WASHINGTON -- Four House Democrats sent a letter to Federal Reserve Chairman Ben Bernanke on Friday, pressing him on the risks of the market manipulation and economic disruption that could be caused by extensive commodities operations at Goldman Sachs, Morgan Stanley and JPMorgan Chase.
Banks that receive federal deposit insurance have traditionally been barred from engaging in commercial activities beyond finance, to prevent market abuses and restrict the frequency and scope of financial bailouts. Banks with commercial operations can buy or sell large quantities of physical commodities to ensure that their financial bets pay off.
The letter from Reps. Alan Grayson (D-Fla.), Raul Grijalva (D-Ariz.), John Conyers (D-Mich.) and Keith Ellison (D-Minn.) highlights allegations of market manipulation by Goldman Sachs and JPMorgan. It also invokes the fraud at Enron, which fueled widespread blackouts when it gamed the market using both its electric power business and its financial trading desk.
"Goldman Sachs, JP Morgan, and Morgan Stanley are no longer just banks – they have effectively become oil companies, port and airport operators, commodities dealers, and electric utilities as well. This is causing unforeseen problems for the industrial sector of the economy," the letter reads. "Coca Cola has filed a complaint with the London Metal Exchange that Goldman Sachs was hoarding aluminum. JP Morgan is currently being probed by regulators for manipulating power prices in California, where the “bank” was marketing electricity from power plants it controlled .... The long shadow of Enron could loom in these activities."
The letter also warns about systemic risks created by mixing banking and commerce, and asks if the Fed has considered the possibility of bank runs caused by shocks to a company's oil or mining interests.
Goldman Sachs and Morgan Stanley developed many of their commodities operations in the years preceding the 2008 financial crash, when the banks were not officially classified as "Bank Holding Companies" eligible for government perks like low-interest loans from the Fed. During the crisis, both registered as Bank Holding Companies to qualify for aid from the central bank, and to shore up confidence with investors. Initially, the Fed granted both banks a two-year grace period on their commodity businesses, but the central bank has offered three one-year extensions to the waiver. The current extension expires this fall.
Although Grayson, Grijalva, Conyers and Ellison do not directly mention the waivers, they ask Bernanke to lay out the legal rationale for permitting banks to engage in commercial activities, and ask him for details. The Glass-Steagall Act of 1933 and the Bank Holding Company Act of 1956 banned the mixing of banking and commerce, but some banks have maintained that 1999's Gramm-Leach-Bliley Act gives them authority to engage in broad commercial activities.
"It seems like there is a significant macro-economic risk in having a massive entity like, say JP Morgan, both issuing credit cards and mortgages, managing municipal bond offerings, selling gasoline and electric power, running large oil tankers, trading derivatives, and owning and operating airports, in multiple countries," the letter reads. "Such a dramatic intertwining of the industrial economy and supply chain with the financial system creates systemic risk, since there is effectively no regulatory entity that can oversee what is happening within these sprawling global entities."
A spokesperson for JPMorgan did not respond to a request for comment on the letter, and a spokesperson for Goldman Sachs declined to comment.
"Morgan Stanley's physical commodities businesses predate our conversion to a bank holding company," said Morgan Stanley spokesman Mark Lake.
Read the full letter here