At least in the world of commodities, it would seem there are Wall Street banks – and then there are Wall Street banks.
There are those tightly regulated by the US Federal Reserve, and likely to be regulated tighter still in the months ahead. And then there are those few who managed to slip a late amendment into the Gramm-Leach-Bliley Act of 1999 that allowed those investment banks that converted to Fed authority to sidestep reporting requirements and limitations that existing banks may become subject to, a recent Thomson Reuters article reports.
As a result of regulation following the financial crisis, some banks have completely withdrawn from physical commodity trading: major players such as JPMorgan Chase and Deutsche Bank have quit altogether and others like Bank of America, Merrill Lynch and Citigroup have complained loudly that there is not a level playing field.
Their ire is directed at those firms that have been allowed to “grandfather” their commodity trading activities existing before the act, and indeed, earn substantial returns by expanding into areas where their peers cannot tread.
Access to cheap Fed money has permitted firms like Goldman Sachs and Morgan Stanley to earn handsome returns in recent years in spite of activities that have raised howls of protest from industrial users.
For example, Goldman Sachs has been a major player in the both the physical and financial side of the aluminum markets. They own the Metro warehousing operation that dominates the LME warehouse scene in Detroit and which has some of the longest load-out queues stretching more than a year. Goldman is reported to have said it would consider selling its warehousing units, but in all probability, this has more to do with the pending demise of lax LME rules than pressure from the Fed.
Certainly, the Fed has limited influence over either bank, both of which built vast networks of production, supply chain and brokerage activities, and each of which supports the other.
Reuters reports that in electricity, metals and coal, Goldman and Morgan still own and operate assets that other banks would be barred from holding, such as power plants. However, pressure from the Fed does appear to be having some effect.
To be continued in Part Two.