WASHINGTON Senators on Tuesday called for greater transparency and regulatory oversight of financial giants that invest in energy and other commodities, suggesting that some Wall Street institutions have too much influence in controlling prices.
A Senate Banking subcommittee hearing focused on a growing issue on Capitol Hill: the involvement of financial firms such as JPMorgan Chase, Morgan Stanley and Goldman Sachs through their subsidiaries in oil refineries, power plants and other commodities not traditionally considered core banking activities.
Lawmakers also raised concerns about the lack of comprehensive research to measure the reach of the banking industry into such ventures.
"Specific activities [of subsidiaries] are not subject to transparency in any way. They're often buried in regulatory filings," said Sen. Sherrod Brown, D-Ohio, who chairs the financial institutions subcommittee. "Taxpayers have a right to know what's happening and to have a say in our financial system."
According to some estimates, the six largest financial holding companies have more than 14,400 subsidiaries. Of those, only 19 are traditional banks.
Witnesses testifying at the hearing agreed that greater supervision is needed to monitor the role banking subsidiaries play in commodities globally, but they debated whether the fix was the responsibility of regulators, mainly the Federal Reserve Board, or of Congress.
Some suggested the Fed was largely to blame for granting approval to banks such as Citigroup and JPMorgan to dive deeper into the commodities business before the financial crisis.
"If, in fact, we saw a catastrophic event at any of these owned facilities, nonfinancial facilities, the impact reputationally and operationally, not only to the institution but to the Federal Reserve, would be catastrophic," said Joshua Rosner, managing director of Graham Fisher & Co.
Rosner said the current statute essentially allows the Fed to interpret securities in a manner to allow banks to extend their reach into commodities even though that extension was not the intent of Congress.
Another panelist, Saule Omarova, an associate professor of law at the University of North Carolina at Chapel Hill School of Law, also advised lawmakers to look at the Fed's mandate. She argued that while many banks are in fact complying with regulations allowing them to expand their role in the commodities business, that does not make it right. She echoed suspicions voiced by Sen. Jeff Merkley, D-Ore., that large banks are making bets on commodity prices while also controlling those prices through some form of ownership.
"I believe there is a reason to suspect that, in fact, such a pattern is emerging," Omarova said.
For example, she said, Goldman Sachs' involvement in the over-the-counter oil derivatives market means the firm "not only can affect price, but they can also influence the price of physical oil if they own tankers or contractually have access to the physical barrels of oil."
However, Randall D. Guynn, head of the Financial Institutions Group at Davis Polk & Wardwell, argued that banks' commodity stakes allow them to spread risk and generate more competition, which benefits consumers.
"These financial institutions are permitted to engage in commodities activities to meet the needs of customers, increase customer choice, increase competition, act as more effective intermediaries between producers and end-users, provide increased liquidity to the markets and lower prices to consumers, and increase the diversification of the revenue streams and exposures of these financial institutions," said Guynn in his written testimony. "All things being equal, increased diversification of activities reduces risk, preserves capital and should help an institution improve its financial condition over time."
Both Brown and Sen. Elizabeth Warren, D-Mass., said a potential congressional vehicle for strengthening oversight of banks' commodities businesses is a bill co-written by Warren that seeks to separate an institution's commercial banking and investment activities.
"Glass-Steagall is not designed to solve every problem but it helps move us in the right direction, helps reduce risk, helps at least to some extent disentangle what has become a mess that is both hard to regulate and is creating additional risk," Warren said at the hearing. "We're looking for more ways to move us in the right direction."