Forum Post: The Commodities Market: A Big Bank Love Story

...But even if this opportunity is ending, the question remains: Why are mega-banks allowed to purchase commodity assets or physical commodities and manipulate prices to their benefit in the trading markets?

The answer is the Federal Reserve, which granted exemptions to firms restricted by the Bank Holding Company Act from making investments in nonfinancial businesses. A 2003 rule determined that “certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” and later exemptions allowed ownership of trading assets like warehouses, power plants or oil storage tanks.

...In his three-point plan for ending the physical commodity shuffle, Brown targeted the Fed’s opaque operations facilitating massive bank profits. “The Federal Reserve must issue clear guidance on permissible non-bank activities,” Brown wrote, “and consider placing limitations on those that expose banks and taxpayers to undue risk.” In June, Congressman Alan Grayson and three colleagues highlighted multiple examples of bank ownership of commodities in a letter to the Fed. “Goldman Sachs, JP Morgan, and Morgan Stanley are no longer just banks—they have effectively become oil companies, port and airport operators, commodities dealers, and electric utilities as well,” the letter reads. “This shift has many consequences for our economy, and for bank regulators. We wonder how the Federal Reserve is responding to this shift.”

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