Banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co., facing regulatory scrutiny of their commodity trading, provide liquidity in oil, natural gas, and other markets that can't be easily replaced, according to a report commissioned by Wall Street's main lobbying group.
The firms' ability to trade physical commodities and related financial derivatives helps airlines and natural gas power plants hedge against changes in commodity prices, according to the report from IHS Inc. released today. The report, commissioned by the Securities Industry and Financial Markets Association, said efforts to curb banks' role in commodity markets would hurt their commercial and industrial clients.
"Banks play a key role in kind of bringing together buyers and sellers and providing financing," Kurt Barrow, vice president at IHS and co-author of the report, said in a telephone interview yesterday. "It's not at all clear who could replace them or to what extent," IHS said in the report.
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The role of banks in in trading commodities while also owning refineries and warehouses has faced scrutiny this year from lawmakers and regulators including the Federal Reserve and Commodity Futures Trading Commission (CFTC). Congressional Democrats and some regulators have sought curbs on bank trading in commodities that could put revenues in jeopardy.
Goldman Sachs's physical commodities unit is a "core" business that provides a crucial service to clients, Chief Executive Officer Lloyd C. Blankfein said yesterday.
"The role we play in that business is very, very important to users in the market," Blankfein, 58, said in a CNBC television interview. "Without us in that market, a good credit, a regulated company, the outcomes won't be very good for the users of the market."
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.
JPMorgan said July 26 that it plans to get out aspects of the business of owning and trading physical commodities ranging from metals to oil. The bank's announcement came three days after members of a Senate Banking subcommittee questioned whether banks are abusing their ownership of raw materials to manipulate markets.
Senator Sherrod Brown, the Ohio Democrat who led that hearing, said he plans another on banks' ownership of mines, pipelines, tankers, and warehouses. "It does significant potential damage to the economy," Brown said July 23.
The Federal Reserve Board said in July that it is reviewing a series of decisions dating to 2003 that have allowed banks to take physical delivery of commodities and expand their trades. Meanwhile, the CFTC, the top U.S. regulator of derivatives, has issued subpoenas to Goldman Sachs, JPMorgan and other operators of metal warehouses after brewer MillerCoors LLC and others complained of long waits for materials.
Bart Chilton, a Democratic member of the CFTC, said U.S. lawmakers should revoke an exemption that lets Goldman Sachs and Morgan Stanley own commodity warehouses and other assets. Congress should also "do away with the ability of the Fed to allow any commodity-related ownership by the banks," Chilton said on Sept. 14.
The Senate Permanent Subcommittee on Investigations is also probing banks' involvement in commodities. Senator Carl Levin, the Michigan Democrat who leads the panel, said in July that his subcommittee, which has subpoena power, had been looking at the commodities issue for at least six months.
"The potential here for conflicts of interest and manipulating prices to benefit their own proprietary holdings is huge and it's a very, very serious issue," Levin said in an interview on July 23.
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