14 Pursuing Oversight

of issues troubling him—from concerns about a bank taking over a commercial business; to that bank’s exercising control over a key raw material important to U.S. defense, the auto industry, and American consumers; to Goldman’s disrupting commodity markets and driving up commodity prices through questionable practices; to concerns about whether Goldman was using inside information from its warehouse activities to line its own pockets in financial markets. It rang all his outrage bells at once.

Senator Levin opened the hearings by observing: “If you like what Wall Street did for the housing market, you will love what Wall Street is doing for commodities.” After generally describing the nine case studies at Goldman, JPMorgan, and Morgan Stanley, he launched into detail about Goldman’s physical aluminum activities.

The first two hearing witnesses were the president of the Detroit warehousing company purchased by Goldman and the head of Goldman’s commodities group. Both denied wrongdoing and defended the warehouse’s actions, but were hard pressed to explain the merry-go-round transactions in which clients were paid millions of dollars to move their aluminum from one Goldman warehouse to another. Both admitted Goldman itself had engaged in a massive aluminum transaction that contributed to the warehouse’s already lengthy exit queue. Yet both denied that any of those transactions contributed to the steadily climbing U.S. aluminum prices. In addition, under questioning, both acknowledged that at least 50 Goldman employees got regular reports on confidential warehousing activities, while denying Goldman ever used any of that inside information for its own trading purposes.

The next panel heard from two more witnesses, one a leading aluminum market analyst and the other the largest purchaser of aluminum in the world, Novelis, which supplies aluminum used to make beer and soda cans, auto parts, and consumer electronics. Both blasted Goldman’s warehouse activities for artificially restricting aluminum supplies, driving up prices, and costing consumers billions of dollars. They expressed outrage about the nearly twoyear delay to get aluminum out of the Goldman warehouse, and strenuously disputed the claim that the warehouse’s actions had no effect on overall aluminum prices. Novelis’ representative testified point blank: “[B]anks and trading companies should not be allowed to own warehouses.”

The second day of hearings took testimony from experts and federal regulators who, rather than comment on the Goldman case study, testified more broadly about the negative impacts of bank involvement with physical commodities. One key moment came when Law Professor Saule Omarova and industrial risk analyst Chiara Trabucchi were shown a chart depicting 31 U.S. power plants and related facilities located across the country that, in 2011, were all controlled by JPMorgan Chase (Image 13.2).20

Professor Omarova described it as a “terrifying picture” which “the law did not mean to happen at all. … [B]anks should not be doing this stuff.” Ms. Trabucchi described it as “a very dangerous proposition” to have so many industrial facilities controlled by bank personnel “who are not necessarily as sophisticated about how to manage those risks as they are in their inherent industry, which is finance.” She warned how a single catastrophic event could impact both the bank and the power plant industry.

Senator McCain interjected: “[A]m I exaggerating too much when I say this is reminiscent of the days of the robber barons when the railroads were controlled by one individual? … Am I too alarmed?” Professor Omarova responded: “Absolutely not.” She said it is “precisely” what “back almost 100 years ago, this country was up in arms against: This kind of seamless wedding of money and control over raw materials and transportation and pure commerce. … Because we were worried about the fact that people who control money and control raw materials can control too much of our society in general.”

The final witness was Federal Reserve Governor Daniel Tarullo who oversaw the Fed’s bank oversight efforts. While he avoided the dramatic language used by other witnesses, it was clear that he, too, saw the banks and their holding companies as having incurred serious risks normally outside the field of banking. He indicated that the Fed wanted it to stop, had informed the financial holding companies of the Fed’s concerns, and would be issuing regulations to make sure those hidden risks to the U.S. banking system would end.

Fixing the Problem

Because the hearing took place only months before Senator Levin’s retirement, we had very limited time to try to fix the problems we’d uncovered.

First, on December 12, 2014, a month before his retirement, Senator Levin introduced and PSI’s ranking Republican Senator McCain cosponsored the “Ending Insider Trading in Commodities Act.”21 The bill was short, but powerful. It prohibited manipulating the price of any commodity-related swap, future, or physical shipment in interstate commerce, and prohibited large financial institutions from trading any future or physical commodity “while in possession of material, nonpublic information related to the storage, shipment, or use of the commodity arising from” the firm’s owning a related business. It was too late to seek any action on the bill, but its introduction made the text available to others interested in taking up the challenge.

Second, Senator Levin instructed the PSI crew to track the physical commodity activities at the three institutions we’d examined. To our relief, within months of the hearing, under pressure from the Fed and OCC, all three financial institutions substantially reduced their physical commodity footprint, although none exited the business entirely.

By the end of 2016, two years after the PSI hearing, according to news reports Goldman had shut down its uranium business and sold its Columbian coal mines and the Metro warehouses. Morgan Stanley had sold its oil storage and pipeline facilities, ended its jet fuel business, and sold its ownership interests in the construction of the natural gas compression facility and Southern Star pipeline company. JPMorgan no longer owned any power plants, its bank had eliminated its metal holdings, and it had installed new controls to ensure its physical commodity holdings complied with the Fed’s size limit. The dangers we’d highlighted in the nine case studies had been mitigated.

The third and final Levin strategy, pushing regulatory reforms, saw mixed success. In 2016, both the OCC and Fed proposed new rules to tamp down on the risks to the financial system caused by bank involvement with physical commodities. The OCC finalized its rule by the end of the year, essentially banning physical commodities at national banks.22 The Fed proposed an equally tough rule which included higher capital requirements for more risky physical commodity activities, a more effective size limit, and other safeguards to reduce the risks to the financial system.23 But the Fed failed to finalize the proposed rule before Dan Tarullo, its driving force, retired in 2017. The new Trump Administration has expressed little interest in following through.

Another disappointment was the CFTC’s ongoing failure to strengthen position limits on commodity speculators to deter price manipulation and excessive speculation in U.S. commodity markets. The Dodd-Frank Act of 2010 required the CFTC to strengthen U.S. position limits, including by applying them to all energy commodities, but as of 2018, those limits still were not in place. The CFTC had proposed a rule with a weak set of position limits, but it was struck down by a court and, despite pressure from Congress, the CFTC has so far failed to finalize a new version. The Trump Administration, with its heavy influx of former Goldman Sachs officials, seems unlikely to take up the fight.

Today, despite the economic and financial dangers connected to bank involvement with physical commodities, none of the three financial institutions we’d examined completely left the physical commodities field. It is possible in the Trump de-regulatory era that all the risks associated with banks engaging in physical commodity activities could return.

Conclusion

For 13 years, from 2001 to 2014, Senator Levin fought abusive commodity pricing using all the investigative tools he had. He used hearings and reports to expose oil company gimmicks to push up gasoline prices; government missteps in taming crude oil prices, natural gas price manipulation, and excessive speculation; the growing, negative impact of hedge funds and other speculators on U.S. commodity prices; and bank attempts to gain control over U.S. energy and raw materials. He pushed hard for greater transparency, more effective government policing of commodity markets, and better safeguards to protect American businesses and consumers from roller coaster commodity prices. The battle was complicated, it was exhausting, and it won him few plaudits from the media or voting public. That didn’t matter. To Senator Levin, it was a battle worth fighting, offering exactly the type of bipartisan, fact-based, in-depth issues that congressional oversight was meant to tackle.

Notes

1. The information in this section is based on “Gas Prices: How Are They Really

Set?” S. Hrg. 107-509 (4/30 and 5/2/2002), including the majority staff report at 322, https://www.gpo.gov/fdsys/pkg/CHRG-107shrg80298/pdf/

CHRG-107shrg80298.pdf. 2. The information in this section is based on “U.S. Strategic Petroleum Reserve:

Recent Policy Has Increased Costs to Consumers but Not Overall U.S. Energy

Security,” Minority Staff Report, S. Prt. 108-18 (3/5/2003), https://www. gpo.gov/fdsys/pkg/CPRT-108SPRT85551/pdf/CPRT-108SPRT85551.pdf. 3. See Feinstein-Lugar-Levin Senate Amendment 2083 to the FY2004 agricultural appropriations bill, H.R. 2673. The amendment failed 41-56. Senate

Roll Call Vote 436 (11/5/2003). 4. See S. 2058, Close the Enron Loophole Act, introduced by Senator Levin in 2007; and Harkin-Chambliss-Feinstein-Snowe-Levin Senate Amendment

No. 3851 to Senate Amendment No. 3500 to H.R. 2419, the 2008 farm bill, also known as the Food, Conservation, and Energy Act. The Senate amendment was agreed to by voice vote (12/13/2007), and retained in the final bill,

Public Law No. 110-234, as Section 13201 et seq. 5. Their first attempt to stop the high-cost filling of the SPR was in 2003: Levin-

Collins Senate Amendment No. 1750 to H.R. 2691, FY2004 Interior appropriations bill (9/23/2003), https://www.congress.gov/amendment/108thcongress/senate-amendment/1750. The amendment passed the Senate, but was dropped in conference. The second attempt was in 2004: Levin-Collins

Senate Amendment No. 2817 to S. Con. Res. 95, FY2005 budget resolution,

Senate Roll Call Vote No. 54 (3/11/2004). The amendment passed the Senate, but the underlying bill was never enacted into law. The third attempt was in 2005:

Frist (for Senators Levin and Collins) Senate Amendment No. 864 to H.R. 6,

Energy Policy Act of 2005, adding Section 301 (6/22/2005), Public Law No. 109-58 (8/8/2005), https://www.congress.gov/amendment/109th-congress/senate-amendment/864. The amendment was enacted into law, but DOE ignored the required balancing test. The successful fourth attempt was in 2008: S. 2598,

Strategic Petroleum Reserve Fill Suspension and Consumer Protection Act (2/6/2008), was incorporated into Reid Amendment No. 4737 to Senate

Amendment No. 4707 to S. 2284, Flood Insurance Reform and Modernization

Act (5/13/2008), https://www.congress.gov/amendment/110th-congress/senateamendment/4737; and enacted into law in H.R. 6022, Strategic Petroleum

Reserve Fill Suspension and Consumer Protection Act (5/14/2008), Public Law

No. 110-232 (05/19/2008). For more information on oil company profits, see, for example, “Money Guzzlers: Big Oil Prepares to Announce Profits,” Center for

American Progress, Daniel J. Weiss and Anne Wingate (7/23/2007), chart entitled, “Big Five Oil Company Profits 2001–2007,” http://ampr.gs/2jEEJQ5;

“Global 500: The World’s Largest Corporations,” Fortune, Telis Demos (7/11/2007) (in 2006, due to high oil prices, oil companies were among the most profitable corporations in the United States), http://for.tn/2zfBZj7. 6. The information in this section is based on “Excessive Speculation in the

Natural Gas Market,” S. Hrg. 110-235 (6/25 and 7/9/2007) (hereinafter

“2007 Natural Gas Hearing”), https://www.gpo.gov/fdsys/pkg/CHRG110shrg36616/pdf/CHRG-110shrg36616.pdf. 7. See “The Role of Market Speculation in Rising Oil and Gas Prices: A Need to

Put the Cop Back on the Beat,” Staff Report by the U.S. Senate Permanent

Subcommittee on Investigations, S. Prt. 109-65 (6/27/2006), at 24, https:// www.gpo.gov/fdsys/pkg/CPRT-109SPRT28640/pdf/CPRT109SPRT28640.pdf. 8. CFTC v. Amaranth Advisors LLC, Case No. 1-07-cv-06682-DC (SDNY 5/21/2008), Court Opinion, at 6. 9. “The Amaranth Collapse: What Happened and What Have We Learned Thus

Far?” EDHEC Risk and Asset Management Research Centre, Hilary Till (8/2007), http://bit.ly/2ARGXyX. 10. CFTC v. Amaranth Advisors LLC, Case No. 1-07-cv-06682-DC (SDNY),

CFTC Complaint (7/25/2007); In re Amaranth Advisers LLC, 128 FERC ¶ 61,085, Order to Show Cause and Notice of Proposed Penalties (7/26/2007). 11. “Amaranth Entities Ordered to Pay a $7.5 Million Civil Fine in CFTC Action

Alleging Attempted Manipulation of Natural Gas Futures Prices,” CFTC

Press Release No. 5692-09 (8/12/2009), http://www.cftc.gov/PressRoom/

PressReleases/pr5692-09; In re Amaranth Advisers LLC, 128 FERC ¶ 61,154

Order Approving Uncontested Settlement (8/12/2009), https://www.ferc. gov/enforcement/market-manipulation/amaranth.pdf.