By now readers will have heard of Wall Street’s two largest independent banks, Goldman Sachs and Morgan Stanley, becoming Bank Holding Companies. The move effectively repeals 1933′s Glass Steagel Act, which separated investment banking activities from commercial banks. The government can now tell Goldman or Morgan to keep higher capital reserves and take less risks in exchange for being able to borrow from consumers. With this concession, the financial capital of America is no longer Wall Street, nor Main St, but Washington D.C. What will this mean for the price of oil?
The question can be broken in to direct and indirect effects. Directly, there will be very little impact. When Sandy Weill merged Travelers (an insurance group) and Citicorp (a bank) in 1999 he combined banking and insurance, sectors the Glass-Steagel act and Bank Holding Company Act kept separate. Citigroup was told to divest some assets within five years to prevent a breach of BHCP. However, the Gramm-Leach-Bliley act of 1999 gave Citigroup carte blanche to keep its activities in all sectors. This gave way to the “Financial Services” industry, opening the doors for mergers between JP Morgan, an investment bank and Chase, a commercial bank (itself a merger between Chase and Chemical Bank) in 2000, and Bank of America’s takeover of Merrill Lynch last week. So really, pure investment banking fell sick almost a decade ago, and its last gasp this week should not be a surpise.
The government may also disallow holding companies from investing in certain types of risky products, leaving a pool of capital which could be invested in oil futures. On the flip side, a higher reserve requirement will pull cash out of the markets. These influences are tangential at best and shouldn’t effect the price too much given the large number of global players unaffected by the Fed.
Indirectly, however, everyone’s spooked. Unlike manufacturing companies with hard assets, banks rely on brokers and bankers for revenue. If these people see a fall in their bonuses and company perks they can easily walk away to hedge funds or boutique banks. This happened with Dresdner Kleinwort’s acquisition of Wasserstein-Perella, when many of WP’s top bankers took flight due to differences in culture. Could the same happen to Bear Sterns employees at JP Morgan or Merrill Lynch’s thundering herd of brokers at Bank of America? Even Citigroup had significant teething problems with infighting amongst upper management.
This uncertainty led to a record one-day gain in the price of oil, with light sweet crude contracts for October delivery jumping $25.45 to $130 a barrel on NYMEX. Gold is also up from $779.31 on the 17th of September to $898.57 today. This flight to safety looks set to continue as institutional investors turn away from the equities markets en masse.
In the short term, a rush to commodities may create a bubble in oil. This summer prices were closing in on $150 due to supply concerns with OPEC and the summer increase in demand. Now though, with increased supply and few shocks expected, the bubble might pop much sooner.
Just like it did on Wall Street.
