By Stuart Burns
Although the US Federal Reserve has little influence directly over Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), recent pressure from the Fed may be having some effect. Continued from Part One.
Reuters reports that the planned sale of TransMontaigne, the oil terminal business that Morgan Stanley bought in 2006, serves as evidence that the Fed may be privately encouraging the firm to reject purchases made after the 1997 cut-off date. Yet the bank retains three power plants it built after this date, in Nevada, Alabama and Georgia, plus a sizable trading book in natural gas and electricity.
Neither Goldman nor Morgan Stanley are likely to give ground where it doesn’t suit them, though; they are making a lot of money off of physical commodities, industrial metals being no exception, and their preferred status over the likes of Citi (NYSE:C) and Merrill Lynch gives them the best of both worlds in order to compete, as well as access to cheap funding and limited regulation.
The biggest beneficiaries of the banks’ pull-back from commodity trading, however, will be trading companies, as we wrote last week. Firms like Glencore (OTCPK:GLCNF), Trafigura and, the article mentions, foreign banks like Brazil’s BTG Pactual that are not subject to Fed regulation will aggressively move into the space left by US banks.
Is this a good thing for the markets?
Arguably, not for consumers and producers, for whom stability and transparency are paramount; the more markets are influenced by less regulated players, the more possibility there is for industry players to be the victims of market movements as a result of financial players’ activities.
The more these move into less regulated areas, the more opaque they will be. Similarly, a recent report that Glencore’s Pacorini warehouse subsidiary has de-listed 14 LME-approved metals warehouses in the Dutch Port of Vlissingen is not a sign that the firm is moving out of warehousing, but merely that it is positioning itself to store metal off-warrant, increasing the scope for the firm’s involvement in the dark side of the aluminum market’s rising inventory story.
Is the Fed powerless to act in view of the former investment bank’s exemptions? No, but it will probably have to limit activities by use of higher capital requirements to safeguard against potential losses or liabilities from catastrophic events like an oil tanker accident, Reuters says. That will force banks to set aside more capital or cap commodity-related revenue.
So watch this space – the story has some room to run yet.