J.P. Morgan to Sell Commodities Business (Jul 2013)


Source: WSJ – J.P. Morgan to Sell Commodities Business

Notable excerpts:

The largest U.S. bank is getting out of the power-plant and warehouse business, amid heightened regulatory scrutiny of Wall Street’s ownership of such assets.

J.P. Morgan Chase & Co. said Friday it is putting its physical commodities operation up for sale, a major retreat for a company that last decade made a costly and bold effort to become No. 1 in the commodities field.

J.P. Morgan joins rivals Goldman Sachs Group Inc.  and Morgan Stanley, which also are seeking buyers for such holdings.

Regulators in recent months have ratcheted up scrutiny of banks’ power-market operations. The Federal Energy Regulatory Commission’s enforcement staff in March accused J.P. Morgan of manipulating energy markets in California and the Midwest. J.P. Morgan denied the accusations in a written response to FERC. The company is negotiating a $410 million settlement that would resolve those allegations.

The Federal Reserve, meanwhile, is reviewing a decade-old policy allowing banks to hold physical commodity assets.

J.P. Morgan’s decision is the most striking move yet by Wall Street to back away from physical commodities, marking a potential final chapter in a decade long push by financial firms to seek profits by planting themselves at the center of the global supply chain for industrial materials.

Such firms in recent years moved into the ownership of everything from oil pipelines and metals warehouses to barges and wind farms. But lawmakers and major metals users such as MillerCoors LLC accused banks of sometimes withholding supplies and driving up their costs. In early 2008, some consumer advocates alleged that banks’ use of tankers contributed to skyrocketing oil prices at that time.

The storing of products ranging from aluminum to steel in warehouses around the world isn’t a core business for the banks, nor is the buying and selling of energy for power plants. Through the first half of the year, such holdings contributed less than $700 million to J.P. Morgan’s $50 billion in revenue, and the business employs less than 1% of its 254,000-person workforce.

But J.P. Morgan at times has been a massive holder of physical commodities. In December 2010, J.P. Morgan amassed a copper stockpile of more than 175,000 tons. It exceeded $1 billion in value at the time and accounted for more than half of all the metal stored in London warehouses, the global hub of base metals trading. The bank said then that most of the purchases were on behalf of clients.

Likewise, J.P. Morgan’s 2010 purchase of Henry Bath & Son Ltd., a metal warehousing network, gave it more than 70 facilities on four continents from New Orleans to Singapore—nearly 11% of the industry total, according to London Metal Exchange data this month.

J.P. Morgan also is the biggest bank in the natural-gas-storage business, according to an analysis of government data by BNP Paribas earlier this year. J.P. Morgan leased about 25 billion cubic feet of natural-gas storage as of the end of the first quarter. The figure includes only storage owned by interstate pipelines, so the total volume of storage may be higher. Bank of America Corp.’s commodities unit was second, with leases to about 16 billion cubic feet of gas storage.

For decades, the U.S. had legal prohibitions on bank ownership of commercial assets to maintain separation between banking and commerce—both to insulate banks from risk and to prevent concentration of financial and economic power that would allow banks to potentially distort markets.

But beginning with bank deregulation in the 1990s and continuing with one-off permissions granted by the Fed throughout the 2000s, regulators allowed banks to expand their participation in physical commodity markets and ownership of physical commodity assets.

The Fed granted permission for banks to expand their roles in physical markets beginning with Citigroup Inc. in 2003. A handful of others followed over the next several years as Goldman Sachs and Morgan Stanley also bought assets such as pipelines, warehouses and power plants.

One attraction was that such businesses allowed banks an early look at information on supply and demand. They could profit by seeing the flow of raw materials and trading based on that plus their added knowledge of financial markets. The physical commodity business generated more than $1 billion for banks, or 15% of total revenue from raw materials, in 2012, with oil-related business representing easily half of that, according to research firm Coalition.

Inside J.P. Morgan, the commodities business became one of the bank’s biggest bets. It spent more than $2 billion acquiring commodities-trading operations, including those of securities firm Bear Stearns Cos., parts of UBS Commodities and, most recently, assets from RBS Sempra Commodities in 2010.

J.P. Morgan Chase tapped Blythe Masters, one of the best-known women on Wall Street, to run the business. It isn’t known what Friday’s decision means for Ms. Masters. She intends to help the firm look for potential buyers, but it is too early to know what she will do afterward, said a person familiar with the situation.

The bank also intends to sell trading desks that buy and sell oil, gas, power and coal. It will continue to hold gold and silver in vaults even if it sells the other physical assets, this person said.


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