Wall Street investment banks are essentially gamblers. They place bets on the price changes in a host of commodities, interest rates, and assets such as stocks and bonds. Every gambler would like to have better information about the direction of prices than other gamblers. Regulations which used to prevent banks from owning the commodities that they traded were eliminated in the Clinton Administration with strong support from Republicans. There was no gridlock in Washington on bank deregulation which enabled investment banks to enter into previously forbidden markets. This Senate hearing was about the potential for insider information that might enable Wall Street banks to influence the price of commodities that are actively traded on the commodity futures market.
Three of the Wall Street investment banks acquired ownership positions in some commodity markets in which they trade. One of the banks was fined for manipulating the energy market through its ownership position in that market. It has exited that market, and along with one of the other banks, plans to exit other ownership positions that it has in commodity markets. The exception is Goldman Sachs. In particular, it was questioned extensively about its ownership of an aluminum warehouse that enabled it to influence the supply of aluminum and therefore the price of aluminum. Large purchasers of aluminum testified that Goldman's ability to influence the supply of aluminum had an effect on the prices that they paid. Since Goldman could influence the price of aluminum, its traders also might benefit from insider information in the futures market if they knew what its warehouse might be doing. Goldman executives were insulted by any insinuation that its traders might have information that was unavailable to its counterparties who traded in the futures market. They argued that there is a Chinese Wall between its traders and the aluminum warehouse which prevents the passage of information between them. With the exception of a Senator from Ohio, who defended Goldman, a Republican Senator and the Democratic Chairman of the committee, were skeptical.
The theatrics in the Committee hearing were interesting. The executives from JP Morgan Chase and Morgan Stanley agreed that it was not a good idea for them to own interests in the commodities that they actively traded. The executives from Goldman Sachs, which has not agreed to exit the commodities business, were not contrite. They fired back at members of the committee who attacked their integrity. In effect, they acted as if they were superior to members of the Senate who were raising questions about the potential for insider trading. Perhaps that it is the real order in the hierarchy that exists between government and Wall Street bankers.