The naïve among us may have believed that with the recent financial meltdown, the major banks and their activities that affect the general economy would have been subjected to more scrutiny by federal regulatory agencies. We may have also believed that risky speculation by these institutions and manipulation of derivatives, financial instruments, and commodities for their own gain, to the detriment of the public interest, would have been prevented by the regulatory agencies. How wrong we were!
Highlighting the failure of the big banks and their regulators to rein in speculative trading were the $6 billion in losses sustained by J.P. Morgan Chase last year by the “London Whale” which apparently went under the radar of the top bank executives and the agencies that were supposed to be providing oversight. Dodd-Frank was formulated to prevent this type of activity, but due to the efforts of bank lobbyists, many of its rules are not yet on the books and the regulators have not been regulating. For a number of reasons, major bank earnings have been soaring, including undue
risk-taking.
A New York Times lead article on Sunday, July 21, revealed how the big investment banks have been making huge sums of money manipulating various commodity markets and hurting the economy by raising the prices of many common items (http://goo.gl/CGgfO). The article focused on the way Goldman Sachs has stockpiled huge stores of aluminum in warehouses they own in Detroit, moving it among their other warehouses to “exploit pricing regulations set up by an overseas commodities exchange” in which Goldman had an ownership interest until last year. It has been estimated by various industry executives and financial analysts that the manipulation of the aluminum market by Goldman and other financial companies has added more than $5 billion to the cost of common items for the American consumer in the last three years. This includes 90 billion aluminum cans sold annually in the United States, automobiles, house siding, electronics, and so forth.
Prior to Goldman purchasing one of the nation’s largest storers of aluminum that had the warehouses in Detroit, the average time for stored aluminum to be delivered to the factories that used the metal was six weeks. Since Goldman took over, the wait has increased to over sixteen months. Prices for the metal rise the longer it is stored, as storage time is figured
into the cost.
However, aluminum is merely one of a number of different commodities that the financial players have obtained major stakes in, being able to manipulate the markets for these resources. Included are other metals like copper, oil, electricity, wheat and other grains, coffee, cotton, and so forth. The investment banks involved in dealing in these commodities have made billions of dollars in profits on these transactions, increasing the cost of these commodities to the American consumer. Two years ago, an internal memo at Goldman Sachs indicated that about one third the price of a barrel of oil was the result of investor speculation. (Just think of what that does to prices at the gas pump.) At present, J.P. Morgan has been accused by the government along with some other banks of rigging electricity prices and is attempting to settle with the federal authorities, a settlement that could top half a billion dollars. Hedge funds are also involved in shaping various commodity markets, which they see as a huge source of income.
Since the repeal of the Glass-Stegall Act in 1999 and Congressional relaxations of other financial regulations that limited the risks banks could take, these institutions have entered into different commercial activities that are far removed from their original purpose. In addition to buying and trading in the commodities themselves, banks have been buying “physical commodity trading assets,” including ports, pipelines, warehouses, and ships. This has been approved by federal regulatory agencies such as the Federal Reserve. However, by controlling these assets, the banks obtain proprietary information regarding the status of the different commodities that allows them to make their trades more profitable. Though insider trading is not considered against the rules in the commodities market, there is an obvious conflict of interest that has not been addressed by the federal regulatory agencies.
The big investment banks are making major profits by manipulation and speculation in the commodities markets at the expense of the American consumer and the economy. The banks have no business being in these businesses. It is up to the Federal Reserve, the S.E.C. and other federal
regulatory agencies to stop these activities and get the bankers back to boring business of banking. If they don’t act, then Congress should further tighten regulations on the banks.
Resurrecting Democracy
www.robertlevinebooks.com
Political junkie, Vietnam vet, neurologist- three books on aging and dementia. Book on health care reform in 2009- Shock Therapy for the American Health Care System. Book on the need for a centrist third party- Resurrecting Democracy- A Citizen’s Call for a Centrist Third Party published in 2011. Aging Wisely, published in August 2014 by Rowman and Littlefield. Latest book- The Uninformed Voter published May 2020