Senate to quiz US regulators on Wall St commodity bets

Reuters

* Hearing on banks and commodities set for Jan. 15

* Top officials from FERC, Fed and CFTC will appear

* Alleged aluminum manipulation to be back in focus

By Anna Louie Sussman

Jan 8 (Reuters) - A Senate panel will hold a hearing next week to question financial regulators over Wall Street's role in physical commodity markets, drawing fresh attention to a controversy over the possible risks posed by the involvement of the largest U.S. investment banks.

The Jan. 15 hearing by a subcommittee of the powerful Senate Banking Committee is to include testimony by top oversight officials with the Federal Energy Regulatory Commission and the Commodity Futures Trading Commission and an official from the Federal Reserve's banking supervision arm.

The hearing, the second called by Senator Sherrod Brown, an Ohio Democrat, comes as the Fed reconsiders exemptions given to banks since the early 2000s that allow them to engage in the previously prohibited trading of physical commodities.

Brown and other lawmakers have questioned whether Wall Street's biggest banks, including JPMorgan Chase & Co and Goldman Sachs, should be allowed to own metals warehouses, oil tankers and other physical assets next to their vast commodity and commodity derivatives trading desks.

At next week's session, the Fed will likely be called on to explain how banks' involvement in commodity markets could hurt their "safety and soundness," said Arthur Long, a banking lawyer at Gibson, Dunn & Crutcher.

Representing FERC will be Norman Bay, a former New Mexico district attorney who has led a series of high-profile market manipulation cases against big traders in the U.S. power and gas markets, including a record $410 million penalty agreed with JPMorgan.

Bay, who took over the FERC's Office of Enforcement in 2009, pressed the cases after Congress gave the agency expanded powers following the California power scandals more than a decade ago.

The Fed's director of banking supervision and regulation, Michael Gibson, and the CFTC's market oversight chief, Vince McGonagle, will be the other two witnesses.

The hearing follows a high-profile session in July in which brewers complained that banks, including JPMorgan and Goldman, had inflated the price of aluminum. Brewers use aluminum for their beverage cans.

The hearing had originally been scheduled for November but was postponed for unknown reasons.

RETREAT OR EXIT

The intense regulatory and political scrutiny has already forced major banks, including JPMorgan and Morgan Stanley , to pull out or shrink their commodities businesses.

JPMorgan announced in July plans to sell its physical commodities business shortly before it agreed to the settlement with FERC over allegations of manipulation of California and Midwest power markets.

Last month, Morgan Stanley sold the majority of its global physical oil trading operations to Russian state-run oil major Rosneft, becoming the latest Wall Street firm to dispose of a major part of its commodity business.

The presence of the CFTC is likely to stir the debate over alleged manipulation of the aluminum market.

The U.S. commodities regulator took the lead in the summer in investigating complaints by end-users, including MillerCoors, that big banks and commodities merchants had made it more expensive for them to buy metal by restricting the flow of metal out of warehouses.

The U.S. Justice Department is also investigating the matter.

At the first hearing in July, MillerCoors, the second largest brewer in the United States, said high physical prices have cost U.S. consumers an extra $3 billion a year.

Goldman has said that Metro International Trade Services, its warehousing unit, has not broken any laws or rules. JPMorgan has consistently said its warehousing subsidiary does not have any queues.

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