By Pam Martens: January 15, 2014
U.S. Senator Sherrod Brown, Chair of the Subcommittee on Financial Institutions and Consumer Protection, part of the Senate Banking Committee, will hold a hearing today at 2:00 p.m. on “Regulating Financial Holding Companies and Physical Commodities.” This will be the second time in six months that the U.S. Senate has investigated the alleged rigging of these markets by Wall Street firms as the Federal Reserve, the sole regulator to grant Wall Street the power to push into these markets, fails to take action to repeal its orders and asks for public comment through March 15, after which time it will study the problem some more.
In his written testimony submitted to the Committee, on which he will take questions today, Norman Bay, Director of the Office of Enforcement at the Federal Energy Regulatory Commission (FERC), cited examples of fraudulent activity by Deutsche Bank, Barclays, and JPMorgan. In the JPMorgan case, FERC forced the bank to pay a combined $410 million in civil penalties and disgorgements to ratepayers in July of last year. At the time, FERC said JPMorgan engaged in 12 manipulative bidding strategies designed to make profits from power plants that were wildly excessive and resulted in the overpayment of tens of millions of dollars to JPMorgan.
Bay said FERC’s efforts in the past have been hampered by the Commodity Futures Trading Commission (CFTC) failing to turn over data on trades except on a case by case basis. According to Bay, “this prevents Commission staff from seeing the complete picture of what is occurring in its jurisdictional markets and from fully integrating the financial information into its automated screens.” (A nice loophole for Wall Street.)
Bay added that he is hopeful this situation will now improve because “earlier this month, FERC and the CFTC signed a Memorandum of Understanding that is intended to result in broader information sharing than currently occurs and is, therefore, a first step toward sharing appropriate data in a timely manner.”
According to Bay’s written testimony, FERC is also being hamstrung in policing its markets by a decision handed down by the U.S. Court of Appeals for the District of Columbia last year in Hunter v. FERC. In that case, the court said the CFTC has exclusive jurisdiction over futures contracts. Bay said that “deprives FERC of authority to bring an action based on manipulation in the futures market, even if the activity affected prices in the physical markets for which FERC has exclusive jurisdiction.”
Bay’s testimony suggested that the legions of Wall Street lawyers are now attempting to cast that decision broadly “to cover not only manipulation in the futures market, but also many additional transactions and products, including those squarely within FERC’s jurisdictional markets.” He asked for legislation from Congress to eliminate this legal uncertainty.
One of the triggering events for these hearings were allegations last year by the beer and soda manufacturers that Wall Street firms were rigging the aluminum markets through their control of the London Metal Exchange (LME).
At the July 23, 2013 hearing before Senator Brown’s Subcommittee, Timothy Weiner, Global Risk Manager of the giant beer brewer, MillerCoors LLC, told the panel that under exemptions that the largest Wall Street firms had received from the Federal Reserve, they now had “effective control” of the London Metal Exchange.
Weiner further testified that these Wall Street firms “have created a bottleneck which limits the supply of aluminum. Aluminum prices in general and for can sheet in particular have remained inflated relative to the massive oversupply and record production. What’s supposed to happen under these economic conditions? When supplies rise while demand is flat to down, prices should fall.”
What’s happening instead, according to Weiner, “is that the aluminum we are purchasing is being held up in warehouses controlled and owned by U.S. bank holding companies, who are members of the LME, and set the rules for their own warehouses. 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. Aluminum users like MillerCoors are being forced to wait in some cases over 18 months to take physical delivery due to the LME warehouse practices or pay the high physical premium to get aluminum today. This does not happen with any of the other commodities we purchase. When we buy barley we receive prompt delivery, the same with corn, natural gas and other commodities. It is only with aluminum purchased through the LME that our property is held for an extraordinary period of time, with the penalty of paying additional rent and premiums to the warehouse owners, until we get access to the metal we have purchased.”
Weiner said that through December 2012, Goldman Sachs was the largest LME principal and through its ownership of Metro International Trade Services owns one of the largest warehouse complexes in the LME system, controlling 29 of the 37 warehouse locations at the LME approved site in Detroit. According to Weiner, “This site houses approximately one quarter of the aluminum stored in LME facilities globally and over 70% of the available aluminum in North America.”
Weiner told the Subcommittee that there is no independent regulator of the LME warehouses or of the Exchange itself – it’s self-regulated by these Wall Street firms and its other principals.
Other witnesses slated to testify at today’s hearing are Vince McGonagle, Director of the Division of Market Oversight at the Commodity Futures Trading Commission and Michael Gibson, Director, Division of Banking Supervision and Regulation at the Board of Governors of the Federal Reserve System.