Posts filed under “Legal”
Giant Banks Take Over Real Economy As Well As Financial System … Enabling Manipulation On a Vast Scale
Top economists, financial experts and bankers say that the big banks are too large … and their very size is threatening the economy. They say we need to break up the big banks to stabilize the economy. They say that too much interconnectedness leads to financial instability.
But – as shown below – the big banks are getting bigger and bigger … and getting into ever more interconnected markets.
Indeed, big banks aren’t even really acting like banks anymore. Big banks do very little traditional banking, since most of their business is from financial speculation. For example, we noted in 2010 that less than 10% of Bank of America’s assets come from traditional banking deposits.
The big banks are manipulating every market. They’re also taking over important aspects of the physical economy, including uranium mining, petroleum products, aluminum, ownership and operation of airports, toll roads, ports, and electricity.
A 2-year bipartisan probe by the Senate Permanent Subcommittee on Investigations has shined a light on this problem, culminating in a new 400-page report.
Senator Levin – the Chair of Subcommittee – summarizes the findings from the investigation:
“Wall Street’s massive involvement in physical commodities puts our economy, our manufacturers and the integrity of our markets at risk,” said Sen. Carl Levin, D-Mich., the subcommittee’s chairman. “It’s time to restore the separation between banking and commerce and to prevent Wall Street from using nonpublic information to profit at the expense of industry and consumers.”
“Banks have been involved in the trade and ownership of physical commodities for a number of years, but have recently increased their participation in new ways,” said Sen. John McCain, R-Ariz. “This subcommittee’s hearing is an opportunity to examine that involvement, determine whether it gives rise to excessive risk, and identify potential causes for concern that warrant further oversight by Congress and financial regulators.”
One focus for the subcommittee is the management of Detroit-area metal warehouses run by Metro Trade Services International, the largest U.S. warehouse company certified to store aluminum warranted by the London Metal Exchange for use in settling trades. Since Goldman bought Metro in 2010, Metro warehouses have accumulated up to 85 percent of the U.S. LME aluminum storage market.
Since Goldman took over the warehouses, the wait to withdraw LME-warranted metal has increased from about 40 days to more than 600 days, reducing aluminum availability and tripling the regional premium for storage and delivery costs.
The investigation revealed a number of previously unknown details about these deals: that Goldman’s warehouse company paid metal owners to engage in “merry-go-round” deals that shuttled metal from building to building without actually shipping aluminum out of Metro’s system; that the deals were approved by Metro’s board, which consisted entirely of Goldman employees; and that a Metro executive raised concerns internally about the appropriateness of such “queue management.”
Goldman didn’t just store aluminum; it was involved in massive trades of aluminum at the same time its warehouse operations were affecting aluminum availability, storage costs, and prices. After Goldman bought Metro, it accumulated massive aluminum holdings of its own, and in 2012, added about 300,000 metric tons of its own aluminum to the exit queue at its warehouses.
The Subcommittee investigation also examined other instances of Wall Street bank involvement with physical commodities. The Subcommittee report details how JPMorgan amassed physical commodity holdings equal to nearly 12 percent of its Tier 1 capital, while telling regulators its holdings were far smaller; and that at one point it owned an amount equal to more than half the aluminum used in North America in a year. The report also discloses that, until recently, Morgan Stanley controlled 55 million barrels of oil storage capacity, 100 oil tankers, and 6,000 miles of pipeline, while also working to build its own compressed natural gas facility and supply major airlines with jet fuel.
Details are also provided about Goldman’s ownership of a uranium trading company and two open pit coal mines in Colombia. When one of the mines was shut down last year due to labor unrest, Goldman’s Colombian subsidiary requested military and police assistance to end a human blockade — before paying the miners with $10,000 checks to end the protest.
The findings and recommendations from the bipartisan report are as follows:
Findings of Fact
(1) Engaging in Risky Activities. Since 2008, Goldman Sachs, JPMorgan Chase, and Morgan Stanley have engaged in many billions of dollars of risky physical commodity activities, owning or controlling, not only vast inventories of physical commodities like crude oil, jet fuel, heating oil, natural gas, copper, aluminum, and uranium, but also related businesses, including power plants, coal mines, natural gas facilities, and oil and gas pipelines.
(2) Mixing Banking and Commerce. From 2008 to 2014, Goldman, JPMorgan, and Morgan Stanley engaged in physical commodity activities that mixed banking and commerce, benefiting from lower borrowing costs and lower capital to debt ratios compared to nonbank companies.
(3) Affecting Prices. At times, some of the financial holding companies used or contemplated using physical commodity activities, such as electricity bidding strategies, merry-go-round trades, or a proposed exchange traded fund backed by physical copper, that had the effect or potential effect of manipulating or influencing commodity prices.
(4) Gaining Trading Advantages. Exercising control over vast physical commodity activities gave Goldman, JPMorgan, and Morgan Stanley access to commercially valuable, non-public information that could have provided advantages in their trading activities.
(5) Incurring New Bank Risks. Due to their physical commodity activities, Goldman, JPMorgan, and Morgan Stanley incurred multiple risks normally absent from banking, including operational, environmental, and catastrophic event risks, made worse by the transitory nature of their investments.
(6) Incurring New Systemic Risks. Due to their physical commodity activities, Goldman, JPMorgan, and Morgan Stanley incurred increased financial, operational, and catastrophic event risks, faced accusations of unfair trading advantages, conflicts of interest, and market manipulation, and intensified problems with being too big to manage or regulate, introducing new systemic risks into the U.S. financial system.
(7) Using Ineffective Size Limits. Prudential safeguards limiting the size of physical commodity activities are riddled with exclusions and applied in an uncoordinated, incoherent, and ineffective fashion, allowing JPMorgan, for example, to hold physical commodities with a market value of $17.4 billion – nearly 12% of its Tier 1 capital – while at the same time calculating the market value of its physical commodity holdings for purposes of complying with the Federal Reserve limit at just $6.6 billion.
(8) Lacking Key Information. Federal regulators and the public currently lack key information about financial holding companies’ physical commodities activities to form an accurate understanding of the nature and extent of those activities and to protect the markets.
Of course, the Federal Reserve – instead of regulating the banks, encouraged them to buy all of these physical assets. As Reuters notes:
[The Senate report] also points the finger at the Federal Reserve, saying the central bank has taken insufficient steps to address the risks taken by financial holding companies gathering physical commodities. The Fed in some cases was unaware of the growing risk, the report said.
Pam Martens is points out:
Adding to the hubris of the situation, the Wall Street banks’ own regulator, the Federal Reserve, gave its blessing to this unprecedented and dangerous encroachment by banking interests into industrial commodity ownership and has effectively looked the other way as the banks moved into industrial commerce activities like owning pipelines and power plants.
One would think that the mega banks’ regulator, the Federal Reserve, would be the first line of defense against this type of dangerous sprawl by banks. According to the Levin Subcommittee report, the Federal Reserve was actually the facilitator of the sprawl by the banks. The report notes:
“Without the complementary orders and letters issued by the Federal Reserve, many of those physical commodity activities would not otherwise have been permissible ‘financial’ activities under federal banking law. By issuing those complementary orders, the Federal Reserve directly facilitated the expansion of financial holding companies into new physical commodity activities.”
Big Banks Busted Massively Manipulating Foreign Exchange, Precious Metals … And Every Other Market Currency markets are massively rigged. And see this and this. Reuters notes today: Regulators fined six major banks including Citigroup (C.N) and UBS (UBSN.VX) a total of $4.3 billion for failing to stop traders from trying to manipulate the foreign exchange…Read More
While midterm coverage is largely focused on the parts of Congress that do very little, vital (and bizarre) midterm elections are going unexamined. State legislators pass a lot of bills, and some of that efficiency is thanks to a group called ALEC that writes legislation for them. It’s as shady as it sounds!
via John Oliver, HBO
Find a financial adviser who will put your interests first Barry Ritholtz Washington Post, October 26 2014 Today’s column is going to be on the wonky side, but stay with me — it is very important stuff. For investors seeking some help, it can be crucial. If you want financial advice, there…Read More
From Transparency International: The OECD Anti-Bribery Convention, adopted in 1997, requires each signatory country to make foreign bribery a crime for which individuals and enterprises are responsible. The Convention is a key instrument for curbing the export of corruption globally because the 41 signatory countries are responsible for approximately two-thirds of world exports and almost…Read More
> My Sunday Washington Post Business Section column is out. This morning, we look at the various legal standards of care financial advisors must adhere to. The print version had the full headline Why Two Standards for Financial Advice? while the online version was Find a financial adviser who will put your interests first. As I…Read More
Fascinating comparison of popular acceptance of non-traditional (in some jurisdictions, they were called “Deviant”) marraiges. Note how the slopes of the lines showing legality and popular acceptance have shifted. Not just change, but the rate of change has accelerated. This suggests to me a more progressive attitude on Social Issues. Add Marijuana legalization to the…Read More
Open Secret: The Global Banking Conspiracy That Swindled Investors Out of Billions is the new book written by Erin Arvedlund.
The book goes behind the scenes of the elite firms that trafficked in LiBOR based products, including Barclays Capital, UBS, Rabobank, and Citigroup to show the negative impact they had on both ordinary investors and borrowers.
Erin’s claim to fame was a column she wrote in Barron’s in the early 2000s outing Bernie Madoff as a fraud. It was a national bestseller titled Too Good to Be True.
Here is Yahoo:
“LIBOR, the London Interbank Offered Rate, is a global benchmark for interest rates. It’s tied to everything from mortgage rates and student loan rates to complex financial derivatives. And guess what? For a very long time it was rigged.
Now, multiple lawsuits are pending, and that could mean some money back for some investors, traders and consumers.
LIBOR is set each day by a group of bankers, based on estimates of rates at which banks would expect to borrow money from each other. It’s a system built on trust, not math. Regulators were tipped off back in 2007 that banks were fixing rates, and by the summer of 2012, an ugly scandal was revealed. An estimated $300 trillion in financial securities worldwide are based on LIBOR.
Video after the jump . . .