Sen. Sherrod Brown, D-Ohio, and others on July 23 questioned the role of large bank holding companies in the energy and commodity sectors.
Brown chairs the Subcommittee on Financial Institutions and Consumer Protection within the Senate Committee on Banking, Housing & Urban Affairs. The subcommittee held a hearing on “Examining Financial Holding Companies: Should Banks Control Power Plants, Warehouses, and Oil Refineries?”
Historically, bank holding companies (BHCs) have been restricted under the Bank Holding Company Act (BHCA) from engaging in commercial activities. In recent years, BHCs have utilized a number of waivers and loopholes in the law, with occasional sign-off from federal regulators, to expand business operations into physical commodities and energy, Brown said in an opening statement.
A handful of investment banks like Goldman Sachs, JPMorgan Chase and Morgan Stanley have a burgeoning list of subsidiaries and few behave like traditional banks, Brown said.
Witnesses at the hearing included: Saule T. Omarova, Assistant Professor at University of North Carolina at Chapel Hill School of Law; Randall D. Guynn, Partner, Davis Polk Wardwell LLP; Josh Rosner, Managing Director, Graham Fisher & Co.; and Tim Weiner, Global Risk Manager, Commodities and Metals, MillerCoors.
Brown said the concern over the expanded power of “trusts” goes back nearly a century – although diverse holding companies are no longer called “trusts” anymore.
“Instead we have “financial holding companies” – large conglomerates combining banks, trading firms, energy suppliers, oil refiners, warehouses, shipping firms, and mining companies,” Brown said.
Sen. Elizabeth Warren, D-Mass., suggested the current trend evokes memories of the days when J.P. Morgan played an active role in running major railroads and steel companies. Democrats on the panel said it is a disturbing trend in the wake of the 2008 financial crisis.
Warren noted that legislation passed following the Great Depression tried to separate “boring banking” with checking accounts and routine lending from the “high stakes risks” associated with commodities trading and Wall Street financing.
Since the 1990s, financial institutions have been able to trade commodities. Goldman Sachs, for instance, is involved in trading coal, natural gas, crude oil and uranium.
The expanded role of financial holdings group raised questions about issues ranging from consumer protection, market manipulation to stability of the institution’s financial holdings, Omarova said in her testimony.
Omarova also raised the specter of what might happen to the stability of a financial institution that owns an oil rig, which suffered a catastrophic accident.
Regulations are not set up to monitor banks when they are “acting like Enron.” Not saying a debacle is likely but more “sunlight” is needed, Omarova said.
Attorney defends role of financial holding firms in energy, commodities
It is “revisionist history” to suggest that banks getting involved in commodities is a “radical” departure, said Guynn, an attorney who represents financial institutions. Reasonable people, however can disagree over where the line should be drawn, Guynn said.
During cross-questioning, Sen. Pat Toomey, R-Pa., suggested that some commodity markets are actually more stable because of the participation of the trading arm of large financial institutions.
Mining companies, for example, could be happy that financial institutions are available to become buyers of their products, Guynn said.
Guynn challenged critics to document any actual marketplace harms rather than “potential” adverse effects. Guynn says the subcommittee should not seek to impose significant new restrictions on financial firms in the energy and commodity sectors.