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.
“This kind of ownership, while part of the real economy, can potentially be a risk for the banking system,” said Senator Sherrod Brown, the Ohio Democrat who is 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 or in the event of an environmental disaster like the Deepwater Horizon oil spill.
“There has been little public awareness of, or debate about, the massive expansion of our largest financial institutions into new areas of the economy,” Mr. 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 on Sunday that explored the operations of warehouses controlled in part by Goldman Sachs, whose tactics along with other financial players, had inflated the price of aluminium. The Times reported yesterday 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.
