barriers that separated commercial banking and traditional commerce in the late 1990s, a group of bipartisan senators has lately been advocating the reinstatement of those walls in part to impose tighter regulation on such actions.
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“This kind of ownership, while part of the real economy, can potentially be a risk for the banking system,” said Sen. Sherrod Brown, D-Ohio, the chairman of the subcommittee, particularly because the giant banks receive the benefit of low-rate borrowing from the Federal Reserve. That could leave taxpayers on the hook for losses caused by a collapse in commodities prices.
“There has been little public awareness of, or debate about, the massive expansion of our largest financial institutions into new areas of the economy,” Brown said. “That is, in part, because regulators have been less than transparent about basic facts.”
Some banking experts disagreed. Randall D. Guynn, head of the financial institutions group at the law firm Davis Polk & Wardwell, told the panel that he “can’t think of a single example” where any commodities-related activity by large banks posed a risk to the nation’s financial system. In fact, he argued that their active involvement “might diminish risk rather than enhance it.”
The hearing followed an article in The New York Times that explored the operations of warehouses controlled in part by Goldman Sachs, whose tactics along with other financial players, had inflated the price of aluminum. The Times reported Tuesday that regulators, including the Federal Reserve and the Commodity Futures Trading Commission, had begun to gather information on the operations and to consider whether additional safeguards were needed.
Major beverage companies have complained about the maneuvers, and Tim Weiner, a MillerCoors executive, testified before the panel on Tuesday. While consumers might not think they have much at stake from tons of aluminum bars stored in a warehouse near Detroit, he said the management of those warehouses has raised prices, cost jobs and hindered innovation.
Goldman Sachs, the owner of the one of the biggest U.S. aluminum-warehouse networks, and the London Metal Exchange said Tuesday that commodity prices have declined in recent years, countering claims of rising costs by beverage companies.
“Delivered aluminum prices are nearly 40 percent lower than they were in 2006,” Goldman said Tuesday in a statement, and the LME said there is no “reported shortage” of the metal.
“The real question isn’t whether prices have fallen the past few years, but whether prices are a true reflection of supply-and-demand conditions,” said Jorge Vazquez, a managing director at Harbor Intelligence, a research company.
“Looking at the warehouse-business model is relevant. Significant changes in the system could improve fairness and efficiency,” Vazquez said.