Framing the Wall Street Commodity Investigation for Carl Levin

By Pam Martens: August 5, 2013 

Senator Carl Levin

The Senate’s Permanent Subcommittee on Investigations, chaired by Senator Carl Levin, has disclosed that it is conducting an investigation into the ownership and warehousing of physical commodities by large Wall Street firms. Senator Levin has also announced that he will not run for reelection next year – meaning this could be one of his last major opportunities to save the country from the further ravages of Wall Street. 

The Senate investigation comes four long years after 60 Minutes reported that Morgan Stanley had acquired the capacity to store 20 million barrels of oil. The report also showed that Goldman Sachs had taken stakes in companies owning oil storage terminals. The 60 Minutes report was in 2009. In 2008, during the financial crisis, the Federal Reserve had approved making Morgan Stanley and Goldman Sachs bank holding companies – giving them the ability to own banks holding insured deposits as well as to access emergency loan programs from the Federal Reserve, despite the fact that they were investment banks engaged in speculative securities trading. 

With Congress and the public stunned at the time by 100-year old financial institutions collapsing before their eyes, this is what the Federal Reserve was able to get away with on September 21, 2008: 

Press Release from the Board of Governors of the Federal Reserve System: September 21, 2008

For release at 9:30 p.m. EDT

“The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

“To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.”

This press release is sure to go down in the financial history books as one of the key cornerstones of the philosophy known as too big to fail. Until this press release rewrote the banking laws of the United States, it was the function of the Federal Reserve to extend credit only to banks holding insured deposits. In a mere press release, the Federal reserve repealed 95 years of U.S. monetary policy and gave credit to the broker-dealer units of Wall Street firms – the divisions which engage in the speculative trading of  securities for both the house and customers.

This expansion of Federal Reserve powers to arbitrarily assume the role of the U.S. Congress came on the heels of a similar Fed act in 2003. On October 2, 2003, the Federal Reserve issued an edict allowing Citigroup to massively expand its oil trading business by taking possession of crude oil on tankers because it would “reasonably be expected to produce benefits to the public.”  Federal Reserve Chairman, Alan Greenspan, voted in favor of this insane policy as did the current Fed Chairman, Ben Bernanke, who served on the Fed Board at the time.

Once Citigroup had received its physical commodity waiver, more waivers followed to Citigroup competitors in subsequent years.

In 1998, the Federal Reserve put the initial wobbly dominoes in place for the epic 2008 collapse of Wall Street – again acting beyond its legal mandate and usurping the role of Congress. Despite the Glass-Steagall Act and the Bank Holding Company Act of 1956, which were in place at the time, outlawing the merger of insured banks with insurance companies and broker-dealers engaged in selling securities, on September 23, 1998, the Federal Reserve allowed Travelers Group Inc. (an insurance company) to become a bank holding company and to acquire Citicorp, parent of Citibank, an insured depository institution backed by the U.S. taxpayer. At the time, Travelers owned Salomon Smith Barney, an investment bank and brokerage firm.  As numerous witnesses at the public hearings on June 25 and June 26, 1998 testified, this combination was patently illegal under the laws of the land at the time. (Congress would eventually cave and repeal the Glass-Steagall Act in 1999.)

Mark Silverman, speaking on behalf of Citicorp-Travelers Watch, a community coalition, stated at the public hearing that “…the merger is illegal. The affiliation between Citibank, as a member bank of the Federal Reserve Board and Travelers’ subsidiaries that are engaged principally in securities dealings is simply prohibited by the Glass-Steagall Act…If the Board approves this merger prior to any change in the law, Congress, pressured by Citigroup and concerned about the consequences of a forced divestiture, can enact one of the most embarrassingly blatant pieces of private-interest legislation in recent memory…the Board risks undermining the legitimacy of itself and the legislature…”

Hilary Botein, Associate Director of the Neighborhood Economic Development Advocacy Project (NEDAP), told the Fed and the audience at the public hearing that the combination made “a mockery of the regulatory process by allowing Citicorp and Travelers to brazenly violate existing law.” 

The Coordinator of the New York City Community Reinvestment Task Force, Sarah Ludwig, stated at the public hearings that the proposed combination was “an affront to the public, and underscores that large and powerful corporations influence government decision making even to the point of obtaining approval on illegal transactions…Secondly, approving the application would constitute hideously unsound policy….” 

“Hideously unsound,” in retrospect, might have even been an understatement.

I was also present at this public hearing and told the Fed panelists:”It is amazing how soon we forget. It was just 60 years ago that 4,835 of America’s banks went broke and closed their doors, leaving shareholders and depositors destitute. The underlying reason that this happened was the lack of moral courage by our regulators and elected representatives to just say no to powerful money interests. Instead of just saying no, Washington handed the banks the equivalent of an ATM card to the Fed’s discount window to speculate in stocks … We also want to remember that the political dynamics that created the backdrop for the banking meltdown in the ’30s grew from a corrupt, cozy culture between Wall Street and Washington.” 

Now we are learning that despite multiple U.S. laws that bar insured depository banks from owning commercial enterprises, this hasn’t stopped Wall Street from buying up warehouses to store metals and other commercial enterprises in such areas as mining, processing, and transporting, while the primary Federal regulator of bank holding companies, the Federal Reserve, looks the other way. 

How did the Federal Reserve, created to ensure sound monetary policy in 1913, become an unelected legislative branch of government, the creator of too big to fail, the entity giving itself the power to bail out its own hubris with trillions of dollars backstopped by the taxpayer,  a yes man to Wall Street while simultaneously serving as its primary regulator. 

If Senator Levin wants to leave a critical, lasting legacy to his country, he’ll expand his commodity investigation into what the Federal Reserve has done since its 1998 approval of the Travelers and Citicorp merger. 

And Senator Levin will think deeply about what all of this human suffering and foreclosures and unemployment and 46.2 million Americans, including one in every five children, living below the poverty level has been about. It all started with the Travelers and Citicorp merger and the repeal of the Glass-Steagall Act. According to John Reed, former CEO of Citicorp, when Sandy Weill, former CEO of Travelers, approached him about the merger, he had his own personal enrichment in mind. John Reed told Bill Moyers the following on a March 16, 2012 PBS program: 

“Sandy Weill. I mean, his whole life was to accumulate money. And he said, ‘John, we could be so rich.’ ”

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