JPMorgan, a major player in commodities on Wall Street, said in a press release that it “is pursuing strategic alternatives for its physical commodities business, including its remaining holdings of commodities assets and its physical trading operations.”
The announcement comes hot on the heels of a New York Times piece detailing a Goldman Sachs aluminium warehousing scheme it asserts has cost consumers $5 billion over the last three years.
Goldman’s foray into the warehousing business is a prime example of the ingenuity displayed by investment banks over the past decade since they first became involved in physical commodities in coming up with new ways to generate revenue.
The New York Times piece also took aim at JPMorgan:
As Goldman has benefited from its wildly lucrative foray into the aluminium market, JPMorgan has been moving ahead with plans to establish its own profit centre involving an even more crucial metal: copper, an industrial commodity that is so widely used in homes, electronics, cars and other products that many economists track it as a barometer for the global economy.
In 2010, JPMorgan quietly embarked on a huge buying spree in the copper market. Within weeks — by the time it had been identified as the mystery buyer — the bank had amassed $1.5 billion in copper, more than half of the available amount held in all of the warehouses on the exchange. Copper prices spiked in response.
At the same time, JPMorgan, which also controls metal warehouses, began seeking approval of a plan that would ultimately allow it, Goldman Sachs and BlackRock, a large money management firm, to buy 80 per cent of the copper available on the market on behalf of investors and hold it in warehouses. The firms have told regulators that these stockpiles, which would be used to back new copper exchange-traded funds, would not affect copper prices. But manufacturers and copper wholesalers warned that the arrangement would squeeze the market and send prices soaring. They asked the S.E.C. to reject the proposal.
The Times noted that separately, JPMorgan faces a potential $500 million settlement for electricity price rigging.
Yesterday, the Wall Street Journal reported that the Department of Justice has opened a probe into the metals warehousing industry. The move is part of a larger campaign against investment bank involvement in commodities gathering steam in Washington, D.C.
JPMorgan’s full statement is included below.
J.P. Morgan to Explore Strategic Alternatives for its Physical Commodities Business
New York, July 26, 2013 – JPMorgan Chase & Co. (NYSE: JPM) announced today that it has concluded an internal review and is pursuing strategic alternatives for its physical commodities business, including its remaining holdings of commodities assets and its physical trading operations.
To maximise value, the firm will explore a full range of options over time including, but not limited to: a sale, spin off or strategic partnership of its physical commodities business. During the process, the firm will continue to run its physical commodities business as a going concern and fully support ongoing client activities.
J.P. Morgan has built a leading commodities franchise in recent years, achieving a top-ranked revenue position. The business has been consistently named as a top client business in Greenwich Associates’ annual client surveys and was recently named Derivatives House of the Year by Energy Risk magazine.
Following the internal review, J.P. Morgan has also reaffirmed 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. The firm will continue to make markets, provide liquidity and offer advice to global companies and institutions that have, for years, relied on J.P. Morgan’s global risk management expertise.
JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $2.4 trillion and operations worldwide. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the United States and many of the world’s most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about JPMorgan Chase & Co. is available at www.jpmorganchase.com.
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