<ul class="summary-list"><li>Warren blasted Kennedy after he suggested Biden's nominee for comptroller of the currency, <keyword id="12160792" type="UNKNOWN" weightage="60" keywordseo="saule-omarova" source="Orion">Saule Omarova</keyword>, is a communist.</li><li>Omarova was born in <keyword id="6380984" type="UNKNOWN" weightage="60" keywordseo="kazakhstan" source="Orion">Kazakhstan</keyword> during the Soviet era, but came to the US in 1991 and is a citizen.</li></ul>Democratic Sen. <keyword id="11984291" type="UNKNOWN" weightage="60" keywordseo="elizabeth-warren" source="Orion">Elizabeth Warren</keyword> ripped into Sen. <keyword id="12562230" type="UNKNOWN" weightage="60" keywordseo="john-kennedy" source="Orion">John Kennedy</keyword> on Thursday after the Louisiana Republican suggested that President <keyword id="99719" type="UNKNOWN" weightage="60" keywordseo="joe-biden" source="Orion">Joe Biden</keyword>'s nominee for comptroller of the currency, Saule Omarova, is a communist. "I don't know whether to call you professor or comrade," Kennedy said to Omarova, a Cornell University law professor, during her confirmation hearing before the Senate Banking Committee."Senator, I'm not a communist," Omarova replied. "I do not subscribe to that ideology. I could not choose where I was born.""My family suffered under the communist regime," Omarova added, noting that her grandmother "escaped death twice" under the regime of Joseph Stalin. "I'm proud to be an American," she said.Kennedy asked Omarova about her membership in a youth communist group when she was growing up in Kazakhstan. She responded by emphasizing that membership was compulsory and a normal aspect of growing up in that part of the world at the time.Warren blasted Kennedy over his comments. "Sexism, racism, pages straight out of Joe McCarthy's 1950s Red Scare tactics … Welcome to Washington in 2021," the Massachussetts senator said, referencing an era during the Cold War when Sen. Joe McCarthy fomented paranoia about <keyword id="12174574" type="UNKNOWN" weightage="60" keywordseo="communism" source="Orion">communism</keyword> infiltrating the US. <blockquote class="twitter-tweet blockquote" data-lang="en" data-cards="" data-conversation="">—The Recount (@therecount) <a href="https://twitter.com/mims/statuses/1461378473201737729?ref_src=twsrc%5Etfw">November 18, 2021</a></blockquote><blockquote class="twitter-tweet blockquote" data-lang="en" data-cards="" data-conversation="">—The Recount (@therecount) <a href="https://twitter.com/mims/statuses/1461369421889519618?ref_src=twsrc%5Etfw">November 18, 2021</a></blockquote>Omarova was born in Kazakhstan while it was still a part of the Soviet Union. She went to Moscow State University and came to the US in 1991, ultimately becoming a citizen. Omarova worked in the Treasury Department under the administration of President George W. Bush. If confirmed, Omarova would oversee an agency that regulates and supervises all national banks. She's widely considered a leading expert in her field."Saule is widely regarded as one of the top financial regulatory scholars in the world," Jeremy Kress, an assistant professor of business law at the University of Michigan, <a href="https://www.npr.org/2021/11/18/1056252505/saule-omarova-occ-treasury-nomination-confirmation-hearing-criticism">recently told NPR</a>. "Whether you agree with her, or disagree with her, you can't have a complete debate about current topics in US banking law and US financial regulation without taking into account what Saule has written on the topic."But Republican critics have pushed against her nomination based on some of her academic work, including a paper that floated offering bank accounts to Americans via the Federal Reserve. Opponents of Omarova have painted her as a radical who wants to nationalize the banking system, or make it government-run. GOP Sen. Pat Toomey of Pennsylvania, the ranking member on the committee, has been a particularly outspoken opponent of Omarova. "She clearly has an aversion to anything like free market capitalism," <a href="https://www.banking.senate.gov/newsroom/minority/toomey-on-senate-floor-ive-never-seen-a-more-radical-regulatory-nominee-than-saule-omarova">Toomey said</a> on the Senate floor last month. In her opening remarks and testimony on Thursday, Omarova emphasized that she strongly supports capitalism and community banks. "If I am confirmed to lead the Office of the Comptroller of the Currency, my top priority will be to guarantee a fair and competitive market where small and mid-size banks that invest in their neighbors' homes and small businesses can thrive," she said. Republicans in recent years have <a href="https://www.businessinsider.com/trump-socialism-focus-line-of-attack-against-2020-democrats-2019-2">frequently labeled Democrats as socialists or communists</a>, even when their political philosophies or voting records are moderate. Biden was decried as a socialist on the campaign trail by former President Donald Trump and his allies in 2020, despite having a well-documented record as a centrist who has often collaborated with Republicans. GOP Sen. Tim Scott of South Carolina, for example, during the 2020 Republican National Convention said that Biden wanted to turn the country into a <a href="https://www.businessinsider.com/first-night-of-rnc-was-dark-all-about-spreading-fear-2020-8">"socialist utopia."</a>Polling shows that most Americans still have <a href="https://www.surveymonkey.com/curiosity/axios-capitalism-update/">a negative view</a> of socialism, but <a href="https://www.businessinsider.com/millennials-would-vote-socialist-bernie-sanders-elizabeth-warren-debt-2019-10">younger voters</a> tend to express more favorable views of it as an economic model. "'Socialism' itself has lost some of its edge for many Americans, since they might associate it with European welfare states that aren't all that threatening," Thomas Alan Schwartz, a Vanderbilt University historian and political scientist, <a href="https://www.businessinsider.com/rubio-baselessly-calls-35-trillion-democratic-spending-bill-marxism-2021-9">told Insider</a> in September.

Warren accuses GOP senator of 'Red Scare tactics' after he suggests Biden nominee is a communist because of where she was born

<ul class="summary-list"><li><keyword id="11917122" type="UNKNOWN" weightage="60" keywordseo="president-joe-biden" source="Orion">President Joe Biden</keyword> is set to nominate Cornell University law professor <keyword id="12160792" type="UNKNOWN" weightage="60" keywordseo="saule-omarova" source="Orion">Saule Omarova</keyword> to head the Office of the Comptroller of the Currency, <a href="https://www.bloomberg.com/news/articles/2021-09-22/biden-to-tap-crypto-big-bank-critic-to-run-wall-street-watchdog?sref=GUP2BhaG">according to a Bloomberg report.</a></li><li>The banking law professor has been a critic of cryptocurrencies and envisions a larger role for the government in overseeing banks. </li><li>Omarova needs Senate confirmation to serve a five-year term.</li></ul>President Joe Biden is preparing to nominate a Cornell University law professor who has been critical of cryptocurrencies and envisions a larger role for the government in overseeing banks to run the Office of the Comptroller of the Currency, <a href="https://www.bloomberg.com/news/articles/2021-09-22/biden-to-tap-crypto-big-bank-critic-to-run-wall-street-watchdog?sref=GUP2BhaG">according to a Bloomberg report.</a>Biden as soon as this week will name Saule Omarova as his choice to head the <keyword id="12075567" type="UNKNOWN" weightage="60" keywordseo="occ" source="Orion">OCC</keyword>, Bloomberg reported late Wednesday, citing three unnamed sources familiar with the nomination process. The OCC is a key regulator overseeing consumer banking and supervises large lenders such as Bank of America and JPMorgan Chase.Omarova, a banking law professor, is expected to push for tougher oversight and rules in the industry. A native of Kazakhstan, Omarova <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3715735">in an October 2020 academic paper</a> wrote about a blueprint for a "People's Ledger," or a comprehensive restructuring of the central bank balance sheet to democratize money and finance the world's largest economy. By separating the lending function from their monetary function, a proposed reform for banks would "effectively 'end banking,' as we know it," with Omarova making a direct play on the title of the 2014 book, "The End of Banking: Money, Credit, and the Digital Revolution". Biden's aides were vetting Omarova in August, <a href="https://www.nytimes.com/2021/08/05/business/occ-comptroller-Saule-Omarova.html">according to The New York Times</a>, noting that Omarova has said <keyword id="11892695" type="UNKNOWN" weightage="60" keywordseo="cryptocurrency" source="Orion">cryptocurrency</keyword> operations could allow banks to conduct more trading activity out of oversight of the Federal Reserve and other regulators. Bloomberg reported that Omarova contends that digital tokens threaten to destabilize the economy and are vulnerable to abuse by private firms at the expense of public safeguards. Omarova served in President George W. Bush's administration as a special adviser for regulatory policy in the Treasury Department. She's practiced law at Davis Polk &amp; Wardwell, specializing in corporate transactions and advisory work in financial regulation.If confirmed by the Senate to a five-year term, Omarova would take over from Michael Hsu, a former Fed official who has been running the OCC on an acting basis since May. Hsu this week told a blockchain panel that <a href="https://markets.businessinsider.com/news/currencies/crypto-regulation-financial-crisis-michael-hsu-occ-brian-brooks-basel-2021-09">crypto and decentralized finance look similar to</a> the financial instruments that sparked the 2008 global financial crisis.

Biden reportedly is set to nominate a law professor critical of crypto and big banks to run the OCC

<ul class="summary-list"><li><keyword id="9147787" type="UNKNOWN" weightage="60" keywordseo="paul-constant">Paul Constant</keyword> is a writer at Civic Ventures and a frequent cohost of the "<a href="http://www.pitchforkeconomics.com/">Pitchfork Economics</a>" podcast with <a href="https://www.businessinsider.com/category/nick-hanauer">Nick Hanauer</a> and David Goldstein.</li><li>In the latest episode, Hanauer and guest host Jessyn Farrell spoke with Cornell law professor Saule Omarova about economic innovation in the US.</li><li>Omarova is a proponent of a new, 21st-century version of an agency that helped get the US out of the Great Depression.</li></ul>In <a href="https://pitchforkeconomics.com/?episode=the-idea-for-a-national-investment-authority-explained-with-saule-omarova">this week's episode of "Pitchfork Economics</a>," co-host Nick Hanauer points out that the United States doesn't really have an industrial policy. Other nations intentionally establish suites of economic, regulatory, and fiscal policies which direct their industrial sectors into specific fields, focus manufacturing into new technologies, and discourage harmful corporate behavior such as environmentally unsound investments. Over the last 40 years, America's leaders have largely left the industrial sector alone to govern itself. That hands-off approach is responsible for some disastrous economic results for the United States. Case in point: Solar cells were created in the United States, and many of the world's leading solar power experts live here, but Hanauer says that "at some point it became staggeringly obvious" to Chinese leaders that cheap and abundant solar cells "would be enormously useful to the <keyword id="34412" type="ORGANIZATION" weightage="60" keywordseo="economy">economy</keyword> and the world, and that having a national competence and advantage in making them would be a good thing." They directed Chinese manufacturers toward "the goal of building scale and dominance in photovoltaic cells."Here in the United States, our leaders either didn't grasp the growing importance of solar power in a world that was struggling to respond to climate change, or they simply believed that the <keyword id="382865" type="PERSON" weightage="60" keywordseo="free-market">free market</keyword> would fill that void. The results speak for themselves: As <a href="https://www.aljazeera.com/opinions/2018/8/22/why-china-and-not-the-us-is-the-leader-in-solar-power">Larry Beinhart notes for Al Jazeera</a>, "seven of the world's top 11 solar panel manufacturers are now in mainland China." <h2>The complexities of the free market</h2>It should be clear by now that simply allowing the free market to blindly flail around in search of short-term profitability is no way to build an economic future. And America's cultural insistence on record quarterly corporate profits is a big reason why our <keyword id="17408" type="PERSON" weightage="60" keywordseo="infrastructure">infrastructure</keyword> has become <a href="https://www.aljazeera.com/economy/2021/3/3/below-average-us-infrastructure-gets-c-from-engineers">a global laughingstock</a>.Hanauer and co-host Jessyn Farrell talk with Saule Omarova, the Beth and Marc Goldberg professor of law at Cornell Law School, who has formulated an intriguing new idea to guide American industrial policy even while honoring our national preference for fierce independence.Omarova is a proponent of a <a href="https://www.dataforprogress.org/a-national-investment-authority">National Investment Authority</a> (NIA), <a href="https://prospect.org/economy/public-investment-reimagined-a-national-investment-authority/">a 21st-century take on the New Deal's Reconstruction Finance Corporation</a>, which invested money in businesses and products that helped build our way out of the Great Depression.When it comes to building infrastructure in America, Omarova explains, "it's really difficult to figure out which tasks specifically should be left to the private market and which tasks should be left to the <keyword id="26362" type="ORGANIZATION" weightage="60" keywordseo="Government">government</keyword>." This leaves what she calls a "dead zone" where some of our most embarrassing failures as a nation have landed - our failure to get broadband and good medical care to rural areas, our inability to build the same kind of inter-city train network that Europe and much of Asia enjoys.The NIA, Omarova says, would be "an institution that can step into that dead zone, and that is designed to be a hybrid" between the free market and the federal government. "It's not hamstrung by the short-term profit obsession," the way that shareholder-driven companies are, she explained. "It has longer time horizons and it has vast resources, and it has its eyes on the public benefit and the public interests first and foremost.""But at the same time, unlike the existing government institutions," the NIA would be "not so constrained by the immediate vagaries of budgetary politics, so it can start working alongside other private market actors and other public government agencies in order to get those projects financed, planned, designed, and implemented." <h2>Blending government and free market perks</h2>Just as the NIA would straddle the void between public ownership and private enterprise, Omarova says the structure of the NIA itself would need to be a unique blend of government and free market: While a federal board would oversee the system, "the actual operations will be conducted by its subsidiaries, the federal government-owned specialty charter corporations."So consider the solar cell example, in which China invested in an expensive and imperfect technology and eventually became the world leader in a burgeoning clean energy sector. The NIA could have directed American companies toward solar power through an aggressively targeted suite of tax incentives to encourage the building of manufacturing plants and the investment of research and development dollars. The US government already performs this kind of incentivization through tax cuts - albeit in a much slower, more limited way. "But at the same time," Omarova said, "why not have the NIA acting through one of its subsidiaries to become a co-investor, a controlling co-investor, or an equity holder in a company that actually does that?"By giving the American people a seat at the boardroom table in exchange for taxpayer investments, the NIA might be able to direct manufacturing plants to Michigan, or West Virginia, or other economically depressed locations "where that plant will actually have far-reaching, very important collateral benefits to the economy and to the society as a whole."<h2>A renewed chance for rapid growth</h2>By placing solar panel manufacturing plants in parts of the country that have been left behind over the last few decades, we'd see rapid <keyword id="169332" type="PERSON" weightage="60" keywordseo="job-growth">job growth</keyword>, renewed economic vigor, and the much-needed bolstering of infrastructure like clean water and good internet connection speeds. Omarova's idea doesn't put government in the driver's seats of corporations so much as it uses government as the pipes through which free enterprise flows, directing that economic energy to where it can do the most good.The NIA is a complex idea, one that's literally never been attempted in American history. The idea of investing in future-forward industries creates many opportunities for failure. But when we take a step back and see what 40 years of totally free markets has done to our global reputation as an economic leader, it becomes obvious that a big, bold idea is necessary if we're going to save the United States from our own worst economic impulses.

America's crumbling infrastructure has become a global laughingstock. A new government agency could fix it - here's how.

Welcome to 10 Things Before the <keyword id="11907548" type="UNKNOWN" weightage="60" keywordseo="opening-bell" source="Orion">Opening Bell</keyword>. If this was forwarded to you, <a href="https://newsletter.businessinsider.com/join/4np/10-things-opening-bell">sign up here.</a> Plus, download Insider's app for news on the go - <a href="https://apps.apple.com/app/apple-store/id554260576?pt=385758&amp;ct=06292021_newsletters&amp;mt=8amp;mt=8">click here for iOS</a> and<a href="https://play.google.com/store/apps/details?id=com.freerange360.mpp.businessinsider"> here for Android</a>.Let's get into it.<hr />1. The Evergrande saga continues to rattle <keyword id="11893875" type="UNKNOWN" weightage="100" keywordseo="markets" source="Orion">markets</keyword>, knocking global stocks. Bond yields meanwhile are heading higher, as investors reassess the rate outlook. <a href="https://markets.businessinsider.com/news/stocks/stock-market-today-evergrande-dents-confidence-bond-yields-rise-2021-9">Here's what's been happening today.</a>2. Robert Kiyosaki expects the Evergrande crisis to batter US stocks and real estate. The 'Rich Dad Poor Dad' author predicts the fallout will devastate unprepared investors -<a href="https://markets.businessinsider.com/news/stocks/rich-poor-dad-robert-kiyosaki-evergrande-stocks-real-estate-crash-2021-9"> he thinks investors should buy gold, silver, and bitcoin to weather the downturn</a>.3. This investing expert says managing risk is what makes an investor successful. Risk literacy, according to Richard Smith, is crucial especially in the digital-investing age. <a href="https://www.businessinsider.com/crypto-investing-expert-how-to-manage-risk-keys-to-success-2021-9">These are Smith's three tips for navigating a volatile market. </a>4. Earnings on deck: Carnival, Mithra Pharmaceuticals, and Eastern Property Holdings, all <a href="https://markets.businessinsider.com/earnings-calendar">reporting.</a> 5. Elon Musk says dogecoin fees must fall for it to be a viable payment option. His tweet came after AMC's CEO said the movie chain may accept doge as payment for movie tickets. The billionaire Tesla exec previously hinted at adopting dogecoin, <a href="https://markets.businessinsider.com/news/currencies/elon-musk-dogecoin-fees-amc-crypto-drop-viable-movie-tickets-2021-9">but his latest comments show he's less certain.</a>6. Cathie Wood plans to sell Tesla if the stock hits $3,000 by next year. Wood said Ark Invest would "peel out" of Tesla if it surged 299% from current levels to hit her five-year price target. <a href="https://markets.businessinsider.com/news/stocks/cathie-wood-ark-sell-tesla-stock-hits-3000-price-target-2021-9">See what else Wood said at a recent conference.</a>7. Jerome Powell said he wasn't aware two top policymakers were actively trading stocks. The Fed Chair avoided voicing confidence in the Dallas and Boston Fed presidents, saying "no one is happy" to have conflict of interest questions raised. In light of this, <a href="https://markets.businessinsider.com/news/stocks/fed-powell-presidents-rosengren-kaplan-share-trades-conflict-review-rules-2021-9">Powell promised a review of rules.</a>8. Biden is set to nominate a law professor critical of crypto and big banks to run the OCC. Cornell professor Saule Omarova will be tapped to run the Office of Comptroller of the Currency, per Bloomberg. <a href="https://markets.businessinsider.com/news/currencies/crypto-occ-biden-nominee-critic-saule-omarova-law-professor-cornell-2021-9">Omarova envisions a larger role for the government in bank oversight.</a>9. Ahead of bitcoin's $3 billion options expiry today, experts shared how they expect digital coins to move. Some top crypto traders and analysts suggest that downside pressure and volatility could rise from here, while some aren't expecting a notable impact on the crypto market. <a href="https://www.businessinsider.com/bitcoin-options-expiry-volatility-trading-strategies-altcoins-crypto-market-analysis-2021-9">Experts named a handful of altcoins that could defy bitcoin's potential fall. </a>10. JPMorgan recommends getting in on the housing boom. While there are some real risks, fears of a 2008-style market crash are overblown, says the firm. <a href="https://www.businessinsider.com/housing-boom-stock-picks-best-homebuilders-and-home-products-jpmorgan-2021-9">See the 16 homebuilder and housing stocks the bank recommends buying.</a><hr />Compiled by Phil Rosen. Feedback? Email <a href="mailto:prosen@insider.com">prosen@insider.com</a> or tweet <a href="https://twitter.com/philrosenn">@philrosenn</a>.Sign up for <a href="https://www.businessinsider.com/subscription/newsletter">more Insider newsletters here</a>.

10 things before the opening bell

<div class="image-container float_right" style="width:480px"><div class="image"><img src="http://static3.businessinsider.com/image/51f9931a6bb3f75722000000-607-455/cogentrix-power-plant-goldman-sachs-2.png?maxX=480" border="0" alt="Cogentrix power plant, goldman sachs" width="480" />AP PhotoSteam rises from Cogentrix power plant in Sioux Falls, Idaho. <keyword id="6361649" type="CITY" weightage="60" keywordseo="Goldman-Sachs">Goldman Sachs</keyword> bought Cogentrix in 2003.</div></div><keyword id="42111" type="COMPANY" weightage="60" keywordseo="Wall-Street">Wall Street</keyword>'s biggest <keyword id="6368751" type="PERSON" weightage="60" keywordseo="Banks">banks</keyword> are currently under the gun for their massive role in global <keyword id="35149" type="PERSON" weightage="60" keywordseo="commodities">commodities</keyword> markets. But what many don't realize is the vast expansion of that role was, in large part, an unintended consequence of the chaos of the financial crisis.
Should we be shocked that the ramifications of the financial crises are still reverberating years later with unexpected repercussions? Not in the slightest.
Without the financial crisis, Wall Street's legally designated, FDIC insured, bank holding companies (FHCs) would not have had the opportunity to build massive portfolios of <keyword id="6359072" type="CITY" weightage="60" keywordseo="oil">oil</keyword>, natural <keyword id="6355653" type="ENTERTAINMENT" weightage="60" keywordseo="Gas">gas</keyword>, metals and more. They would not have been able to buy the things that transport and house those commodities either.
Right now, bankers might be daydreaming of an alternate reality where they didn't build the huge, now tenuous, commodities portfolios which are drawing increased scrutiny.
Such scrutiny as the July 20th <a href="http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=1&amp;=_r=6&amp;_r=0" target="_blank">The New York Times story that accused Goldman Sachs</a> of using its <keyword id="126663" type="COMPANY" weightage="60" keywordseo="aluminum">aluminum</keyword> warehouses to manipulate the price of the commodity — an assertion the bank emphatically denies — costing consumers billions.
Then there's <keyword id="63460" type="CITY" weightage="60" keywordseo="JP-Morgan">JP Morgan</keyword>, which just agreed to pay a $410 million fine for using trading strategies to manipulate energy markets — the bank neither confirms nor denies the manipulation charges.
It won't stop there.
In September, The Fed will rule on whether or not to allow Wall Street banks — specifically JP Morgan, Goldman Sachs, and <keyword id="48670" type="CITY" weightage="60" keywordseo="Morgan-Stanley">Morgan Stanley</keyword> — to keep the physical commodities they purchased during a five-year, post-financial-crisis shopping spree.
This could be The Fed's chance to correct mistakes it made while it was asleep at the wheel, allowing the commodities businesses at Wall Street banks to get bigger and more interconnected than anyone in American history — specifically Andrew Jackson — ever intended. He originally crushed the national bank because he didn't want it to centralize commercial and financial power.
You can almost hear Jackson turning over in his grave.
<h2>Softening the rules to grease the commodity wheels</h2>
In 1956 the U.S. enacted the Bank Holding Companies Act (BHCA) effectively barring any company that owned a commercial bank (a bank holding company) from engaging in activities outside the business of <keyword id="6354778" type="ORGANIZATION" weightage="60" keywordseo="Banking">banking</keyword>.
The idea was that commerce and banking should be separate, and, more importantly that banks should never become something that Americans really hate — monopolies.
Certain institutions were designated “financial holdings companies” (FHCs) so that they could do complex things like underwrite insurance/bonds or deal in securities. Still, FHCs remained subject to the regulations of the BHCA, and were not supposed to be in the business of warehousing or transportation, which are only a few of the logistical non-finance businesses that Wall Street banks are involved in now.
In 1999 the BHCA was softened by a provision in the Gramm-Leach-Bliley Act, the one that repealed Glass-Steagall. Through the 1990s, banks argued they needed telephone help lines and data processing units to conduct their activities. They said they should be able to own those businesses too. With Gramm-Leach-Bliley FHCs were allowed to petition the Fed for special permission to buy “complementary” non-financial businesses.
The meaning of “complementary” was kept quite vague. According to Gramm-Leach-Bliley, FHCs were ... “to engage, to a limited extent, in activities that appear to be commercial if a meaningful connection exists between the proposed commercial activity and the FHC’s financial activities.” And if they posed no risk to the greater financial system, of course.
Between 2000 and 2012 banks used this rule almost exclusively to take advantage of the commodities boom and buy physical assets. Citigroup was the first to use it in 2003, requesting permission to sell oil, gas, and other commodities on the spot market.
Two years later, JP Morgan got in the mix and JP Morgan Ventures Energy Corporation — the business that was just fined by federal regulators — <a href="http://www.federalreserve.gov/boarddocs/press/orders/2005/20051118/attachment.pdf" target="_blank">was born in 2005</a>. It, too, was subject to the <a href="http://www.federalreserve.gov/boarddocs/press/orders/2005/20051118/attachment.pdf" target="_blank">Fed's stipulations about the size of its business </a>— it could only equal 5% of the bank's core capital, for one.
The Fed specified that JP Morgan could trade only in the commodities it petitioned for. It also said that to minimize the bank's exposure risk, it didn't want JP Morgan owning any of the transportation companies or storage facilties involved in commodities.
These facilities were to be owned and operated by third parties not insured by the FDIC. If something went wrong, the Fed wanted to make sure taxpayers wouldn't be on the hook.
Reading the Fed's language, it isn't hard to understand why critics feel today's Wall Street commodities business <a href="http://www.businessinsider.com/jp-morgan-portfolio-of-physical-assets-2013-7" target="_blank">of oil refineries, wind farms, and warehouses</a> has strayed away from what Gramm-Leach-Bliley intended. The question now, is whether or not Wall Street banks should be allowed to continue in the commodities business.
And of course, who's to blame for their straying in the first place?
<h2>How Goldman Sachs and Morgan Stanley got in the game</h2>
While JP Morgan was asking the Fed for special permission, Goldman Sachs and Morgan Stanley didn't have to. Until the financial crisis they were investment banks without commercial operations and thus not subject to the regulations of the BHCA. During the commodities boom of the early 2000s they purchased businesses that would do what these banks do best — make money.
As a result, Morgan Stanley became a huge player in the oil and energy business. By 2005 it was the <a href="http://online.wsj.com/article/0,,SB110971828745967570,00.html" target="_blank">2nd most active seller of power</a> in the United States. In <a href="http://www.heidmar.com/uploads/images/img/media-pdf/2006-Jun-23-Heidmar-Confirms-Morgan-Stanley-Deal.pdf" target="_blank">2006 it bought oil tanker company Heidmar Inc.</a> for an estimated $200 million. That same year it <a href="http://www.marketwatch.com/story/transmontaigne-agrees-to-be-acquired-by-morgan-stanley-unit" target="_blank">acquired Colorado oil company TransMontaigne</a> for $11.35 a share.
By 2012 Reuters estimated that Morgan Stanley's bank commodities businesses had <a href="http://uk.reuters.com/article/2012/06/06/uk-morganstanley-commodities-idUKBRE8550Q820120606" target="_blank">netted it $17 billion over 10 years.</a>
Goldman Sachs wasn't going to get left behind. The bank has a long history in the commodities derivatives business. In 1981 it bought commodities trading company J. Aron and Company, which is where CEO Lloyd Blankfein and COO Gary Cohn both got their starts.
The bank moved into physical assets with the commodities boom <a href="http://www.reuters.com/article/2012/09/07/cogentrixenergy-carlyle-idUSL4E8K73S320120907" target="_blank">purchasing Cogentrix Energy</a> (which owned coal-fired and solar power plants as well as an oil pipeline) in 2003.
<h2>With a crisis comes opportunity</h2>
This semblance of order — freedom to enter physical commodities markets for banks without commercial arms, and the requirement of special permission for banks with commercial arms — was turned on its head with the financial crisis.
In the chaos of shoring up the global banking system, Goldman and Morgan Stanley became FHCs subject to BHCA regulation overnight.
In the heat of the moment Hank Paulson and Ben Bernanke were surely not combing through the banks' books looking for BHCA conflicts. Also, according to BHCA regulation, these banks had five years to divest themselves of any conflicting businesses. It was a matter that could be dealt with at another time. “Another time” being now.
JP Morgan, though already an FHC, also found itself in a special position at the start of the financial crisis — the bank was first in line at a Bear Stearns fire sale.
When JP Morgan acquired Bear Stearns, it also acquired Bear Stearns' energy commodities business, Arroyo Energy Investors.
When Europe's banking system was on its knees begging for mercy, regulators ordered The Royal Bank of Scotland to sell its commodities business, RBS Sempra. JP Morgan snapped it up. JP Morgan then purchased the “global oil, global metals, including Henry Bath, global coal and European power, gas, and non-U.S. emissions assets” — $1.7 billion of assets — for $1.6 billion in 2010.
With those deals, JP Morgan officially welcomed itself to the Big Leagues.
<a href="http://www.jpmorgan.com/cm/cs?pagename=JPM_redesign/JPM_Content_C/Generic_Detail_Page_Template&amp;cid=1277505237241" target="_blank">From the purchase announcement release:</a>
“We are fortunate to welcome the talented employees of RBS Sempra Commodities to J.P. Morgan today,” said Blythe Masters, head of Global Commodities. “With their deep market knowledge and expertise, they complement the team at J.P. Morgan and will provide a powerful competitive advantage as we extend our Commodities business globally.”
JP Morgan also bought now-defunct commodities brokerage MF Global's stake in the London Metals Exchange (LME) in 2011, <a href="http://dealbook.nytimes.com/2011/11/23/jpmorgan-said-to-buy-mf-global-stake-in-london-metal-exchange/?_r=0" target="_blank">becoming its largest shareholder with a 10.9% stake.</a> It also considered getting more <a href="http://www.reuters.com/article/2012/02/01/us-metals-jpmorgan-idUSTRE81019J20120201" target="_blank">aggressive in the warehousing</a> space in 2012.
<blockquote class="pullquote">No one wants to admit that they dropped the ball.</blockquote>
Through all of this, Blythe Masters, already known on Wall Street, became legendary for running the bank's commodities unit. This May, however, regulators told JP Morgan that they were investigating the bank's activity in energy markets, and in a 70-page document pointed to Masters as an executive who had made “scores of false and misleading statements and material omissions” about the business, <a href="http://dealbook.nytimes.com/2013/05/02/jpmorgan-caught-in-swirl-of-regulatory-woes/?hp&amp;pagewanted=print&amp;_r=0" target="_blank">according to The NYT.</a>
While JP Morgan had an unprecedented growth spurt, Goldman continued to make acquisitions in the physical commodities space despite its new FHC status. Morgan Stanley, also a newly minted FHC, merely let the money roll in.
Goldman acquired its controversial Metro warehouses, one of the largest in the LME network, in 2010. In 2012, it led a group that bought <a href="http://uk.reuters.com/article/2012/05/29/uk-vale-coal-idUKBRE84S00M20120529" target="_blank">a coal business Brazil's Vale for $407 million.</a>
Morgan Stanley, sitting pretty, retained TransMontaigne Partners, which earned over $152 million in 2011.
<h2>Letting go is hard to do, especially for Big Banks</h2>
With the five-year grace period for BHCA divestment coming to an end, banks know that the Fed is weighing its policy options.
“The Fed is in a difficult position as well,” said UNC Law Professor and banking expert <a href="http://www.law.unc.edu/faculty/directory/omarovasaulet/" target="_blank">Saule Omarova</a>. “No one wants to admit that they dropped the ball.”
Omarova maintains that it's truly impossible for anyone outside the inner circles of banks and the Fed to know what banks are actually holding. She says the truth lies in the living wills banks were forced to write after the financial crisis. They detail all of the assets banks have on their vast balance sheets, but those wills are kept as secrets inside the Federal Reserve.
According to Omarova, banks even quibbled about the number of lawyers who could be present as the wills were being written. Too many loose lips sink ships — and banks.
For its part, JP Morgan has <a href="http://www.businessinsider.com/jpmorgan-considering-options-for-commodities-business-2013-7" target="_blank">said it may exit the physical commodities business entirely.</a> Goldman, on the other hand, seems ready to fight on. After The <keyword id="53556" type="CITY" weightage="60" keywordseo="New-York-Times">New York Times</keyword> published the damning story about Goldman's aluminum warehouses, the bank released a <a href="http://www.businessinsider.com/goldman-sachs-aluminum-fact-sheet-2013-7" target="_blank">fact sheet defending the business.</a> This week, Goldman Sachs COO Gary Cohn went on CNBC to discuss the matter live.
This may be because BHCA regulation has a grandfather clause. As Omarova points out in her research paper, “<a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2180647" target="_blank">The Merchants of Wall Street, Banking Commerce and Commodities</a>,” banks that have been designated FHCs after November 1999 can continue “activities related to the trading, sale, or investment in commodities and underlying physical properties,” as long as they meet certain conditions.
The <a href="http://www.bis.org/publ/work420.htm" target="_blank">Bank for International Settlements (BIS)</a> put out a working paper detailing the risks associated with holding commodities. Instead of being a hedge, researchers Marco Jacopo Lombardi and Francesco Ravazzolo determined that commodities actually add volatility to portfolios as the correlation between commodity and equity returns has increased since the financial crisis.
Politicians fear that with Wall Street banks owning commodities, the cost of a BP oil spill-sized accident could fall on the backs of taxpayers. They fear a whole new set of risks we haven't seen yet. After all, this whole story could be considered one of unintended consequences.
If what Washington wants to do is make banking boring, simple, and less risky, Wall Street may have to prepare to let go of the goods that it acquired in chaos.
Historically, letting go hasn't necessarily been the Street's strong suit.

How The Financial Crisis Helped Turn Big Banks Into Global Commodities Kings

Tod<div class="image-container float_right" style="width:480px"><div class="image"><img src="http://static4.businessinsider.com/image/51eeec76eab8ea0010000016-955-716/elizabeth-warren-5.png?maxX=480" border="0" alt="elizabeth warren" width="480" />Screenshot</div></div>ay the Senate <keyword id="6354778" type="ORGANIZATION" weightage="60" keywordseo="Banking">Banking</keyword> Committee met to discuss <keyword id="42111" type="COMPANY" weightage="60" keywordseo="Wall-Street">Wall Street</keyword>'s role in the global <keyword id="35149" type="PERSON" weightage="60" keywordseo="commodities">commodities</keyword> business, and as you can imagine Senator <keyword id="213453" type="PERSON" weightage="60" keywordseo="Elizabeth-Warren">Elizabeth Warren</keyword> (D-MA) was quite outspoken about the fact that she wants it majorly diminished.
"...I share the concern of many of my colleagues about asset managers at huge Wall Street <keyword id="6368751" type="PERSON" weightage="60" keywordseo="Banks">banks</keyword> excising control of key parts of America's infrastructure," she said.
This discussion is crucial, as all of that will come up for consideration in September.
Back in 2003 the Federal Reserve decided to temporarily allow banks to purchase commodities directly. That means oil, power, copper, aluminium etc. This September, that temporary regulatory relaxation is set to expire, and if it does, a big chunk of Wall Street's business will expire with it.
And now that the ruling is up for discussion, Congress gets to weigh in. Wall Street be warned, if this hearing was any indication, the Senate is coming down on the side of culling the commodities business.
Warren decried the idea that banks would use "other people's money" in pension and retirement savings "to pave the way for big banks to be able to control an electric plant or an oil refinery."
One witness at the hearing asked her simply — what would have happened if a bank had owned the Exxon-Valdez? 
If that general tone sounds ominous, recent news stories haven't helped. This weekend, the <a href="http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=1&amp;=_r=6&amp;_r=1&amp;">New York Times reported that Goldman Sachs has allegedly</a> been using its <keyword id="126663" type="COMPANY" weightage="60" keywordseo="aluminum">aluminum</keyword> warehouses to manipulate the price of the metal.
Additionally, <keyword id="63460" type="CITY" weightage="60" keywordseo="JP-Morgan">JP Morgan</keyword> is in negotiations with FERC, a federal energy regulator, to settle charges that its traders manipulated energy markets in the western U.S., <a href="http://online.wsj.com/article/SB10001424127887324144304578620072193479766.html">they could pay up to $410 million.</a>
For today's hearing, Senators heard testimony from Ms. Saule Omarova, Associate Professor of Law University of North Carolina at Chapel Hill School of Law; Mr. Joshua Rosner, Managing Director Graham Fisher &amp; Company; Mr. Timothy Weiner, Global Risk Manager Commodities/Metals, MillerCoors LLC; and Mr. Randall D. Guynn, Head of Financial Institutions Group.
Aside from Guynn, all of the witnesses cautioned against renewing the Fed's 2003 decision. Omarava was especially damning, saying that when Congress separated banking from commerce in 1956, they sought to prevent markets like the one we're in.
"In this... over the counter derivative oil market I suspect <keyword id="6361649" type="CITY" weightage="60" keywordseo="Goldman-Sachs">Goldman Sachs</keyword> can actually manipulate price," said Omarava. "They could also affect the price of physical oil if they own tankers... I'm all for the DOJ launching an anti-trust investigation into these matters... If this is the market where JP Morgan and Goldman Sachs are playing, it makes me very uncomfortable as a banking attorney."
Omarava also expressed doubts that regulators would be able to catch this activity as it's so complex.
The witnesses didn't just talk about prices either, they talked monopolies. Since her rise to prominence as a regulator and then a Senator, Warren has been saying that banks are getting too big, too interconnected, and too complicated. Rosner's testimony corroborated that idea, and added to it the specter of commodities -controlling, all-encompassing banking behemoths backstopped by the government (too big too fail).
It's just more "coddling" from the Fed, he said, later adding... "These institutions have become the equivalent of the government institutions we saw fail during the crisis."
This isn't to say that Warren's going to give up her crusade to bring back Glass-Steagall and pick this up as her mantle — she's not. At the hearing she said that it was just "one tool in a tool box" to bring Wall Street back down to size.
There's a difference between the reinstatement of Glass-Steagall and this commodities issue though, and that difference is all that matters to Wall Street banks.
Where trying to reinstate Glass-Steagall seemed like a matter of lobbyists, taking Wall Street of the commodities business is a matter of dollars. It impacts the Street's bottom line — if it didn't, Goldman wouldn't have put out a <a href="http://www.businessinsider.com/goldman-sachs-aluminum-fact-sheet-2013-7">"fact sheet" on its involvement in the aluminum warehouse business.</a>
 This actually makes bankers nervous.
Watch video of Warren's portion of the hearing below:
<iframe width="560" height="315" frameborder="0" src="//www.youtube.com/embed/w8rylMUjM34"></iframe>

Elizabeth Warren Wants To Take This Goldman Sachs Aluminum Story And Run Right Over Wall Street With It

<div class="image-container float_right" style="width:480px"><div class="image"><img src="http://static5.businessinsider.com/image/51eafa55eab8eaa17d00002d-1200-924/ben-bernanke-evil.jpg?maxX=480" border="0" alt="ben bernanke evil" width="480" />REUTERS/Jim YoungU.S. <keyword id="6355253" type="ORGANIZATION" weightage="60" keywordseo="Federal-Reserve">Federal Reserve</keyword> Board Chairman Ben Bernanke listens to questions as he testifies before the House Financial Services Committee during a hearing on "The State of the Economy, the State of the Labor Market and the Conduct of the Monetary Policy" in Washington February 15, 2007. </div></div>
NEW YORK (<keyword id="76338" type="CITY" weightage="60" keywordseo="Reuters">Reuters</keyword>) - The <a class="cite">Federal Reserve</a> is "reviewing" a landmark 2003 decision that first allowed regulated banks to trade in physical commodity markets, it said on Friday, a move that may send new shockwaves through <keyword id="42111" type="COMPANY" weightage="60" keywordseo="Wall-Street">Wall Street</keyword>.
The one-sentence statement suggests the <a class="cite">Fed</a> is taking a much deeper, wide-ranging look at how banks operate in commodity markets than previously believed, amid intensifying scrutiny of everything from electricity trading to metals warehouses.
While the <a class="cite">Fed</a> has been debating for years whether to allow banks including Morgan Stanley <MS.N> and JPMorgan <JPM.N> to continue owning assets like oil storage tanks or power plants, Friday's surprise statement suggests it is also reconsidering whether all bank holding firms should be able to trade raw materials such as gasoline tankers and coffee beans.</JPM.N></MS.N>
By referencing its initial decision a decade ago permitting Citigroup's Phibro unit to trade oil cargoes - setting a precedent for a dozen more banks that followed suit - the <a class="cite">Federal Reserve</a> has put in question a key profit center for Wall Street's top players, which have already seen multibillion-dollar commodity revenues shrink in the face of new regulations.
On Tuesday, the <a class="cite">Senate Banking Committee</a> is holding its first hearing on the issue, asking whether so-called "Too Big to Fail" banks should be taking on additional risks like moving tankers of crude oil or operating power plants.
Amid growing frustration in Washington over regulators' failure to push through new rules five years after the financial crisis, the <a class="cite">Fed</a>'s widening area of enquiry came as a shock.
"They must be feeling some pressure on this issue if they've felt compelled to issue a public statement," said <a class="cite">Saule Omarova</a>, associate professor of law at the <a class="cite">University of North Carolina</a> at <a class="cite">Chapel Hill School of Law</a>, who will appear at the hearing.
"Are they using this opportunity to in fact review the entire position of banks in physical commodity markets?"
The pressure may intensify as the U.S. power market regulator levies record fines over manipulating power markets. It levied a $453 million penalty against <a class="cite">Barclays</a> <BARC.L> this week and is in talks to settle charges against JPMorgan, which is alleged to have used power plants that it owned or operated to game markets.</BARC.L>
"The <a class="cite">Federal Reserve</a> regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies," the <a class="cite">Federal Reserve</a> said, its first public statement since a 2012 Reuters report brought the issue to light. (Full story: http://link.reuters.com/xer86s).
A <a class="cite">Federal Reserve</a> spokesperson declined to elaborate or provide any details on the scale or timing of the review.
Spokespeople for Goldman Sachs and Morgan Stanley declined to comment on the <a class="cite">Fed</a> statement.
PHIBRO SET PRECEDENT
In 2003, the <a class="cite">Federal Reserve</a> issued a letter to Citigroup, which had been seeking permission to allow its Phibro unit - acquired in 1998 - to continue trading in physical energy markets. The Bank Holding Company Act (BHC Act) normally prohibits banks from engaging in non-financial activities, but <a class="cite">Citi</a> had argued that the activities should be allowed.
Regulated commercial banks had long been permitted to trade in commodity derivatives such as futures, but at the time did not enjoy the same freedom in physical markets, unlike investment banks like Goldman Sachs and Morgan Stanley.
The <a class="cite">Fed</a> agreed with <a class="cite">Citi</a>, saying that trading in real commodities would allow the banks to "transact more efficiently with customers". It said the trading must be "complimentary" to their main activities, contribute to the public good and should not pose a "substantial risk" to the bank.
That decision, which came at the start of a decade-long boom in commodity trading, opened the door to a dozen more applications from global giants like Deutsche Bank and domestic players like <a class="cite">Wells Fargo</a>. With many of the permits, the <a class="cite">Fed</a> gave greater and greater leeway in what and how they could trade.
"Maybe the <a class="cite">Fed</a> can openly say we think these activities are systemically risky unless they're cut back but I don't know what's going through the <a class="cite">Fed</a>'s head," said one commodity regulation expert who declined to be named. "This came out of the blue. This has taken everyone by surprise."
Since converting to bank holding companies at the height of the financial crisis, Goldman Sachs and Morgan Stanley have also been subject to the holding company rules.
But up until now, the <a class="cite">Fed</a>'s focus was believed to be on their ownership of assets, a more clearly controversial issue.
Under the 1999 decision to repeal part of the Glass-Steagall Act, ending the forced separation of commercial and investment banking, any non-regulated bank that converted to holding company status after 1999 would be allowed to continue to own and invest in assets, as long as they held them prior to 1997. The banks have argued that their activities are "grandfathered" in, or that they are simply merchant banking investments.
It is not clear that argument will hold up under political pressure, which is intensifying ahead of a nominal September deadline for Goldman and Morgan to comply with the rules.
"Reviewing Wall Street's expansion into commercial activities is essential," Senator <a class="cite">Sherrod Brown</a>, a Democrat from <a class="cite">Ohio</a>, said in a statement. "<a class="cite">Congress</a>, regulators, and the public need to understand what has happened in the 14 years since the financial floodgates were opened, and reconsider what we want banks to do."
Large industrial consumers of aluminum have accused banks of boosting prices of the metal through their control of London Metal Exchange warehouses, which have been slow to deliver metal to customers, boosting premiums for physical metal and earning big profits on rent for storing the metal.
Four U.S. congressmen wrote to <a class="cite">Federal Reserve</a> Chairman <a class="cite">Ben Bernanke</a> on June 27 expressing their concern about the issue, and asking for more information on the <a class="cite">Fed</a>'s position.
Both Goldman Sachs and JPMorgan have explored selling their warehouse businesses they bought in 2010 in recent months, although it is not clear if that is because of increased regulatory pressure.
GETTING PHYSICAL
As commodity prices surged over the past decade, a host of global investment banks piled into the market, pressuring the former duopoly of Goldman and Morgan. At their peak in 2008 and 2009, revenues in the sector reached some $15 billion.
But pressures have mounted over the past few years as regulators crack down on proprietary trading, new capital measures limit trading books and bonus caps shrink.
Commodity revenue from the top investment banks fell to about $6 billion in 2012, consultants Coalition estimated.
While banks generate much of that revenue from trading derivatives - selling indexes to investors or hedging prices for an oil company - many have delved deeply into physical markets in order to get better information on markets, leverage their positions or offer more options to customers.
For instance, many banks are involved in "supply and offtake" arrangements with refineries, providing crude oil to the plant and then selling gasoline or diesel in the market.
The <a class="cite">Federal Reserve</a> has generally allowed banks to trade in most major physical commodity markets so long as there is a similar futures contract for the commodity, which means it is regulated by the <a class="cite">Commodity Futures Trading Commission</a>. Crude oil and gasoline, for instance, are allowed but iron ore is not.
Friday's statement calls that into question.
While some consumer groups have been critical of the sway that banks can exert on commodity markets by owning key pieces of infrastructure, it is unclear how many would support barring them from trading commercial markets entirely.
"I want them to have physical business because they play a positive role in the business on balance by providing financing," said one senior executive in the metals market who has been critical of the banks' warehouse ownership.
(Additional reporting by Jeanine Prezioso in New York; Editing by Jonathan Leff, Bob Burgdorfer and Peter Cooney)

The Fed Says They Are 'Reviewing' Decision That Allows Banks To Trade Physical Commodities

<div class="image-container display-table float_right"><div><div class="image"><img src="http://static4.businessinsider.com/image/5295c630eab8ea9d7589e3c1-1200-924/jamie-dimon-justice-5.jpg" border="0" alt="jamie dimon justice" />REUTERS/Gary CameronJ.P. Morgan CEO Jamie Dimon (front) leaves the U.S. Justice Department after meeting with Attorney General Eric Holder, in Washington, September 26, 2013.</div></div></div>LONDON/NEW YORK (Reuters) - The U.S. Federal Reserve was pressing <keyword id="111830" type="CITY" weightage="60" keywordseo="JPMorgan-Chase">JPMorgan Chase</keyword> &amp; Co <JPM.N> to distance itself from its metals warehousing business more than a year ago, documents seen by Reuters show, long before the issue became a focal point in the debate over Wall Street's role in physical commodities trading.</JPM.N>
A series of letters between JPMorgan's lawyers and the Fed, released to Reuters through a Freedom of Information Act request, show Wall Street's primary regulator took a tough stance on the bank's efforts to hold onto the global network of Henry Bath &amp; Sons warehouses, part of the larger RBS Sempra commodity trading business it bought in mid-2010.
The correspondence shows the Fed balked at JPMorgan's request to turn the one-time trading assets into a strictly arms-length financial investment back in June 2012, and told the bank it must provide quarterly updates on what it was doing to either comply with banking rules, or sell the business.
The Fed also pressured JPMorgan to dilute the amount of metal held by its own traders in Henry Bath, an issue that has riled major metal consumers and critics of a copper investment fund the bank was trying to launch.
Eventually, by May this year, JPMorgan had decided to simply sell the business, the letters show. Three months later, with broader pressure mounting over Wall Street's involvement in the raw materials supply chain, JPMorganwould put its entire physical commodity trading business on the block.
The documents, which consist of six letters over a period of 13 months, provide the deepest look yet at how the Federal Reserve has wrestled with the thorny regulatory question of banks and physical commodity markets.
They show the Fed has at times taken a tough line with banks in the sector, and may darken the outlook for Goldman Sachs <GS.N> and Morgan Stanley <MS.N>, both of which still own physical commodity trading assets such as warehouses, pipelines and oil storage tanks. Both banks argue that a 1999 law gives them greater latitude to own and operate assets as they are former investment banks.</MS.N></GS.N>
The letters also raise questions about the Fed's willingness to allow Wall Street to convert former trading assets into passive merchant investments that they can own for up to a decade. Both Goldman and Morgan Stanley have claimed this authority to retain or pursue new investments in recent years, Reuters reported last week.
Spokespeople for JPMorgan and the Fed both declined to comment on the letters.
WALL STREET'S WAREHOUSES
The Federal Reserve announced in July that it was reviewing the broader role of Wall Street banks in physical commodity trading amid rising political scrutiny, and fears that so-called "too big to fail" banks may be taking on unnecessary risks by operating oil tankers and power plants.
But it has been tackling the issue for years as Wall Street deepened its collective push into commodity markets, a trend that reached its zenith with JPMorgan's $1.6 billion purchase in 2010 of RBS Sempra, which included Henry Bath.
JPMorgan knew from the outset that the warehouses presented a problem. As a Fed-regulated commercial bank, it did not have the authority to own "non-conforming" assets such as warehouses for longer than a two-year grace period (with three possible one-year extensions). The Fed had already ordered the previous owner, Edinburgh-based Royal Bank of Scotland <RBS.L>, to get out of the business of owning commodities storage.</RBS.L>
In addition, metals warehousing has drawn attention due to allegations that banks and merchants have tried to game the London Metal Exchange (LME) warehousing rules, deliberately creating bottlenecks for aluminum consumers such as drinks can makers to boost storage income, while raising physical prices.
JPMorgan has long said its Henry Bath customers face no long queues, in contrast to the Metro International Trade Services warehouses operated by Goldman Sachs, where metal owners have to wait as long as a year. Goldman has previously denied Metro was driving up prices or violating any laws.
But JPMorgan has nevertheless been named in a series of class-action lawsuits targeting the industry, and is the subject, alongside other banks and merchants, of a Commodity Futures Trade Commission (CFTC) probe. TheDepartment of Justice is also looking into the matter.
JPMorgan also created controversy in metal markets by trying to launch a physical copper exchange-traded fund for small investors, which would have been backed by metal stored in Henry Bath sheds. Many in the market feared it would artificially tighten supplies and drive up prices.
By early 2012, other metals traders said JPMorgan was directing aluminum supplies into its own warehouses inRotterdam, Europe's largest port, and in Chicago. Since the late 1980s, Henry Bath has been owned by trading firms that tended to use it primarily as a place to store their own metal rather than rent out space to other companies.
It is not clear what percentage of metal held in Henry Bath was owned by JPMorgan's traders, but it was high enough to alarm the Federal Reserve and to make it difficult for JPMorgan to classify the asset as a strictly passive investment. By law, banks can only claim the so-called "merchant" authority if there is no interconnection between the bank and the business.
Although JPMorgan operated Henry Bath at arm's length on a corporate level, the commercial ties ran deeper, according to a person familiar with the matter.
"Henry Bath has always been a creature of its owners," said an executive at a rival warehousing firm. Prior toJPMorgan and RBS, Henry Bath had been owned by Sempra Commodities, Enron and legendary German trading house Metallgesellschaft.
FED REJECTION
Despite the apparent obstacles, JPMorgan initially told the Fed it wanted to keep Henry Bath under its merchant authority, which would have allowed it to keep the firm until 2020.
In June 2012, it requested a one-year extension of the grace period to conform the business. But the Fed paused. Instead, after what JPMorgan said were "conversations with (Fed) Board staff", the bank's lawyers submitted a revised request in August, seeking three one-year extensions all at once, with no mention of how it intended to own the business.
Again, the Fed balked, eventually granting just a basic one-year extension that November, and stipulating that the bank must file a detailed road-map on plans to either conform or sell the business, including quarterly updates.
It is not clear why the Fed declined the three-year extension to the grace period, or what occurred during the discussions held during the interim. But the tone suggests a clear shift in approach.
"It seems that long before July they made a decision to sell it because the focus of the letters seemed to shift from conformance to divestiture," said a banking lawyer who reviewed the letters but was not authorized to speak to the press.
By March of this year, it was holding discussions regarding an "outright sale" of the business while also continuing efforts to conform it. JPMorgan was talking to other commodity companies about storing more metal in Henry Bath, in an attempt to "decrease the average percentage" of metals owned by the bank in its 75 warehouses, according to a letter that month.
Just over one month later however, JPMorgan had given up attempting to retain the business as a merchant investment, a letter dated May 1 shows.
JPMorgan's decision to sell Henry Bath this year was made after "internal and external" discussions, said a source familiar with the matter.
RBS had also contemplated seeking to keep Henry Bath as a merchant deal after buying into the SempraCommodities business in 2008, but ultimately decided that it would be better to divest Henry Bath than hold it at arm's length, according to a person familiar with the decision.
The sources were not authorized to speak to the media.
PROFITS HIT
To be sure, even as the Fed was pressing, the attraction of being in the metals storage business was waning.
The LME was working on a major overhaul of its warehousing policy aimed at appeasing industrial users who have complained about long wait times and inflated prices for their metal. It proposed a series of tougher new rules this July, and beefed up those measures early in November.
Henry Bath reported a profit of just $2.4 million last year, down from $28 million in 2011 mainly due to higher taxes, according to filings with British commercial register, Companies House.
Others are also feeling the heat.
Even though Goldman Sachs and Morgan Stanley have argued that their physical commodity businesses should be grandfathered, both are moving to sell or spin out some parts.
Goldman Sachs executives have publicly said the business remains "core" to its operations, but last week it emerged that the bank would resume talks with parties interested in buying Metro, and was also moving to sell its uranium trading desk.
"JPMorgan and other banks have adjusted their game depending on the playing field," said Saule Omarova, associate professor of law at the University of North Carolina and a visiting professor at Cornell.
"The calculus remains complex. And the economics depend on regulatory decisions."
(Editing by Richard Chang)

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