Fed: Pare back Wall Street merchant banking

WASHINGTON/NEW YORK • The United States Federal Reserve Board recommended that the nation's legislature pare back Wall Street's ability to own physical commodities and engage in other aspects of merchant banking because of possible risks to the financial system, according to a report issued on Thursday.

US lawmakers should repeal permission granted in 1999 for Goldman Sachs Group and Morgan Stanley to conduct activities like storing and transporting physical commodities that other banks cannot do, the Fed said jointly with two other regulators.

The report was required under Dodd-Frank, the Wall Street reform law, which required the Fed, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency to report to Congress on the types of banking activities that might pose risks to the financial system.

Goldman Sachs, Morgan Stanley and JPMorgan were the targets of criticism that led to the 2014 review of their commodities businesses. It found lenders used their ownership of metals and other physical commodities to dominate markets and gain unfair trading advantages. The physical commodities businesses at Goldman Sachs and Morgan Stanley were protected by grandfathering that allowed them wider abilities than most banks - an advantage the Fed is seeking to end.

Existing rules allowing commodity investments raise "safety and soundness concerns as well as competitive issues", the Fed said.

Wall Street firms have been scaling back riskier parts of their commodities businesses in recent years because of public and political scrutiny.

Last November, Morgan Stanley completed the sale of its physical oil business to commodity trading firm Castleton Commodities. In 2014, the bank sold its controlling stake in oil storage business TransMontaigne to NGL Energy Partners LP.

In December 2014, Goldman sold its controversial Metro metals warehousing unit to Swiss private equity group Reuben Brothers.

The Fed recommended that Congress repeal the ability of banks to make investments in non-financial companies. This would preclude banks being exposed to legal liability for operations of a portfolio company, the report said.

Spokesmen for Goldman and Morgan Stanley declined to comment on the report. A number of banking trade organisations called the recommendations "unfortunate and ill-considered". They said regulators had not provided a cost-benefit analysis or justification for the changes.


A version of this article appeared in the print edition of The Straits Times on September 10, 2016, with the headline 'Fed: Pare back Wall Street merchant banking'. Print Edition | Subscribe