Tim Weiner, global risk manager of commodities and metals at MillerCoors LLC, smells a rat in his supply chain. He believes bank holding companies, through their control and ownership of stores of aluminum, are inflating the metal’s prices. Testifying at a Senate hearing on Tuesday, Weiner said the aluminum he purchases for the packaging of the company’s beer is being held up in warehouses that are controlled and owned by U.S. bank holding companies.
“These bank holding companies are slowing the load-out of physical aluminum from these warehouses to ensure that they receive increased rent for an extended period of time,” he said. MillerCoors has to wait as long as 18 months for the metal or pay a high premium. Weiner believes the practice is keeping aluminum prices higher than they should be in a market where there has been “massive oversupply and record production.”
Tuesday’s hearing of the Financial Institutions and Consumer Protection Subcommittee of the Senate Committee on Banking, Housing & Urban Affairs detailed other instances in which large U.S. banks have diversified into commodities-markets operations, stretching the limits of rules designed to separate banking and commerce. The upshot: the high prices and price volatility some commodities have experienced may in part stem from banks’ heavier involvement in the storage, transportation and trading of “physical” commodities (as opposed to their participation in the “non-physical” futures and options markets.)
According to Professor Saule Omarova, associate professor of law at the University of North Carolina, the practice of mixing banking and commerce has undergone a “qualitative change” in the past decade. Large financial holding companies (FHCs), particularly Goldman Sachs, JPMorgan Chase and Morgan Stanley, have become “major merchants of physical commodities and energy, despite the legal wall designed to keep them out of any non-financial business.” That might not be so bad, of course, if financial institutions didn’t control payments, credit allocation, bond markets, futures and options markets — virtually all the channels through which money flows.
Under U.S. banking laws, banks’ participation in the commodities markets must be related to an underwriting or investment-banking activity. In addition, “even though [a financial holding company] is permitted to acquire full ownership of a purely commercial firm, the principal purpose of its investment must remain purely financial: making a profit upon subsequent release or disposition of its ownership stake,” said Omarova.