November 18, 2017

Senate Panel Examines Potential Risks in Banks’ Involvement in Commodities

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.

Article source: http://www.nytimes.com/2013/07/24/business/senate-panel-examines-potential-risks-in-big-banks-involvement-in-commodities.html?partner=rss&emc=rss

Shares Fall on Lower Oil and Commodities Prices

Crude oil prices turned decidedly lower after weeks of hitting highs not seen since September 2008. Oil fell 3.4 percent, to $106.18 a barrel in New York trading, while Brent crude fell 2.4 percent, to $121.05 in London.

Analysts cited several reasons for Tuesday’s decline in the oil and commodities markets, including expectations of lower demand in Japan as that economy slows in the aftermath of the earthquake, the tsunami and the nuclear crisis.

Economists from Capital Economics said, however, that Japan was one factor in the overall weakness in commodity prices.

“More generally, we have been arguing for some time that these prices would soon reach danger levels that would undermine demand and contribute, in time, to sharp falls,” Capital Economics said in a report.

Some analysts said oil prices had been due for a correction, with the speculative nature of the markets one reason behind its recent rise. Prices have risen on a weaker dollar and heightened concerns over the potential for oil supply disruptions in the Middle East and North Africa. Other commodities were also lower, including gold, silver, copper, cotton and corn.

As oil prices fell, so did energy shares, which declined nearly 3 percent. Industrials and materials shares were at least 1 percent lower.

The Dow Jones industrial average was down 0.95 percent or 115.53 points, while the broader Standard Poor’s 500-stock index declined 0.78 percent. The technology-heavy Nasdaq composite fell 0.96 percent.

Also weighing on Tuesday’s market were quarterly results from Alcoa, the aluminum producer, which reported Monday after the market closed that its first-quarter profit slightly beat estimates but that its revenue lagged behind estimates. Alcoa shares fell more than 6 percent.

But oil was the main focus of investors. Clark Yingst, a chief market analyst for Joseph Gunnar, said that the recent surge in prices has not been driven by underlying demand but by a weaker dollar and the geopolitical crisis in the Middle East and North Africa.

Goldman Sachs economists wrote in a research report that they expected a “substantial pullback” of $20 in the near-term target price of Brent crude oil price goal to $105 a barrel.

“We continue to believe that — even with the loss of Libyan production — the oil market has adequate inventory and OPEC spare production capacity to avoid the degree of physical tightness experienced in 2008 well into next year,” the report said.

Mr. Yingst also said the International Monetary Fund had recently reduced its growth forecasts for the United States because of higher energy prices. And an International Energy Agency report on Tuesday hinted that there were early signs of demand for oil starting to ease.

Speculation has also been cited as a factor in the surge in prices, and the Commodity Futures Trading Commission said in its most recent report that oil futures contracts had increased 4.5 percent as of last Tuesday to reach the third highest level since records started in 2006.

Such speculation, Mr. Yingst said, “contributed to the sky rocketing oil prices” in the futures market in 2008. “All of that has come together and caused the decline across the board,” he said of the range of factors affecting the drop in commodity prices.

But he said the decline in oil prices was good in that it could help consumer discretionary spending and lower inputs for corporations.

Meanwhile, bond prices benefited from increased risk aversion and fears over the human and economic costs of the continuing situation in Japan, an analyst said.

“Recognizing this, the global investment community is taking the latest developments as good reason to reinitiate the “flight to quality” trade by fleeing riskier assets in favor of Treasuries,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company.

Article source: http://feeds.nytimes.com/click.phdo?i=9f3445f4218eee0a177517ff2ff09bf6