By Pam Martens: January 21, 2014

On February 5, 1997, the U.S. investment bank, Morgan Stanley, known for its stock underwriting and merger and acquisition business, made its first foray into creating a product distribution pipeline to mom and pop investors — it bought Dean Witter, Discover & Company and its army of stockbrokers. Last year, Morgan Stanley completed the purchase of Smith Barney’s retail brokerage business, giving it a selling force of over 16,000 stockbrokers – now called advisors.

But a 16,000-strong sales force is not the only product distribution pipeline owned by Morgan Stanley. The company has a controlling stake in TransMontaigne, a sprawling oil and gas behemoth which owns real pipelines that carry real oil. According to the company’s web site, the ownership structure is as follows:

“TransMontaigne Partners has no officers or employees and all of our management and operational activities are provided by officers and employees of TransMontaigne Services Inc. TransMontaigne Services Inc. is an indirect wholly owned subsidiary of TransMontaigne Inc. TransMontaigne Inc. is an indirect wholly owned subsidiary of Morgan Stanley. We are controlled by our general partner, TransMontaigne GP L.L.C., which is an indirect wholly owned subsidiary of TransMontaigne Inc.”

According to TransMontaigne Partners’ web site, the business owns at least 44 fuel terminals; 21 million barrels of storage capacity; the 67-mile Razorback pipeline between Missouri and Arkansas; the Diamondback pipeline from its Brownsville, Texas facility to its terminal in Matamoros, Mexico; a dock facility located in Baton Rouge, Louisiana connected to the Colonial pipeline; along with other oil and gas-related assets.

But Morgan Stanley’s footprint is not just in investment banking, retail stock brokerage, investment advisory services, physical commodities, derivatives trading on those same commodities – it’s also a bank (Morgan Stanley Bank, National Association) holding deposits insured by the Federal Deposit Insurance Corporation (FDIC), which gives it access to the Fed’s discount window.

In the tumultuous days of the collapse of Wall Street in 2008, the Federal Reserve issued a press release on September 21 announcing that it was allowing Morgan Stanley and Goldman Sachs to become bank holding companies. But far more important, in the same announcement the Federal Reserve effectively revoked the lessons of the 1929 Wall Street crash by bailing out the speculators in the non-bank brokerage units of Morgan Stanley and its counterparts across Wall Street. The Federal Reserve announcement read:

“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.”

Over the next two years, the U.S. taxpayer and the Federal Reserve would pour trillions of dollars in below-market-rate loans into U.S. and foreign banks to bail out the mistakes of speculators.

Recently, the U.S. Senate and the Commodity Futures Trading Commission have come to the stunning conclusion that they have no idea of just how sprawling Wall Street’s ownership and control of physical commodities may be. The information is just not available, not even to regulators. This has prompted the U.S. Senate’s Permanent Subcommittee on Investigations, which has subpoena power, to open an investigation into the matter. Last week, Senator Carl Levin, Chairman of the Committee, said that the investigation is ongoing.

Also last week, Senator Sherrod Brown convened the second hearing on the matter before the Subcommittee on Financial Institutions and Consumer Protection, part of the Senate Banking Committee. Senator Brown told hearing participants that “the six largest U.S. bank holding companies have 14,420 subsidiaries, only 19 of which are traditional banks.”

In July 2012, the Federal Reserve Bank of New York issued a study titled A Structural View of U.S. Bank Holding Companies. That report revealed that U.S. bank holding companies own at least 16 utilities; 479 insurance companies; 2,388 real estate firms; 1,682 healthcare and social assistance companies; and 5 mines. We know from more recent revelations that Wall Street’s largest banks also own at least 104 metal warehouses. Last year, beer and soda manufacturers alleged before Congress that Wall Street banks now control the London Metal Exchange and are rigging the price of aluminum to the detriment of both the manufacturers and consumers.

There are legitimate concerns that Wall Street’s ownership of physical energy assets while trading trillions of dollars in oil and gas futures may also be rigging the marketplace.

On January 15, Norman Bay, the Director of the Office of Enforcement at the Federal Energy Regulatory Commission (FERC), explained in detail how the rigging of the commodities markets might be conducted in his testimony before Senator Brown’s Subcommittee:

“A fundamental point necessary to understanding many of our manipulation cases is that financial and physical energy markets are interrelated…a manipulator can use physical trades (or other energy transactions that affect physical prices) to move prices in a way that benefits his overall financial position.  One useful way of looking at manipulation is that the physical transaction is a ‘tool’ that is used to ‘target’ a physical price…The purpose of using the tool to target a physical price is to raise or lower that price in a way that will increase the value of a ‘benefitting position’ (like a Financial Transmission Right or FTR product in energy markets, a swap, a futures contract, or other derivative).

“Increasing the value of the benefitting position is the goal or motive of the manipulative scheme.  The manipulator may lose money in its physical trades, but the scheme is profitable because the financial positions are benefitted above and beyond the physical losses.”

Wall Street is able to leverage its trades in the oil futures market by a factor of 95 to 1 or greater. Typically, margin of 5 percent or less is required of large oil speculators on the major commodity futures exchanges. If you know the direction of prices, you can make a killing using very little of your own firm’s capital. And if you also own the physical commodities, you can call yourself a bona fide hedger and avoid rules meant to rein in risky or manipulative trading.

Last year, at the first hearing on the issue on July 24, Senator Brown summed up the concern of the handful of Congressional members who are paying attention to this critical matter which could have catastrophic consequences to the nation – again.

Senator Brown asked: “Do the benefits of combining these activities outweigh the harm to consumers and manufacturers? Can regulators or the public fully understand these large, complex financial institutions and the risks to which these firms are exposing themselves – and the rest of society? Are the laws and regulations sufficiently stringent and transparent, and are regulators enforcing them aggressively enough? And what do we want our banks to do – make small business loans or refine and transport oil? Issue mortgages or corner the metals market?”

We know what the public wants our banks to do – stop rigging markets and limit themselves to traditional banking activities like making consumer and business loans. The problem is not figuring out what the public wants or what is right and ethical. The problem is a timid and cowering Congress that takes its marching orders from Wall Street’s campaign financiers – one more pipeline that needs a permanent gate valve.