Welcome to Scribd. Sign in or start your free trial to enjoy unlimited e-books, audiobooks & documents.Find out more
P. 1
The Merchants of Wall Street

The Merchants of Wall Street

Ratings: (0)|Views: 368|Likes:
Published by marco saba
Abstract:
This article examines the principal legal, policy, and theoretical implications of a transformative – but so far unrecognized – change in the banking industry: the emergence, over the last decade, of U.S. financial conglomerates as leading global merchants in physical commodities, including crude and refined oil products, natural gas, coal, base metals, and wholesale electricity. Historically, one of the core principles of U.S. bank regulation has been the separation of banking from commerce. Several statutes – including the National Bank Act of 1863, the Bank Holding Company Act of 1956, the Gramm-Leach-Bliley Act of 1999, and even the Dodd-Frank Act of 2010 – affirm this foundational principle, which generally prohibits banks and bank holding companies from conducting commercial (i.e., non-financial) activities. Notwithstanding these statutory restrictions, however, large U.S. bank holding companies – notably, Morgan Stanley, Goldman Sachs, and JPMorgan – have since the early 2000s been moving aggressively into the purely commercial businesses of mining, processing, transporting, storing, and trading a wide range of vitally important physical commodities. And, equally surprisingly, it is virtually impossible under the current system of public disclosure and regulatory reporting to understand the true nature and scope of these institutions’ commodity activities.
Abstract:
This article examines the principal legal, policy, and theoretical implications of a transformative – but so far unrecognized – change in the banking industry: the emergence, over the last decade, of U.S. financial conglomerates as leading global merchants in physical commodities, including crude and refined oil products, natural gas, coal, base metals, and wholesale electricity. Historically, one of the core principles of U.S. bank regulation has been the separation of banking from commerce. Several statutes – including the National Bank Act of 1863, the Bank Holding Company Act of 1956, the Gramm-Leach-Bliley Act of 1999, and even the Dodd-Frank Act of 2010 – affirm this foundational principle, which generally prohibits banks and bank holding companies from conducting commercial (i.e., non-financial) activities. Notwithstanding these statutory restrictions, however, large U.S. bank holding companies – notably, Morgan Stanley, Goldman Sachs, and JPMorgan – have since the early 2000s been moving aggressively into the purely commercial businesses of mining, processing, transporting, storing, and trading a wide range of vitally important physical commodities. And, equally surprisingly, it is virtually impossible under the current system of public disclosure and regulatory reporting to understand the true nature and scope of these institutions’ commodity activities.

More info:

Published by: marco saba on Aug 27, 2013
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

10/11/2013

pdf

text

original

 
THE MERCHANTS OF WALL STREET:BANKING, COMMERCE, AND COMMODITIES
Saule T. Omarova
*
 
Introduction ............................................................................................................. 2
 
I. What We Say: The Separation of Banking and Commerce................................ 8
 
A. Policy Reasons for Separating Banking from General Commerce ............. 8
 
B. The Gramm-Leach-Bliley Effect: Partial Mixing of Banking andCommerce ................................................................................................. 12
 
1.
 
Financing Commerce: Merchant Banking Powers ............................ 14
 
2.
 
Pure Commerce: “Complementary” Powers ..................................... 18
 
3.
 
A Special Kind of Commerce: Grandfathered CommoditiesActivities ............................................................................................ 22
 
II. What We See: Banking Organizations’ Entry into Physical Commoditiesand Energy Trading.......................................................................................... 25
 
A. Why Our Vision Is Obscured: A Note on the Informational Gap .............. 25
 
B. Let’s Get Physical: The Scope of FHCs’ “Complementary” Powers ......... 30
 
1.
 
Permissible Physical Commodities Trading ...................................... 32
 
2.
 
Energy Management and Energy Tolling .......................................... 35
 
C. The Boundaries of “Complementarity”....................................................... 37
 
III. What We Don’t (Yet) See: How the Crisis Changed the PhysicalCommodities Trading Game ............................................................................ 40
 
A. Morgan Stanley and Goldman Sachs: Playing for the New Club ............... 41
 
1.
 
Morgan Stanley: Oil, Tankers, and Pipelines .................................... 42
 
2.
 
Goldman Sachs: Metals, Warehouses, and Other Things ................. 46
 
B. The Rise of JPMC: How Not to Waste a Crisis .......................................... 52
 
IV. What Say We? Legal, Policy, and Theoretical Implications ............................ 58
 
A. Post-Crisis Legal Paradoxes: New Game under Old Rules, OldGame under New Rules? .......................................................................... 58
 
*
 
George R. Ward
 
Associate Professor at the University of North Carolina at ChapelHill School of Law. I would like to thank the organizers of and participants in the 2013Harvard/Stanford/Yale Junior Faculty Forum, the “New Voices on Financial MarketRegulation” conference at Cornell University Law School, a scholars’ roundtable atBrooklyn Law School, and faculty workshops at Georgetown University Law Center,Washington and Lee University School of Law, and The George Washington UniversityLaw School. Special thanks to Robert Hockett, Tom Hazen, Adam Levitin, Lynn Stout,Heidi Schooner, Arthur Wilmarth, Christopher Brummer for their comments andencouragement, and to Anne-Marie Tosco, Jacob Gerber, and Andrew Rohrkemper fortheir research assistance. All errors are mine.
 
 
 DRAFT (forthcoming in
 
 M 
 INNESOTA
 L
 AW 
 R
 EVIEW 
 ,
 
Vol.
 
98)
21.
 
The BHCA Solution: Definitely, Maybe ........................................... 59
 
2.
 
The Discreet Charm of the Dodd-Frank Act ..................................... 63
 
B. Rethinking the Foundational Myth: Should Policy Permit Banks toBe Commodity Merchants? ...................................................................... 67
 
1.
 
Safety and Soundness; Systemic Risk ............................................... 67
 
2.
 
Conflicts of Interest, Market Manipulation, and ConsumerProtection ........................................................................................... 70
 
3.
 
Concentration of Economic and Political Power ............................... 73
 
4.
 
Beyond the Foundational Myth: Limits of Governability andRegulatory Capacity .......................................................................... 74
 
C. Beyond Banking: Pushing Conceptual and Theoretical Boundaries .......... 77
 
Conclusion .............................................................................................................. 78
 
“We move oil all over the world. We have barrels in storage. Theyare real, not just things on paper. They go on ships and they go torefineries.”
1
 I
NTRODUCTION
In June 2011, Coca-Cola ran out of patience … and aluminum. So thecompany filed a complaint with the London Metal Exchange (“LME”), theworld’s largest organized market for industrial metals, claiming that, formonths, a wholly-owned subsidiary of Goldman Sachs Group, Inc.(“Goldman”) had hoarded enough commercial aluminum in its metalwarehouses in Detroit to drive global aluminum prices to record levels.
2
ForCoca-Cola, which uses aluminum cans to package its iconic soft drinks, thisartificial delivery bottleneck at Goldman’s metal warehouses meant anunjustified rise in operational costs and potential disruptions of itsproduction process.On September 20, 2012, the Federal Energy Regulatory Commission(“FERC”) issued an order threatening to penalize JPMorgan VenturesEnergy Corp., a wholly-owned subsidiary of JPMorgan Chase & Co.(“JPMC”), for potentially misleading the agency in its probe of thecompany’s allegedly manipulative trade practices.
3
The FERC began itsinvestigation in June 2012, after receiving complaints from electric powergrid operators in California and the Midwest alleging that JPMC’s power
1
David Sheppard & Alexandra Alper,
 As Banks Deepen Commodity Deals, Volcker Test Likely
, R
EUTERS
, July 3, 2012 (quoting an anonymous Wall Street bank executive).
2
Dustin Walsh,
 Aluminum Bottleneck: Coke’s complaint: 12% of global stockpile held here, boosting prices
, C
RAIN
S
D
ETROIT
B
USINESS
, June 26, 2011.
3
Kasia Klimasinska,
 JPMorgan Power-Trading Business Faces Suspension, FERC says
, B
LOOMBERG
, Sept. 20, 2012.
 
 
 DRAFT (forthcoming in
 
 M 
 INNESOTA
 L
 AW 
 R
 EVIEW 
 ,
 
Vol.
 
98)
3traders had intentionally inflated wholesale prices at which the companysupplied these important regional markets with electricity.
4
 In July 2012, the
Financial Times
reported that JPMC, Goldman, andMorgan Stanley had struck similarly-structured deals, under which theywould supply crude oil to several major U.S. oil refineries and buy thoserefineries’ output for resale in the open market.
5
Under the terms of thesedeals, financially-strapped refineries would not have to worry about any of the logistical details of buying, storing, and transporting oil supplies orshipping their jet fuel and gasoline to customers – the experts at JPMC,Goldman and Morgan Stanley would take care of all of these operationaldetails.
6
 On the surface, there is nothing particularly surprising about theseseemingly unrelated snippets of recent news stories. Yet, when readtogether, they reveal something quite extraordinary and puzzling aboutcurrent trends in the U.S. banking sector – and the current state of U.S. bank regulation.The root of the puzzlement is the fact that all three of these institutions –Goldman, JPMC, and Morgan Stanley – are registered U.S. bank holdingcompanies (“BHCs”) that own or control at least one U.S. commercial bank and, by virtue of that fact, are subject to extensive regulation andsupervision by the Board of Governors of the Federal Reserve System (the“Board”). One of the core principles underlying and shaping the elaborateregulatory regime applicable to all U.S. banks and BHCs is the principle of separation of banking and commerce.
7
Pursuant to that principle, U.S.commercial banks generally are not permitted to conduct any activities thatdo not fall within the relatively narrow band of the statutory concept of “thebusiness of banking.”
8
Moreover, under the Bank Holding Company Act of 1956 (“BHCA”),
9
BHCs – companies that own or control U.S. banks – aregenerally restricted in their ability to engage in any business activities otherthan banking or managing banks, although they may conduct a widervariety of financial activities through their non-depository subsidiaries.
10
 
4
 
 Id.
 
5
Gregory Meyer,
Wall Street banks step up oil trade role
, F
IN
.
 
T
IMES
, July 15, 2012. 
6
 
 Id 
.
7
 
See
Bernard Shull,
 Banking and Commerce in the United States,
18 J. B
ANKING
&
 
F
IN
. 255 (1994); Bernard Shull,
The Separation of Banking and Commerce in the United States: an Examination of the Principal Issues
, 8 F
IN
.
 
M
ARKETS
,
 
I
NST
.
 
&
 
I
NSTR
. 1 (Aug.1999).
8
12 U.S.C. §24 (Seventh).
9
Bank Holding Company Act of 1956, Pub. L. No. 84-511, §§ 1-12, 70 Stat. 134, 135(1956).
10
12 U.S.C. §§1841-43.

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->