THE future of Goldman Sachs' and Morgan Stanley's commodity businesses faces even greater uncertainty after a key deadline for them to conform their physical trading to United States regulations expired at the weekend without word from the Federal Reserve (Fed).
The Fed's silence leaves the two banks even more unsure about whether they will be able to continue owning and operating physical commodity trading assets, from power plants to metal warehouses, and questioning whether the long-running issue has now been swept into a broader Fed review of the role of Wall Street in physical markets.
The banks have been discussing the issue with the regulator behind closed doors for five years, since converting to Fed-regulated banks at the peak of the financial crisis in September 2008. Rival commercial banks are not allowed to own such assets.
But in July, Wall Street's role - including other banks - in physical commodity trading suddenly came under intense scrutiny in Washington amid a series of civil and criminal investigations, including accusations banks have artificially inflated prices in markets from electricity in California to aluminium, boosting the cost of aluminium drink cans.
That issue may come to a head at Senate Banking Committee hearings next month, where the Fed and the banks are expected to testify. The close nature of the two dates has led some to speculate that the Fed may make an announcement on its review soon, to get out in front of a grilling on the Hill.
Nevertheless, the Fed's silence on the expiry of the September 21 deadline came as a surprise to some.
"One would expect something similar to an order from the Fed unless the banks had a very strong indication - formally or informally - that it's okay for them to continue holding these assets," said Saule Omarova, a visiting law professor at Cornell University.
"Given the seriousness of the issue and the public attention it is surprising the Fed didn't announce they were folding it into the formal review they announced in July."
As recently as last September, the Fed told Goldman Sachs, one of the largest traders of oil and metal on Wall Street, it had just 12 months to stop any impermissible commodity-related activities, according to a letter obtained through a Freedom of Information Act request.
"Goldman Sachs continues to engage in commodity-related activities... that the board has not permitted" for financial holding companies, said Robert Frierson, Secretary of the Board, in a letter dated September 19 2012 approving a final one-year grace period for the former investment bank to comply with commercial banking regulations.
It appears little, if anything, has changed. The Fed declined to comment on the expiry of the deadline when contacted by Reuters on Friday.
Spokesmen for Goldman Sachs and Morgan Stanley also declined to comment. Reuters