Government Scrutiny Prompts JPMorgan To Consider Commodities Business Sale

The announcement follows a week of congressional and media scrutiny of banks’ involvement in physical commodities.

Richard Drew / AP

JPMorgan Chase Chairman and CEO Jamie Dimon is interviewed on the floor of the New York Stock Exchange Friday, July 12, 2013.

In a statement put out Friday afternoon, JPMorgan Chase said that it had “concluded an internal review and is pursuing strategic alternatives for its physical commodities business” and would consider “a sale, spin off or strategic partnership of its physical commodities business.”

Banks’ involvement in storing, shipping, and mining physical commodities, like metals, oil, and gas, have come under scrutiny over the past week, following a New York Times article last weekend which examined Goldman Sachs’s aluminum warehousing business. The article claimed that the bank was pushing up the price of aluminum by moving around the metal in its Detroit area warehouses, increasing the time it took for aluminum to be shipped out to the customers storing it there. JPMorgan acquired Henry Bath, a UK metal warehouser in 2010 as part of a $1.6 billion acquisition of RBS’s commodities business.

In 2005, JPMorgan won approval from the Federal Reserve to trade physical commodities, like actual metals or natural gas, in addition to derivatives like futures that they were already trading. When JPMorgan acquired Bear Stearns as part of its financial crisis rescue, the bank ended up with interests in actual power plants and power facilities.

According to a filing, JPMorgan has equity interests or a tolling agreement — a right to both supply the fuel and sell power for a particular plant — in over thirty facilities. In its annual report, JPMorgan disclosed that the value of commodities it had in inventory was $16.2 billion.

In 2011, JPMorgan said that, “The firm now controls a diverse network of physical assets, including 70 billion cubic feet per day of storage capacity — an increase of almost 100% since the purchase — and almost double the transport capacity it had previously.”

Earlier this month, the Federal Reserve said it was reviewing a decision it had made in 2003 to allow bank holding companies — the parent company of banks — to own physical commodities. Citi was the first bank holding company to win the Federal Reserve’s approval, with JPMorgan getting authorization two years later.

JPMorgan said in its statement that it will “remain fully committed to its traditional banking activities in the commodity markets, including financial derivatives and the vaulting and trading of precious metals.” JPMorgan was also reportedly in talks to sell Henry Bath.

In testimony delivered to the Senate banking committee this week, Saule Omarova, a University of North Carolina law professor, said that JPMorgan’s “newly acquired physical commodity and energy assets and operations… raise a more fundamental legal question as to whether the firm has the statutory authority to own such assets and to conduct such operations in the first place.” In its statement, JPMorgan said, “We considered many different factors, including the impact of potential new rules and regulations.”

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