Wall Street's Commodities War

VisionsofAmerica | Joe Sohm | Getty Images

Reuters is reporting that Wall Street is desperately trying to hold on to its commodities warehousing business:

Wall Street's biggest banks are locked in an increasingly frantic struggle with the Federal Reserve over the right to retain the jewels of their commodity trading empires: warehouses, storage tanks and other hard assets worth billions of dollars.

While the battle over proprietary trading and new derivatives regulations has taken place largely in public view since the 2008 financial crisis, the fight by JPMorgan Chase, Morgan Stanley and Goldman Sachs to retain or expand their prized physical commodity operations — most acquired in only the past six years — has remained hidden.

The debate is nearing an inflection point: Within 18 months, the Fed will likely either allow banks more freedom to invest in the physical commodity world than ever; or force them to sell off the assets that many banks are counting on to buttress their trading books, at a time when they are already vulnerable because of intensifying competition and new trading curbs.

The banks here are Goldman Sachs , Morgan Stanley , and JPMorgan Chase . For the banks, the benefits of keeping these businesses are obvious: They contribute mightily to the bottom line.

It also gives them a big advantage when it comes to trading. From Reuters:

"The truth of it is that having access to the physical markets is about optimization and knowledge — it gives you the visibility of the market to make far more successful proprietary trading decisions in both physical and financial markets," said Jason Schenker, President and Chief Economist at Prestige Economics in Austin, Texas.

"That's why for many years the most successful traders had access to both markets, and why we've seen little sign they're moving quickly to divest these assets now. It's trading with material non-public information - the difference compared with equity markets is that it's perfectly legal."

So we know what's in it for Goldman, Morgan Stanley and JPMorgan. But what's in it for us?

The financialization of commodities has no obvious public benefit. Until recently, none of these firms were in this business. Why should we allow Wall Street more control over yet another vital part of the economy?

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