Quite dramatically, being the biggest bull in the China shop, JPMorgan Chase made the striking announcement this past week that it would quit trading in physical commodities. This in a week during which a Senate panel held hearings on whether banks such as Goldman Sachs and JPMorgan are manipulating commodity/material markets through their trading activities and ownership of vast stores of raw materials ranging from aluminum, oil, gasoline, heating oil, copper, power, coal, extending to warehouses, oil facilities, power plants all the while also examining the degree these financial institutions are placing themselves at the center of the global supply chain for industrial materials
This corner, as others on the Huffington Post discussed, has focused on this issue with particular emphasis on the malign influence of bank holding companies on the everyday cost of the goods we buy, such as JPMorgan, Goldman Sachs, (Please see Shahien Nasiripour's "MillerCoors Urges Federal Reserve Crackdown On Wall Street's Aluminum Dealings") and the role of the Federal Reserve in countenancing and supporting these excesses through massive financial accommodation. (Please see "After Costing American Billions, Federal Reserve Reexamines Banks Commodity Speculation.")
JPMorgan, whose trading activities have had a vast impact on the commodities markets, through not only their trading, but also their vast stockpiles of industrial materials, suddenly announced that it was taking steps to exit the physical commodities trading business. The announcement comes on the heels of JPMorgan's settlement negotiations with the Federal Energy Regulatory Commission (FERC) for alleged manipulation of the California and Mid-West power market. (Please see "JPMorgan accused of Rigging Energy Markets. A Feather Duster Anyone.")
That it has come to this is a remarkable turn of events given the enormous efforts and investment by JPMorgan Chase spearheaded by its President and CEO Jamie Dimon to attain the leadership role in prop trading. In 2010 the Wall Street Journal alerted us to Dimon's full court press ambition, voiced through his commodity chief Blythe Masters to have JPMorgan "build the number one commodities franchise on the planet" and added that rivals are "scared s__less of us."
Dimon has been relentless in his attempts to eviscerate the Dodd-Frank law because of its projected reintroduction of the Volcker Rule that would entail draconian restrictions on proprietary commodities and derivatives trading by banks. In context, Dimon's hubris was laid bare when he was quoted, "Paul Volcker by his own admission has said he doesn't understand capital markets. He has proven that to me." (Please see "The Volcker Rule and Wall Street's Pliant Media Plant.")
Dimon has spent significant capital building up JPMorgan's proprietary trading capability, expending billions to acquire new trading platforms such as that of UBS Commodities and the purchase of the Royal Bank of Scotland's Sempra trading division, expanding his prop trading hires from 125 in 2006 to 1,800 in 2010, being until very recently, the largest shareholder of the London Metals Exchange (LME), taking massive positions in the commodities traded on the LME, such as acquiring billion dollars plus of copper inventory thereby helping to push the price of copper through the roof. JPMorgan's unbridled speculation touched the price of a full range of commodities to the benefit of JPMorgan Chase and at the cost of consumers most everywhere. (Please see "Jamie Dimon's Malign Influence on the Culture of American Banking.")
The matter was clearly phrased by Senator Sherrod Brown (D-Ohio) Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection after learning about JPMorgan's announcement last week:
"This could be good news for consumers and taxpayers. Banks should focus on core banking activities. Our economy is strengthened when financial conflicts of interest and financial risk are reduced." Then even more succinctly, "What do we want our banks to do: to make small business loans or refine and transport oil? To issue mortgages or corner the metals market?
A prediction: With JPMorgan now muted in its aggressive trading in the oil market one foresees that the quoted price of West Texas Intermediate (WTI) crude oil could conceivably drop by $10 a barrel (and a corresponding decrease in the price of gasoline) in the next 60 days from Friday's close of $104.70 bbl on the New York Mercantile Exchange (NYMerc). Oil and oil related business represents easily 50 percent of its total revenues from raw materials in 2012. (Please see "JPMorgan Retreats From Bet On Commodities," WSJ.)
JPMorgan's oil trading has included chartering VLCC's (cargo ships of over 200,000 tons DWT) and taking millions of barrels (one ton equals 7.4 bbls crude oil) off the market, thereby moving the spot price for oil higher, and keeping it stored on board cargo vessels at anchor for months at a time, to await even higher prices. Without JPMorgan's aggressive trading, a significant pullback in the price of oil is possible, that is if the massive Swiss oil trading firms such as Glencore and Vitol don't step in aggressively, or if the Saudi's through their jointly owned (with Royal Dutch Shell) massive 'Motiva' refinery (the largest refinery in the United States with a throughput capacity of 600,000 bbls/day-at Port Arthur, Texas) restrain themselves from gaming the WTI crude oil market on the commodity exchanges. (Please see "Is Saudi Arabia's Trojan Horse Spiking Gas Prices Americans Paying At The Pump?.")
Again, leaving the last word to that sage Commodity Futures Trading Commission member Bart Chilton:
This whole area of banks owning the physical, warehousing and delivery mechanisms of commodities is one that policy makers need to thoughtfully consider and soon. Banks getting back to being banks and making loans to businesses and individuals seems like the best course of action. Perhaps that will happen without any policy changes, although I have definite doubts.
Chilton is but one clarion voice in the wilderness. He needs an echo chamber the length and breadth of the nation to assure he is heard by those who can indeed effect 'policy changes.'
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