WASHINGTON/NEW YORK - Wall Street's multibillion-dollar commodity trading operations will be put under the political spotlight on Tuesday as a powerful US Senate committee questions whether commercial banks should control oil pipelines, power plants and metals warehouses.
The Senate Banking Committee hearing comes as Goldman Sachs, Morgan Stanley and JPMorgan Chase - which generated an estimated $4 billion in commodity revenues last year - face growing pressure from a number of investigations into their operations, and as the Federal Reserve reviews Wall Street's right to operate in raw material markets.
Big aluminium consumers like MillerCoors are set to tell the committee that the banks' control of metal warehousing firms has driven up industry costs by as much as $3 billion. The banks will not speak at the hearing, with their views represented by a lawyer who often works with Wall Street.
The threat to Wall Street's physical commodity trading divisions has escalated abruptly across multiple fronts, putting an uncomfortable spotlight on a lucrative side of their business that has thus far fallen largely outside of regulators' sights.
Last Friday, the Fed raised the stakes dramatically, issuing a surprise statement to say it was reviewing a landmark 2003 ruling that first allowed commercial banks to trade physical commodities such as gasoline barges and coffee beans. Until now the Fed had been thought only to be debating whether or not certain banks could own assets, not trade the raw materials.
"Since 2003, our government and central bank have allowed an unprecedented mixing of banking and commerce," Joshua Rosner, managing director of independent research firm Graham Fisher & Co, said in prepared remarks.
"So far, that grand experiment has gone better for the banks than it has for consumers."
At issue is not whether banks should be allowed to trade derivatives like corn futures or oil options, but whether they should be allowed to invest in infrastructure such as tankers and warehouses that can be integrated with their trading operations - and more broadly whether they should be allowed to continue holding title to the underlying physical commodities.
Goldman, Morgan Stanley and JP Morgan declined to comment in detail on their physical commodity trading.