A potentially lucrative move for the banks and their clients, yes. But one that could dangerously send the cost of most consumer electronics soaring.
Nothing new
And this is a tactic these firms have used before. The New York Times article focuses on a somewhat similar strategy to what Goldman Sachs Group Inc (NYSE:GS) employs in the aluminum market, except instead of owning both the copper and the storage warehouses, they own only the warehouses.
The author explains how — according to insiders — the sole job of the company’s truck drivers and warehouse employees is to take part in an “industrial dance” shifting aluminum from one warehouse to another.
This “lengthens the storage time,” adding “millions a year to the coffers of Goldman Sachs Group Inc (NYSE:GS), which owns the warehouses and charges rent to store the metal.”
And while it contributes only a fraction of a penny to the end product consumers purchase, when you add it up over billions of aluminum cans sold each year, you’re looking at $5 billion straight from consumers’ pockets and into those of Goldman Sachs Group Inc (NYSE:GS) and other financial firms over the past three years alone.
But it’s not only aluminum.
Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co (NYSE:JPM), and Morgan Stanley (NYSE:MS) have a presence in all the major commodity markets: oil, wheat, cotton, you name it. This is big business, from which the top 10 banks derive about $6 billion in revenue, according to Bloomberg.
And although the Federal Reserve permitted JPMorgan Chase & Co (NYSE:JPM) to trade in commodities, the same 2005 ruling that granted that permission expressly forbade them “to own, operate, or invest in facilities for the extraction, transportation, storage, or distribution of commodities.”
Yet until recently, the Fed has turned a blind eye to these events. Luckily, the Senate Banking Committee recently held hearings on these allegations. The Fed followed suit, announcing plans to review previous rulings on what fine line banks are permitted to walk as it relates to commodity trading and ownership.
For now, things are at a standstill. But the Senate Banking Committee will reconvene in September on the matter, hearing testimony from the Fed and the major banks.
What’s next?
Should investors in these Wall Street banks be worried? Hardly. As big as they are, these side commodity businesses still amount to just a small fraction of the companies’ overall revenue. And depending on how the Senate Banking Committee and the Fed decide, the banks are likely to alter their strategy to cooperate within the lines of the law.
But as consumers, let’s hope the Senate puts an end to this madness — before the prices of our cell phones, televisions, and new cars go straight through the roof.
The article Why the Price of Houses, Cars, and Electronics May Be About to Skyrocket originally appeared on Fool.com is written by Adam Wiederman.
Adam Wiederman has no position in any stocks mentioned. The Motley Fool recommends BlackRock and Goldman Sachs and owns shares of Freeport-McMoRan Copper & Gold and JPMorgan Chase.
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