In an article in Wednesday's Financial Times, "Banks Braced For Fed's Commodities Decision," an issue was raised that has been pointedly swept under the rug by the banking community and, I'm sad to say, our government.
A plethora of banks and bank holding companies such as Goldman Sachs, Morgan Stanley, JP Morgan Chase, and Citigroup (please see "Citigroup's Oil Traders $100,000,000 Payday: A Wakeup Call For the Nation") have been actively trading physical commodities and paper commodity derivatives (i.e. oil, natural gas, an array of agricultural commodities, metals, and on).
According to the FT article, several banks have entered the commodity business in recent years guided by "an increasingly permissive Fed."
What a time to be permissive! The likes of Goldman, Morgan Stanley, and JP Morgan slunk their way onto a commodity trading platform some years ago by acquiring interests in power plants and oil tankers, giving them the rationale to deal in physical commodities.
Divestment was envisaged as companies became financial holding companies. But a knowing banking community, aided by moneyed lobbyists, created an accommodating loophole in the Gramm-Leach-Bliley banking reforms of 1999.
One needs raise the question again and again: What is a bank or bank holding company doing using FDIC insured deposits, access to loans at the Fed window, access to myriad Fed Reserve and governmental loan and support programs, and the implied government guarantee of 'too big to fail" playing casino, gambling with commodity positions, with both physical product and paper derivatives? They are buying and selling commodity derivatives far beyond their in-house needs and, in most cases, based on pure speculation. And this is continuing even after the disastrous, egregious speculation of the all too recent past.
In the title I have used the word "our," because these banks could very well not be in existence were it not for the government's massive intervention, ranging from TARP funds (please see "Your Tarp Money Is Being Used To Prop Up The Price of Oil"), guaranteeing dubious asset holdings, and -- as with Goldman Sachs -- providing third parties (AIG) with counter-party liquidity to cover billions of what otherwise would have been massive losses on speculative derivatives. In a sense, a strong case can be made that they have become morally beholden as "our banks."
It is one thing for banks to finance the trade in commodities, by establishing letters of credit and providing third party financing for inventories and production. But it is sheer madness, after recent history, to permit banks to become commodity traders, especially with our money.
In playing the commodity markets with federally guaranteed deposits and implied guarantees, the banks make the public pay twice. First, the public pays by providing much of the financing at give-away levels. Second, we have to pay more in day-to-day prices for staples, such as gasoline, because of speculatively driven higher prices for core commodities, like oil.
In the old days, commodity traders put their own money on the line. It's well past time we return to that discipline. It will go a long way in reducing the speculative excesses of many of the commodities being traded on the exchanges.