By Christian Berthelsen and Ryan Tracy
WASHINGTON -- A two-year U.S. Senate investigation of
commodity-market activities at big Wall Street banks like Goldman
Sachs Group Inc. and J.P. Morgan Chase & Co. found the firms
compromised market integrity and put the broader financial system
at risk.
The firms did so by influencing prices, gaining trading
advantages with non-public information and entering risky
businesses like uranium trading and coal production, according to
the investigation.
The findings from the U.S. Senate Permanent Subcommittee on
Investigations shed new light on how banks built up voluminous
inventories of aluminum, copper and other commodities, often
exceeding regulatory limits. It portrays banks straying far beyond
their traditional business lines to dabble in lucrative but risky
activities that posed legal and financial threats to the firms.
The Senate report also depicts the Federal Reserve as failing to
stop the bank buildup of commodities, allowing firms like J.P.
Morgan to hold assets well in excess of allowable limits. At times,
the report said, the Fed was simply unaware of how much oil,
aluminum and copper banks were stockpiling.
Investigators found J.P. Morgan exceeded restrictions on copper
holdings by defining it as a precious metal despite its widespread
use in industrial applications and exceeded aluminum limits by
holding it as an asset of a subsidiary instead of the parent
company. Morgan Stanley held 55 million barrels of oil storage
capacity, enough supply for nearly three days' worth of U.S.
consumption. The report found that Goldman engaged in
"merry-go-round" transactions involving aluminum for its own
financial gain.
The banks say they adequately manage the risks of the activities
and don't use their commodities business to gain an unfair
advantage. All three firms have moved to reduce their commodities
holdings amid congressional and regulatory scrutiny.
The findings are likely to put additional pressure on the Fed as
it considers whether to restrict or reduce Wall Street banks' role
in physical commodity markets. Fed Gov. Daniel Tarullo is expected
to testify at a Senate hearing on the report on Friday.
Democrat and Republican lawmakers said the evidence showed new
reforms and restrictions are needed to rein in Wall Street's role
in raw materials markets. The report recommended a series of
actions that could shrink bank trading and strengthen oversight.
While none of the activities highlighted in the report appear to be
illegal, officials said they had not yet decided whether to refer
certain matters to enforcement agencies.
"We found substantial evidence that these activities expose
major banks to catastrophic risks that are poorly understood," said
Sen Carl Levin, (D., Mich.), who chairs the subcommittee and will
hold the two-day hearing. Executives from Goldman, J.P. Morgan, and
Morgan Stanley are set to testify. "They are raising costs and
uncertainty for the end users of commodities, which hurts American
manufacturers and consumers."
Write to Christian Berthelsen at christian.berthelsen@wsj.com
and Ryan Tracy at ryan.tracy@wsj.com
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