On the eve of Sen. Sherrod Brown’s Senate Banking subcommittee hearing on banks owning physical commodities and production infrastructure, the Federal Reserve made a “surprise” announcement that it was reviewing its decisions a decade ago—to let banks own physical commodities and infrastructure. Michael Gibson of the Fed, who testified along with witnesses from the CFTC and FERC, tried some obfuscation of the obvious Glass-Steagall issue, in his testimony, but not as successfully as in the past.
Senator Brown opened the hearing by saying, “For years, U.S. banking laws drew sharp lines between banking and commerce, and respected this separation. In 1999, Congress weakened those lines ….”, a clear reference to the Glass-Steagall Act whose re-establishment he has not yet sponsored.
The Fed’s Gibson then opened his testimony, by claiming that “before Gramm-Leach Bliley” (getting rather close, himself, to naming the Glass-Steagall Act) banks were allowed some commodity dealings. Those were, he said, owning certain metals so closely related to their business as to be incident to it (gold and silver, no surprise there), and “engaging as principals in derivatives contracts” based on commodities.
This was clever, based on a riff which the American Bankers Association and regulators, led by Alan Greenspan, have been selling Congress since 1989-90: that derivatives are not securities. Many in Congress believe this, even though bank bond-trading desks and derivatives salesmen have always known perfectly well that they were selling securities, and some have explained this in books. Thus, one Senator entering the hearing said he was convinced that the activities which were its subject — banks issuing commodity derivatives and using physical possession and ownership to “settle” them and manipulate their prices — “were allowed by Glass-Steagall.”
Senator Elizabeth Warren, after consulting with experts, asked the Fed’s Gibson a simple question: If Glass-Steagall were restored, as by the act I have sponsored with other Senators, would the Federal Reserve be analyzing each case of each commodity and each financial institution, and making determinations to allow or not allow ownership of each one? Gibson’s eventual answer was no, since this would be an area of impermissible bank activity [under Glass-Steagall].
The question and answer were a useful surprise to the other members of the subcommittee.