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When Wall Street Mega-Banks Control Commodities, Prices Rise, the Financial System Is Endangered, Public Citizen Report Shows

April 10, 2014

When Wall Street Mega-Banks Control Commodities, Prices Rise, the Financial System Is Endangered, Public Citizen Report Shows

Federal Regulators, Congress Should Establish Secure Wall Between Banking and Commerce

WASHINGTON, D.C. – As the Federal Reserve Board revisits a critical policy concerning whether Wall Street mega-banks may own commodities, a new Public Citizen report concludes that for the sake of consumers and the financial system, regulators and lawmakers should establish a strong wall between banks and commerce.

The Federal Reserve Board has asked for comments by April 16 on whether banks should own commodities.

Not only does bank control of metals, oil, food and other commodities enable Wall Street to monopolize markets and drive up prices, but it puts the financial system – and taxpayers – at risk. Banks buy commodities with borrowed, federally insured deposits so a natural disaster or catastrophic event can create billions in liabilities. When a bank lacks its own capital to cover these liabilities, taxpayers may be stuck with the bill.

The scope of the problem is impossible to grasp because banks don’t fully disclose ownership.

“Wall Street will continue speculating on basic commodities and draining money from the economy until it can no longer get away with it,” said Bartlett Naylor, financial policy advocate with Public Citizen’s Congress Watch division and author of the report. “These ‘too big to fail’ institutions have survived their own recklessness only because We the People have bailed them out. Disaster is imminent in the risky game Wall Street is playing with our economy.”

The report, “Big Banks: Big Appetites,” explains how separating banking and commerce served as a foundational principle of the American economy. Problems arose when banking spilled into commerce. A turning point came in 1999, when the Gramm-Leach-Bliley Financial Modernization Act was passed, punching holes in the wall between banks and commerce.

“Mega-banks such as Goldman Sachs and Morgan Stanley took full advantage of the loopholes and are now speculating on basic commodities – like fuel, metal and other materials that have nothing to do with banking – to line their own pockets at the expense of the average consumer,” said Lisa Gilbert, director of Public Citizen’s Congress Watch division.

The solutions:

• The Federal Reserve should use its existing discretion to protect the safety and soundness of the financial system by limiting bank ownership of commodities;

• Congress should pass the 21st Century Glass-Steagall Act and similar measures, which would erase the 1999 loopholes; and

• The Commodity Futures Trading Commission should require that speculation intelligence firms – which gather and sell to traders real-time information about specific markets – register with the agency, and that their reports be made public.

Read the report.