JPMorgan Chase, the largest U.S. bank, said Friday it may sell its prized physical commodities business, just three years after it aggressively expanded into the sector, as authorities probe whether big banks are using their holdings of raw materials to manipulate commodities markets.
JPMorgan said it may sell or spin off assets ranging from raw materials such as oil and copper to warehouses that store aluminum and other metals, energy tolling agreements, interests in power plants and wind farms, trading operations, and assets used to transport the commodities. The bank said it will continue to provide financial products tied to commodities, such as derivatives, and will continue to house and trade precious metals such as gold.
The surprise announcement follows a July 16 Huffington Post story that detailed how a coalition of beer brewers such as MillerCoors, automakers, and other companies that depend on metals, including Boeing, Coca-Cola, Dr. Pepper Snapple Group and Reynolds Consumer Products, has accused big banks, including JPMorgan and Goldman Sachs, of manipulating the aluminum market, costing consumers billions of dollars in unnecessary charges and fueling regulatory concerns on both sides of the Atlantic. The allegations prompted a Senate probe into Wall Street's expansion into the commodities business as concerns multiply over whether the broader economy is being hurt by banks using important raw materials to benefit their bottom lines.
The potential sale by JPMorgan follows months of internal review, and comes as the company braces for a settlement with the Federal Energy Regulatory Commission over claims it rigged energy markets. The deal reportedly may cost the company more than $600 million. It also follows a July 19 announcement by the Federal Reserve that it is revisiting a landmark 2003 decision that allowed banks to enter the physical commodities business, raising the specter that banks may be banned from the highly profitable activity. The Commodity Futures Trading Commission and Department of Justice have launched preliminary probes over claims that warehouse owners such as JPMorgan are manipulating the aluminum market. A hearing on Tuesday by a Senate Banking Committee panel explored whether banks should be forbidden from controlling assets tied to raw materials given that they actively sell and trade financial products pegged to commodity prices.
"This could be good news for consumers and taxpayers. Banks should focus on core banking activities," said Sen. Sherrod Brown (D-Ohio), who led the Senate hearing on banks' physical commodities activities. "Our economy is strengthened when financial conflicts of interest and financial risk are reduced."
The potential sale at JPMorgan may be the first domino to fall as a result of increased regulatory and congressional scrutiny of the physical commodities business. Washington lawmakers, famously empathetic to so-called end users of raw materials, may heighten their review of banks as end-users such as MillerCoors publicly criticize banks and regulators for failing to stop alleged market manipulation.
In addition, the Fed by this fall could force Goldman and Morgan Stanley to divest key physical commodities businesses as a result of a temporary exemption they won when they converted to bank holding companies at the height of the financial crisis in 2008.
Testifying before Brown's panel this week, Tim Weiner, MillerCoors global risk manager of commodities and metals, urged the Fed to toughen its oversight of big banks due to their negative influence over commodities, including the aluminum MillerCoors uses for beer cans. Weiner said alleged gaming in the aluminum business has cost purchasers of the metal an extra $3 billion in recent years. That expense gets passed on to beer and soda drinkers.
Weiner, whose company makes Coors Light and Miller High Life, told the Senate Banking Committee that financial groups, through their ownership of warehouses, have been distorting the aluminum market by controlling how much of the metal flows out of their storage facilities, leading to extra rent and other costs for industrial companies. The exploitation of rules by banks and other warehouse owners had led to an "economic anomaly in the aluminum and other base metal markets," costing MillerCoors tens of millions of dollars.
"The potential impact on the debate by actual major end-users could be extremely significant and helpful," Dennis Kelleher, president and chief executive of Better Markets, a Washington nonprofit group advocating for stricter oversight of large financial institutions, said earlier this week. "The financial industry is supposed to be in service to the real economy. When that's not true, people pay attention."
Goldman Sachs, the owner of the biggest London Metal Exchange-authorized aluminum warehouse in North America, disputed the allegations.
Ten major global banks have generated nearly $50 billion in revenue off their commodities business over the last five years, according to Coalition, a financial data provider. JPMorgan, Goldman and Morgan Stanley last year were the top three global banks in commodities revenue, with the 10 leading institutions generating about $6 billion in revenue off commodities activities.
The physical commodities business had been a source of pride at JPMorgan, until recent controversies perhaps made the business more trouble than it's worth. In his March 2012 letter to shareholders, Jamie Dimon, JPMorgan chairman and chief executive, boasted that the company had become one of the top three firms in commodities. The business included 600 employees and 10 main offices around the world, and the number of clients grew more than 10 percent in 2011.
In recent years, JPMorgan has led the financial industry in generating revenue off commodities following its $1.6 billion acquisition in 2010 of Sempra Commodities from Royal Bank of Scotland. Analysts at Deutsche Bank estimated Thursday that up to 10 percent of the JPMorgan's revenue off trading in fixed-income, currencies and commodities, or FICC, comes from physical commodities. The company generated $4.8 billion in revenue off so-called FICC trading last quarter, its securities filings show.
JPMorgan had expected its physical commodities business to come under additional scrutiny. In its latest annual report, the company said it expected laws and regulations governing its commodities activities to "expand in scope and complexity, and to restrict some of the firm’s activities, which could result in lower revenues." The company also said it may incur "substantial" costs in complying with rules.
In February, Michael Cavanagh, co-chief executive of the financial group's corporate and investment bank, told investors that given "changes in regulation, particularly around the physical side, we'll be making sure we optimize that business for the new world we're in."
CORRECTION: JPMorgan generated $4.8 billion in revenue off FICC trading last quarter, not $688 million as previously reported.