Three big Wall Street banks that have owned commodities such as aluminum exposed themselves to risk and in some cases manipulated prices in a way that raised costs for consumers, a Senate investigation has found.
The heavy involvement of Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley in the business of storing and moving commodities like oil, aluminum, uranium and copper also gives them unfair trading advantages in financial markets, according to a report issued Wednesday by the Senate Permanent Subcommittee on Investigations.
Aluminum cans that hold beverages like soda or beer are held up as an example. Goldman has used its stockpile of aluminum — in a cluster of warehouses near Detroit — to cause delivery delays to create shortages and inflate the metal's price, according to the report. The price for beverage makers and ultimately consumers is forced higher, it said.
Goldman maintains there has been no shortage of aluminum and prices have fallen substantially since 2008. In addition, the bank says, more than 75 percent of the aluminum it holds in storage doesn't go into "queues" that can back up and delay deliveries.
The three banks, among the biggest in the U.S., have faced increased scrutiny in recent years of their activities in commodities. Lawmakers and federal regulators are asking whether banks should be allowed to control power plants, warehouses, oil refineries and pipelines. The Federal Reserve proposed earlier this year restricting banks' activities in markets for physical commodities. Under current Fed rules, banks that engage in commodities activities must hold capital to absorb potential losses from the activities.
Activities like oil refining and uranium mining "expose major banks to catastrophic risks that are poorly understood," Sen. Carl Levin, D-Mich., the subcommittee's chairman, said at a news conference Wednesday. The costs from an oil spill, mine explosion or power plant disaster could exceed a bank's capital reserves and insurance coverage, potentially forcing taxpayers to bail it out, Levin warned.
"There's great risk to the economy," he said. "We need to restore the separation of commerce and banking."
The three banks maintain that they manage their commodities businesses prudently against risks.
"Morgan Stanley is proud of its comprehensive approach to risk management, which has enabled the firm to manage its commodities business prudently and effectively over the last three decades," the bank said in a statement.
In some cases, they have sold physical commodities businesses to nonbank companies and are in the process of selling others.
The report doesn't specifically allege price manipulation by Morgan Stanley. It says the bank's involvement in oil storage and transport gave it access to valuable non-public information about shipments and pipelines that it could profit from in trading.
Goldman says it's in the physical commodities business because that enhances its key role as a middleman for producers, consumers and investors in the financial markets linked to the products. The risks cited by the Senate report are actually "quite limited and manageable," in Goldman's view.
JPMorgan, the biggest U.S. bank, says it holds enough capital to cover it in the event of a physical disaster that caused its liability to exceed its insurance coverage.
Executives of the three banks' commodities divisions are scheduled to testify at a hearing Thursday by the investigative subcommittee. In a second hearing on Friday, Fed Gov. Daniel Tarullo and Larry Gasteiger, an enforcement official at the Federal Energy Regulatory Commission, are testifying.
As an example of price manipulation, the report cites JPMorgan's involvement in the electricity market. In July 2013, the bank agreed to pay $410 million to settle accusations by U.S. energy regulators that it manipulated electricity prices between September 2010 and November 2012. The FERC said JPMorgan used improper bidding strategies to squeeze excessive payments from the agencies that run the power grids in California and the Midwest.
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