Tuesday, August 6, 2013

The Senate Banking Subcommittee Hearing on Commodity Activities of Financial Holding Companies (July 23, 2013)

In my previous post, I discussed the problems with a New York Times article on aluminum that seemed timed to precede by a couple of days a hearing held by a subcommittee of the Senate Banking Committee on the permissible activities of financial holding companies. The hearing focused on whether these companies should be permitted to own affiliates involved in such activities as storing physical commodities or generating electricity. The hearing itself did not produce any insights into the aluminum issue but it did usefully shed light on the legal and regulatory developments that resulted in some financial holding companies, notably J.P. Morgan Chase and Goldman Sachs, being in these businesses.
Three witnesses at the hearing argued that financial holding companies involvement in these types of activities should either be prohibited or sharply curtailed: Tim Weiner of MillerCoors, Joshua Rosner of Graham Fisher & Co., and Saule Omarova, an associate law professor at the University of North Carolina at Chapel Hill. Joshua Rosner is the coauthor of Reckless Endangerment, a book I criticized in this blog post. I know Saule Omarova slightly. She was a senior adviser to Randall Quarles when he was Treasury Under Secretary for Domestic Finance in the George W. Bush Administration. I do not know her party affiliation, if any, but many Republicans who follow these issues likely disagree with her forcefully presented and strong opinions on the issues discussed at the hearing.

One witness, Randall D. Guynn, a partner and head of the Financial Institutions Group at the law firm, Davis Polk & Wardwell, argued that no changes needed to be made to curtail financial holding companies activities with respect to physical commodities or electric power generation. Interestingly, both Randall Quarles and Saule Omarova have also worked at Davis Polk. Quarles was at one point the co-head of the Financial Institutions Group.
In his testimony, Mr. Weiner implies that MillerCoors purchases and obtains aluminum through the LME market. However, he does not say that MillerCoors obtains the bulk of the aluminum it uses in this manner. Given the delays he claims, up to 18 months for “aluminum users like MillerCoors,” this is doubtful. There does not appear to be any shortage of beverages in aluminum cans available for purchase by American beverage drinkers. What is most likely is that companies needing aluminum obtain it directly from the companies that produce it. What MillerCoors is apparently upset about, as mentioned in my previous post, is the increase in the “premium” they have to pay. The reason for that remains unclear. Unfortunately, none of the Senators at the hearing questioned Weiner on these issues.

Whether Goldman was deliberately manipulating the aluminum market by its warehouse practices, though, is a separate issue from whether financial holding companies should be in this business at all. Saule Omarova in her testimony and a draft law article she cites in her written statement provides interesting background to the legal development resulting in permitting financial holding companies into the physical commodity business. I also agree with her that financial holding companies should not be permitted to do this. They have conflicts of interest and financial advantages provided by the federal government that argue strongly for limiting what lines of business are permissible for these companies.

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