There are at least a few stories posted on Bloomberg about the latest revelation of Fed blunders regarding the regulation of the activities of bank holding companies pertaining to the trading of physical commodities including crude oil.
The whole issue sparked my curiosity. So I decided to make a picture of WTI crude prices and compare it key dates in the article to see if the data might reveal some important clue.
Here’s the not so pretty picture:
And here are key paragraphs from the article:
In a landmark decision in 2003, the Fed let Citigroup Inc. continue making transactions in physical commodities after finding them complementary to the firm’s trading and investing in financial instruments. The New York-based bank otherwise would have been forced to divest its Phibro energy-trading unit to comply with a federal rule banning banks from dealing directly in materials and fuel.
The subsidiary, once known as Philipp Brothers, was part of the Salomon Brothers investment bank acquired by Travelers Cos. in 1997. Travelers merged with Citigroup in 1998. While Citigroup agreed to sell Phibro to Occidental Petroleum Corp. (OXY) in 2009, other Wall Street banks also have been allowed to make trades in physical commodities.
Commodities revenue at the 10 largest banks amounted to about $6 billion last year, down from $8 billion in 2011, amid low volatility and client flows, according to a Feb. 15 report from London-based analytics company Coalition. Increasing concerns that regulation and capital rules are stiffening also led banks to re-examine commodity strategies, it said.
From a similar article, also from Bloomberg:
“The Federal Reserve 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,” said Barbara Hagenbaugh, a Fed spokeswoman. She declined to elaborate.
When the Federal Reserve gave JPMorgan Chase & Co. approval in 2005 for hands-on involvement in commodity markets, it prohibited the bank from expanding into the storage business because of the risk.
It goes on to discuss JPMorgan’s warehousing businesses, suggesting that it is in the storage business as it pertains to metals like aluminum. It doesn’t specifically mention crude, other than in a generalized fashion.