(Chelsea Update would like to thank John Mann, president and CEO of Chelsea State Bank for this column, which is a follow-up on this first column.)
Two weeks ago, my column focused on ‘Too-Big-To-Fail’ as it relates to the U.S. Banking industry. And, I noted that this is probably not high on your list of major concerns in your everyday lives.
Just after the column published, a story broke that actually brings this issue closer to home. It may directly affect what you buy – from gas in your cars to beverages in your refrigerators.
News reports allege Big Bank holding companies have been driving up commodity prices. We have seen this in the past with examples of financial speculators who tried to make big profits by hoarding commodities like gold, silver and copper.
Now, mega financial firms may be doing the same thing with aluminum.
As reported by a number of media outlets including The New York Times, Wall Street Journal and Reuters, large investment banks like Goldman Sachs have purchased warehousing facilities worldwide for aluminum storage and then move it from one facility to another to manipulate the price.
When a purchaser buys the metal, it takes much longer—up to 18 months in some cases—to satisfy their order. Buyers pay rent on the storage in the meantime, but Goldman makes its real money, in this case, on trading in aluminum futures.
What we are seeing is the involvement of mega financial companies in physical commodities activities and in the storage-and-transportation businesses. A loose coalition of beer brewers, automakers, Boeing and Coca-Cola is accusing the companies, including Goldman Sachs and JPMorgan Chase, of anti-competitive behavior in the aluminum market.
These arrangements have risks for the whole economy. “When Wall Street controls the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation,” said Sen. Sherrod Brown (D-Ohio), a member of the banking committee. “It also exposes these megabanks — and the entire financial system – to undue risk.”
When done properly, commodity trading can limit price spikes for producers. As Brown notes, when a speculator can own commodity assets or the physical commodity itself – as mega banks are starting to do with aluminum and several other products – profits extracted from speculation can soar, to the detriment of producers and consumers.
America’s biggest bank, JP Morgan Chase, also has been accused of manipulating electricity prices. On Tuesday, July 30, JP Morgan was fined $410 million due to improper practices involving price manipulation via its subsidiary JP Morgan Ventures Energy Corp.
According to a report in the Detroit News, U.S. energy regulators are accusing JPMorgan Chase & Co. of manipulating electricity prices in California and the Midwest, including Michigan, in 2010 and 2011.
The Federal Energy Regulatory Commission said in an enforcement notice that the bank used improper bidding strategies to squeeze excessive payments from the agencies that run the power grids in California and the Midwest.
The commission recently levied a $453 million fine on the British bank Barclays for price rigging in California and other Western states. Barclays is disputing the allegations. In addition, there have been recent allegations about speculation in oil markets that could be pushing up gas prices for all of us who drive.
The Federal Reserve threatened to ban Big Banks from trading physical commodities. In a recent statement, the Fed said it was reviewing an earlier decision that allowed mega banks to trade and own raw materials.
So let the investigations begin. Right now charges are being disputed so getting the principals under oath is our best bet to get to the truth. It’s time to put the spotlight on all of this, and for all of us to pay closer attention and demand accountability.
Chelsea State Bank is a full service financial institution with offices in Chelsea and Dexter. The bank was formed over 100 years ago by local farmers and business leaders to provide timely financial solutions to individuals, families and businesses in the community. This tradition of community service continues today.
For more information, please visit www.csbonline.com or call the bank at 475-1355.