By Ryan Tracy And Christian Berthelsen
WASHINGTON--Executives at three of Wall Street's biggest banks
faced a grilling at a Senate hearing Thursday examining whether
their commodity businesses wielded unfair market power or put the
financial system at risk.
Sen. Carl Levin (D., Mich.), chairman of the Senate Permanent
Subcommittee on Investigations, spent three hours accusing two
witnesses from Goldman Sachs Group Inc. of manipulating aluminum
markets. The senator, who is retiring at the end of this year, then
took aim at J.P. Morgan Chase & Co. and Morgan Stanley for
obscuring from regulators their investments in metals or natural
gas.
"If you liked what Wall Street did for the housing market,
you'll love what they're doing for commodities," Mr. Levin said,
referring to a series of legal settlements over banks' handling of
mortgages.
He said the profitable business for banks has brought on new
risks to the firms and opportunities for foul play, declaring "it's
time to reduce bank involvement with physical commodities."
The hearing centered on a report by the subcommittee's
bipartisan staff finding banks' involvement in commodities was far
more widespread than previously known and gave them an unfair
advantage over other market participants. The investigation by Mr.
Levin and Sen. John McCain (R., Ariz.) puts pressure on the Federal
Reserve as it weighs policies that would scale back the role banks
play in the markets. Fed Gov. Daniel Tarullo, one of the senior
officials overseeing that review, is to testify before the
subcommittee Friday.
The bulk of the hearing focused on activity at a Goldman
aluminum-warehousing subsidiary, Metro International Trade Services
LLC. A major aluminum purchaser and an independent analyst
testified that the company's apparent strategy to increase wait
times to withdraw metal from its Detroit-area warehouses had caused
an unprecedented dislocation in aluminum markets that is driving up
the prices of beer cans and cars.
A pair of Goldman Sachs executives said their actions didn't
affect those prices and they were acting on orders from clients. In
a series of testy exchanges with Messrs. Levin and McCain, the
executives acknowledged the warehouse firm introduced a new
transaction structure after Goldman bought it in 2010, causing
metal transfers between warehouses that created a logjam and drove
up wait times for customers to withdraw aluminum. Metro
International's chief executive, Chris Wibbelman, said another part
of Goldman, its commodity-trading arm, ordered withdrawals of
300,000 tons of aluminum from the warehouses and further extended
wait times in 2012.
The hearing didn't provide evidence of collusion between Goldman
traders and the warehouse executives, but senators said they
weren't confident in voluntary bank policies to prevent that kind
of wrongdoing. "There's little doubt that if we were talking about
the stock market, rather than commodities transactions, the use of
inside information that affects prices would be strictly
prohibited," Mr. Levin said, suggesting the practice ought to be
illegal.
Meanwhile, the senators also probed the myriad ways in which the
huge orders for metal withdrawals benefited Goldman and Metro. A
management document circulated to the Metro board showed that
Metro's earnings grew roughly threefold after Goldman's purchase
when the metal wait times began to lengthen, going from $67 million
in 2009 to $211 million in 2012.
Though Goldman executive Jacques Gabillon testified the bank's
policy ensured there was "not a single instance in which
confidential information went to metals traders at Goldman Sachs,"
Mr. Levin introduced memos and emails showing that sensitive Metro
data went to 50 Goldman executives, including two of the most
senior executives in the commodity unit-- Isabelle Ealet, who has
since become global co-head of the firm's securities division, and
Greg Agran, who remains global co-head of commodities trading. And
he introduced emails from Metro employees expressing concerns about
the practices, including one who apparently quit after expressing
concerns about information sharing after a confrontation involving
a Goldman trader. Mr. Gabillon said the information circulated
wasn't actionable by traders.
"I don't think we can rely on a private policy to ensure this
doesn't happen," Mr. Levin said. "The stakes are too great. As far
as I'm concerned, it should be illegal to share this kind of
information. When you have a huge economic interest on the other
side of ethical interests, too often the ethical interests give
way."
Jorge Vazquez, founder and managing director of research
consultancy Harbor Aluminum, testified that manufacturers have
faced an additional $3.5 billion in costs since 2011 as a result of
the wait times and increased prices caused by the tactics. "There
are warehouse practices that may pose a conflict of interest," Mr.
Vazquez said.
Commodity executives from Goldman, Morgan Stanley and J.P.
Morgan faced questioning during an afternoon session on whether
certain parts of their operations presented potential legal
liability for their banks even though they are incorporated as
separate entities.
Mr. Levin pointed out that although Goldman's uranium-trading
subsidiary, Nufcor, is separately incorporated, all of its
employees are from Goldman Sachs and all of its operations are
managed by the bank.
For Morgan Stanley, he noted that a since-abandoned
compressed-natural-gas business was merely a shell and that all the
executives of the company were Morgan Stanley commodity executives,
including co-head Simon Greenshields, who was testifying on the
panel. In some cases the executives acknowledged the bank could be
held liable for mishaps at the units.
Goldman Sachs, J.P. Morgan and Morgan Stanley said they
effectively manage the risks from their commodities businesses.
Write to Christian Berthelsen at christian.berthelsen@wsj.com
and Ryan Tracy at ryan.tracy@wsj.com
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