WASHINGTON â€" Lawmakers on Wednesday pressed the Federal Reserve to act more forcefully, and quickly, to limit investment banks’ involvement in the physical commodities business, which has been blamed for inflating prices on everyday items like electricity and canned beverages.
For months, Congress has been evaluating complaints that the huge commodities holdings of investment banks like Goldman Sachs and Morgan Stanley pose a risk to the banking system. Businesses and consumer groups have also expressed concern that the banks’ financial heft gives them an unfair advantage over other competitors as well as the ability to manipulate prices for essentials like energy, cotton and food.
On Tuesday, the Fed said it was considering some new rules and issued a request for public comment. Even so, Senator Sherrod Brown, who chaired Wednesday’s hearing on the issue, said he was “incredulous†that the Fed had been examining the matter for six years and had yet to take action.
“The Fed’s proposal yesterday was a timid step,†said Senator Brown, a Democrat from Ohio. “It was too slow in coming, and there is still too much that we do not know about these activities and investments.â€
Other members of the Senate subcommittee on financial institutions and consumer protection faulted the Fed for being overly focused on the internal workings of banks. In doing so, the lawmakers said the Fed overlooked the effect banks’ commodities activities may have ! on prices paid by the public.
When regulators evaluate a bank’s request to enter into a commodities-related business, they are supposed to weigh whether it will have a public benefit. But during questioning from Senator Jack Reed, an official from the Fed acknowledged that its evaluation process focused primarily on the bank.
“So the public interest test goes by the wayside,†said Senator Reed, a Democrat from Rhode Island.
“That’s the way it’s set up in the statute,†said the witness, Michael S. Gibson, the director of the Fed’s division of banking supervision and regulation.
The formal request released by the Fed on Tuesday seeks public input on 24 questions about how banks’ activities in the commodities business may benefit or harm consumers. In part, the request asked whether the commodities investments pose a significant risk to the banking system if banks incurred large losses in the volatile markets.
In the 19-page notice released Tuesday, the Fed referred to costly accidents in the commodities business in recent years, including the 2010 BP oil spill in the Gulf of Mexico, saying that a similar crisis at a bank-owned facility could endanger the financial system.
“The recent catastrophes accent that the costs of preventing accidents are high and the costs and liability related to physical commodity activities ca! n be diff! icult to limit and higher than expected,†the notice said.
Mr. Gibson testified that the Fed anticipated tighter regulation.
But it is unclear whether those regulations will prohibit or limit the banks commodities holdings or merely require higher capital reserves or more insurance.
The subcommittee held a similar hearing July, after an article in The New York Times reported that a chain of warehouses owned by Goldman Sachs had inflated the price of aluminum across the country. During that hearing, a witness from the brewing industry testified tha Goldman’s warehousing practices â€" which can create long delays for manufacturers, higher rent for the warehouse and an inflated storage premium â€" ultimately cost American consumers $3 billion per year.
While banks were for decades forbidden from owning or trading physical commodities, those regulations have been eased over the past 15 years. The Gramm Leach Bliley Act passed by Congress in 1999, which loosened restriction on the banking industry, contained a special grandfather clause that gave two banks â€" Goldman Sachs and Morgan Stanley â€" wider latitude to delve into commodities. In 2003, the Fed first permitted some commercial banks to handle physical commodities. After the financial crisis in 2008, the Fed also allowed some bank holding companies, including Goldman Sachs and Morgan Stanley, to retain their commodities units, as well as warehouses, ports, refineries and pipel! ines used! to store and ship them.
Banks, and many traders, say their commodities investments benefit consumers because the financial giants add liquidity to the market and help the warehousing and delivery systems to operate more efficiently.
But there have also been abuses. Last year, JPMorgan Chase and Deutsche Bank agreed to hefty settlements after investigations that they were rigging electricity prices. Norman C. Bay, head of enforcement for the Federal Energy Regulatory Commission, testified that his agency has collected more than $873 million in penalties since its regulatory powers were been broadened since the Enron electricity price-rigging scandal early last decade.
Mr. Ba said the agency plans to expand its monitoring of electricity markets in the coming months because it recently gained access to real-time data from the Commodity Futures Trading Commission that will help understand whether energy speculators are using futures swaps and other financial instruments as part of a strategy to manipulate prices.
The calls for tighter regulatory scrutiny over banks commodities investments during the past year have led some investment banks, including JPMorgan Chase, Goldman Sachs and Bank of America, to consider selling some or all of their commodities units. In his testimony, Mr. Gibson said the Fed had given JPMorgan a firm deadline to sell its commodities business, but he did not say when it is.
