The Vampire Squid Strikes Again: The Mega Banks' Most Devious Scam Yet

Banks are no longer just financing heavy industry. They are actually buying it up and inventing bigger, bolder and scarier scams than ever

Illustration by Victor Juhasz
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Call it the loophole that destroyed the world. It's 1999, the tail end of the Clinton years. While the rest of America obsesses over Monica Lewinsky, Columbine and Mark McGwire's biceps, Congress is feverishly crafting what could yet prove to be one of the most transformative laws in the history of our economy – a law that would make possible a broader concentration of financial and industrial power than we've seen in more than a century.

Matt Taibbi on the Great American Bubble Machine

But the crazy thing is, nobody at the time quite knew it. Most observers on the Hill thought the Financial Services Modernization Act of 1999 – also known as the Gramm-Leach-Bliley Act – was just the latest and boldest in a long line of deregulatory handouts to Wall Street that had begun in the Reagan years.

Wall Street had spent much of that era arguing that America's banks needed to become bigger and badder, in order to compete globally with the German and Japanese-style financial giants, which were supposedly about to swallow up all the world's banking business. So through legislative lackeys like red-faced Republican deregulatory enthusiast Phil Gramm, bank lobbyists were pushing a new law designed to wipe out 60-plus years of bedrock financial regulation. The key was repealing – or "modifying," as bill proponents put it – the famed Glass-Steagall Act separating bankers and brokers, which had been passed in 1933 to prevent conflicts of interest within the finance sector that had led to the Great Depression. Now, commercial banks would be allowed to merge with investment banks and insurance companies, creating financial megafirms potentially far more powerful than had ever existed in America.

All of this was big enough news in itself. But it would take half a generation – till now, basically – to understand the most explosive part of the bill, which additionally legalized new forms of monopoly, allowing banks to merge with heavy industry. A tiny provision in the bill also permitted commercial banks to delve into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally."

Complementary to a financial activity. What the hell did that mean?

The Feds vs. Goldman

"From the perspective of the banks," says Saule Omarova, a law professor at the University of North Carolina, "pretty much everything is considered complementary to a financial activity."

Fifteen years later, in fact, it now looks like Wall Street and its lawyers took the term to be a synonym for ruthless campaigns of world domination. "Nobody knew the reach it would have into the real economy," says Ohio Sen. Sherrod Brown. Now a leading voice on the Hill against the hidden provisions, Brown actually voted for Gramm-Leach-Bliley as a congressman, along with all but 72 other House members. "I bet even some of the people who were the bill's advocates had no idea."

Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum. And they're doing it not just here but abroad as well: In Denmark, thousands took to the streets in protest in recent weeks, vampire-squid banners in hand, when news came out that Goldman Sachs was about to buy a 19 percent stake in Dong Energy, a national electric provider. The furor inspired mass resignations of ministers from the government's ruling coalition, as the Danish public wondered how an American investment bank could possibly hold so much influence over the state energy grid.

There are more eclectic interests, too. After 9/11, we found it worrisome when foreigners started to get into the business of running ports, but there's been little controversy as banks have done the same, or even started dabbling in other activities with national-security implications – Goldman Sachs, for instance, is apparently now in the uranium business, a piece of news that attracted few headlines.

Wall Street's War

But banks aren't just buying stuff, they're buying whole industrial processes. They're buying oil that's still in the ground, the tankers that move it across the sea, the refineries that turn it into fuel, and the pipelines that bring it to your home. Then, just for kicks, they're also betting on the timing and efficiency of these same industrial processes in the financial markets – buying and selling oil stocks on the stock exchange, oil futures on the futures market, swaps on the swaps market, etc.

Allowing one company to control the supply of crucial physical commodities, and also trade in the financial products that might be related to those markets, is an open invitation to commit mass manipulation. It's something akin to letting casino owners who take book on NFL games during the week also coach all the teams on Sundays.

The situation has opened a Pandora's box of horrifying new corruption possibilities, but it's been hard for the public to notice, since regulators have struggled to put even the slightest dent in Wall Street's older, more familiar scams. In just the past few years we've seen an explosion of scandals – from the multitrillion-dollar Libor saga (major international banks gaming world interest rates), to the more recent foreign-currency-exchange fiasco (many of the same banks suspected of rigging prices in the $5.3-trillion-a-day currency markets), to lesser scandals involving manipulation of interest-rate swaps, and gold and silver prices.

But those are purely financial schemes. In these new, even scarier kinds of manipulations, banks that own whole chains of physical business interests have been caught rigging prices in those industries. For instance, in just the past two years, fines in excess of $400 million have been levied against both JPMorgan Chase and Barclays for allegedly manipulating the delivery of electricity in several states, including California. In the case of Barclays, which is contesting the fine, regulators claim prices were manipulated to help the bank win financial bets it had made on those same energy markets.

And last summer, The New York Times described how Goldman Sachs was caught systematically delaying the delivery of metals out of a network of warehouses it owned in order to jack up rents and artificially boost prices.

You might not have been surprised that Goldman got caught scamming the world again, but it was certainly news to a lot of people that an investment bank with no industrial expertise, just five years removed from a federal bailout, stores and controls enough of America's aluminum supply to affect world prices.

How was all of this possible? And who signed off on it?

By exploiting loopholes in a dense, decade-and-a-half-old piece of financial legislation, Wall Street has effected a revolutionary change that American citizens never discussed, debated or prepared for, and certainly never explicitly permitted in any meaningful way: the wholesale merger of high finance with heavy industry. This blitzkrieg reorganization of our economy has left millions of Americans facing a smorgasbord of frightfully unexpected new problems. Do we even have a regulatory structure in place to look out for these new forms of manipulation? (Answer: We don't.) And given that the banking sector that came so close to ruining the world economy five years ago has now vastly expanded its footprint, who's in charge of preventing the next crash?

In this Brave New World, nobody knows. Moreover, whatever we've done, it's too late to have a referendum on it. Garrett Wotkyns, an Arizona-based class-action attorney who has spent more than a year investigating the banks' involvement in the metals markets and is suing Goldman and others over the aluminum case on behalf of two major manufacturers, puts it this way: "It's like that line in The Dark Knight Rises," he says. "'The storm isn't coming. The storm is already here.'"

To this day, the provenance of the "complementary activities" loophole that set much of this mess in motion remains something of a mystery. We know from congressional records that a vice chairman of JPMorgan, Michael Patterson, was one of the first to push the idea in House testimony in February 1999 and that, later that year, an early version of the bill put forward in the Senate by Phil Gramm also contained the provision.

But even one of the final bill's eventual authors, Republican congressman Jim Leach, can't remember exactly whose idea adding the "complementary activities" line was. "I know of no legislative history of the provision," he says. "It probably came from the Senate side."

Moreover, Leach was shocked to hear that regulators had pointed to this section of a bill bearing his name as the legal authority allowing banks to gain control over physical-commodities markets. "That's news to me," says the mortified ex-congressman, now a law professor at the University of Iowa. "I assume no one at the time would have thought it would apply to commodities brokering of a nature that has recently been reported."

One thing that is clear in the public record is that nobody was talking, at least publicly, about banks someday owning oil tankers or controlling the supply of industrial metals.

The JPMorgan witness, Michael Patterson, told the House Financial Services Committee at the 1999 hearing that his idea of "complementary activities" was, say, a credit-card company putting out a restaurant guide. "One example is American Express, which publishes magazines," he testified. "Travel + Leisure magazine is complementary to the travel business. Food & Wine promotes dining out . . . which might lead to greater use of the American Express card."

"That's how insignificant this was supposed to be," says Omarova. "They were talking about being allowed to put out magazines."

Even apart from the "complementary" provision, Gramm quietly added another time bomb to the law, a grandfather clause, which said that any company that became a bank holding company after the passage of Gramm-Leach-Bliley in 1999 could engage in (or control shares of a company engaged in) commodities trading – but only if it was already doing so before a seemingly arbitrary date in September 1997.

This meant that if you were a bank holding company at the time the law was passed and you wanted to get into the commodities business, you were out of luck, because the federal law prohibited banks from being involved in physical commodities or any other forms of heavy industry. But if you were already a commodities dealer in 1997 and then somehow became a bank holding company, you could get into whatever you pleased.

This was nuts. It was a little like passing a law that ordered you to leave the Army if you were gay in November 1999 – but if you were a heterosexual soldier as of September 1997 and then somehow became gay after 1999, you could stay in the Army.

To this day, nobody is exactly clear on what the grandfather clause means. If a company traded in tin before 1997 and then became a bank holding company in 2015, would it have to stick with tin? Or did the fact that it traded tin in 1997 mean the company could buy oil tankers and pipelines in 2020?

In 2012, the Federal Reserve Bank of New York – the most powerful branch of the Fed, the primary regulator of bank holding companies and the final authority on these things – put out a paper saying it had no clue about the exact meaning of the provision. "The legal scope of the exemption," a trio of New York Fed officials wrote in July that year, "is widely seen as ambiguous." Just a few weeks ago, the Fed's director of banking supervision, Michael Gibson, told the Senate, "I'm not a lawyer," and that it's "under review."

It almost didn't matter. For nearly a decade, this obscure provision of Gramm-Leach-Bliley effectively applied to nobody. Then, in the third week of September 2008, while the economy was imploding after the collapses of Lehman and AIG, two of America's biggest investment banks, Goldman Sachs and Morgan Stanley, found themselves in desperate need of emergency financing. So late on a Sunday night, on September 21st, to be exact, the two banks announced they had applied to the Federal Reserve to become bank holding companies, which would give them lifesaving access to emergency cash from the Fed's discount window.

The Fed granted the requests overnight. The move saved the bacon of both firms, and it had one additional benefit: It made Goldman and Morgan Stanley, which both had significant commodity-trading operations prior to 1997, the first and last two companies to qualify for the grandfather exemption of the Gramm-Leach-Bliley Act. "Kind of convenient, isn't it?" says one congressional aide. "It's almost like the law was written specifically for them."

The irony was incredible. After fucking up so badly that the government had to give them federal bank charters and bottomless wells of free cash to save their necks, the feds gave Goldman Sachs and Morgan Stanley hall passes to become cross-species monopolistic powers with almost limitless reach into any sectors of the economy.

And they weren't the only accidental beneficiaries of the crisis. JPMorgan Chase acquired the commodity-trading operations of Bear Stearns in early 2008, after the Fed pledged billions in guarantees to help Chase rescue the doomed investment bank. Within the next two years, Chase also acquired the commodities operations of another failing bank, the newly nationalized Royal Bank of Scotland, which included Henry Bath, a U.K.-based company that owns a large network of warehouses throughout Europe.

As a result, entering 2010, these three companies were newly empowered to go out and start doubling down on investments in physical industry. Through a fortuitous circumstance, the cost of financing for bank holding companies had also dropped like a stone by the end of 2009, as the Fed slashed interest rates almost to zero in a desperate attempt to stimulate the economy out of its post-crash doldrums.

The sudden turning on of this huge faucet of free money seems to have been a factor in an ensuing commodities shopping spree undertaken by all three firms. Morgan Stanley, for instance, claimed to have just $2.5 billion in commodity assets in March 2009. By September 2011, those holdings had nearly quadrupled, to $10.3 billion.

Goldman and Chase – along with Glencore and Trafigura, a pair of giant Swiss-based conglomerates that were offshoots of a firm founded by notorious deceased commodities trader and known market manipulator Marc Rich – all made notably coincidental purchases of metals-warehousing companies in 2010.

The presence of these Marc Rich entities is particularly noteworthy. According to famed Forbes reporter Paul Klebnikov, who was assassinated in 2004 after years of reports on Russian corruption, Rich made a fortune in the early Nineties striking crooked deals with the Soviet bosses who controlled the U.S.S.R.'s supplies of raw materials – in particular commodities like zinc and aluminum. These deals helped create a fledgling class of profiteers among the bosses of the crumbling Soviet empire, a class that would go on years later to help push Russia out of its communist past into its kleptocratic present.

"He'd strike a deal with the local party boss, or the director of a state-owned company," Klebnikov said back in 2001. "He'd say, 'OK, you will sell me the [commodity] at five to 10 percent of the world-market price . . . and in return, I will deposit some of the profit I make by reselling it 10 times higher on the world market, and put the kickback in a Swiss bank account.'"

Rich made these reported deals while in exile from the United States, which he fled in 1983 after the U.S. government charged him with tax evasion, wire fraud, racketeering and trading with the enemy after being caught trading with rogue states like Iran, among other things. The state filed enough counts to put him away for life, and he remained a fugitive until January 2001, when a little-known Clinton administration Justice Department official named Eric Holder recommended Rich be pardoned. A report by the House Committee on Government Reform later concluded that Holder had not provided a credible explanation for supporting Rich's pardon and that he must have had "other motivations" that he didn't share with Congress. Among other things, the committee speculated that Holder had designs on the attorney general's office in a potential Al Gore administration.

In any case, in 2010, a decade after the Rich pardon, Holder was attorney general, but under Barack Obama, and two Rich-created firms, along with two banks that have been major donors to the Democratic Party, all made moves to buy up metals warehouses. In near simultaneous fashion, Goldman, Chase, Glencore and Trafigura bought companies that control warehouses all over the world for the LME, or London Metals Exchange. The LME is a privately owned exchange for world metals trading. It's the world's primary hub for determining metals prices and also for trading metals-based futures, options, swaps and other instruments.

"If they were just interested in collecting rent for metals storage, they'd have bought all kinds of warehouses," says Manal Mehta, the founder of Sunesis Capital, a hedge fund that has done extensive research on the banks' forays into the commodities markets. "But they seemed to focus on these official LME facilities."

The JPMorgan deal seemed to be in direct violation of an order sent to the bank by the Fed in 2005, which declared the bank was not authorized to "own, operate, or invest in facilities for the extraction, transportation, storage, or distribution of commodities." The way the Fed later explained this to the Senate was that the purchase of Henry Bath was OK because it considered the acquisition of this commodities company kosher within the context of a larger sale that the Fed was cool with – "If the bulk of the acquisition is a permissible activity, they're allowed to include a small amount of impermissible activities."

What's more, according to LME regulations, no warehouse company can also own metal or make trades on the exchange. While they may have been following the letter of the law, they were certainly violating the spirit: Goldman preposterously seems to have engaged in all three activities simultaneously, changing a hat every time it wanted to switch roles. It conducted its metal trades through its commodities subsidiary J. Aron, and then put Metro, its warehouse company, in charge of the storage, and according to industry experts, Goldman most likely owned some metal, though the company has remained vague on the subject.

If you're wondering why the LME would permit a seemingly blatant violation of its own rules, a good place to start would be to look at who owned the LME at the time. Although it eventual­ly sold itself to a Hong Kong company in 2012, in 2010 the LME was owned by a consortium of banks and financial companies. The two largest shareholders? Goldman and JPMorgan Chase.

Humorously, another was Koch Metals (2.32 percent), a commodities concern that's part of the Koch brothers' empire. The Kochs have been caught up in their own commodity-manipulation schemes, including an episode in 2008, in which they rented out huge tankers and used them to store excess oil offshore essentially as floating warehouses, taking cheap oil out of available supply and thereby helping to drive up energy prices. Additionally, some banks have been accused of similar oil-hoarding schemes.

The motive for the Kochs, or anyone else, to hoard a commodity like oil can be almost beautiful in its simplicity. Basically, a bank or a trading company wants to buy commodities cheap in the present and sell them for a premium as futures. This trade, sometimes called "arbitraging the contango," works best if the cost of storing your oil or metals or whatever you're dealing with is negligible – you make more money off the futures trade if you don't have to pay rent while you wait to deliver.

So when financial firms suddenly start buying oil tankers or warehouses, they could be doing so to make bets pay off, as part of a speculative strategy – which is why the banks' sudden acquisitions of metals-storage companies in 2010 is so noteworthy.

These were not minor projects. The firms put high-ranking executives in charge of these operations. Goldman's acquisition of Metro was the project of Isabelle Ealet, the bank's then-global commodities chief. (In a curious coincidence commented upon by several sources for this story, many of Goldman's most senior officials, including CEO Lloyd Blankfein and president Gary Cohn, started their careers in Goldman's commodities division.)

Meanwhile, Chase's own head of commodities operations, Blythe Masters – an even more famed Wall Street figure, sometimes described as the inventor of the credit default swap – admitted that her company's warehouse interests weren't just a casual thing. "Just being able to trade financial commodities is a serious limitation because financial commodities represent only a tiny fraction of the reality of the real commodity exposure picture," she said in 2010.

Loosely translated, Masters was saying that there was a limited amount of money to be made simply trading commodities in the traditional legal manner. The solution? "We need to be active in the underlying physical commodity markets," she said, "in order to understand and make prices."

We need to make prices. The head of Chase's commodities division actually said this, out loud, and it speaks to both the general unlikelihood of God's existence and the consistently low level of competence of America's regulators that she was not immediately zapped between the eyebrows with a thunderbolt upon doing so. Instead, the government sat by and watched as a curious phenomenon developed at all of these new bank-owned warehouses, in the aluminum markets in particular.

As detailed by New York Times reporter David Kocieniewski last July, Goldman had bought into these warehouses and soon began pointlessly shuttling stocks of aluminum from one warehouse to another. It was a "merry-go-round of metal," as one former forklift operator called it, a scheme of delays apparently designed to drive up prices of the metal used to make the stuff we all buy – like beer cans, flashlights and car parts.

When Goldman bought Metro in February 2010, the average delivery time for an aluminum order was six weeks. Under Goldman ownership, Metro's delivery times soon ballooned by a factor of 10, to an average of 16 months, leading in part to the explosive growth of a surcharge called the Midwest premium, which represented not the cost of aluminum itself but the cost of its storage and delivery, a thing easily manipulated when you control the supply. So despite the fact that the overall LME price of aluminum fell during this time, the Midwest premium conspicuously surged in the other direction. In 2008, it represented about three percent of the LME price of aluminum. By 2013, it was a whopping 15 percent of the benchmark (it has since spiked to 25 percent).

"In layman's terms, they were artificially jacking up the shipping and handling costs," says Mehta.

The intentional warehouse delays were just one part of the anti-capitalist game the banks were playing. As an incentive to get metal under their control, they actually paid the industrial producers of aluminum extra cash to store the metal in their warehouses, fees reportedly as much as $230 a metric ton.

Both Goldman and Glencore reportedly offered such incentives, which not only allowed the companies to collect more rent (Goldman was charging a daily rate of 48 cents a metric ton) but also served to discourage industrial producers like Alcoa or the Russian industrial giant Rusal (which has Glencore CEO Ivan Glasenberg on its board of directors) from selling directly to manufacturers.

The result of all this was a bottlenecking of aluminum supplies. A crucial industrial material that was plentiful and even in oversupply was now stuck in the speculative merry-go-round of the bank finance trade.

Every time you bought a can of soda in 2011 and 2012, you paid a little tax thanks to firms like Goldman. Mehta, whose fund has a financial stake in the issue, insists there's an irony here that should infuriate everyone. "Banks used taxpayer-backed subsidies," he says, "to drive up prices for the very same taxpayers that bailed them out in the first place."

Dave Smith, Coca-Cola's strategic procurement manager, told reporters as early as the summer of 2011 that "the situation has been organized to artificially drive up premiums." Nick Madden, the chief procurement officer of Novelis, a leading can-maker, said at roughly the same time that the delays in Detroit were adding $20 to $40 a metric ton to the price of aluminum.

Coca-Cola was the first to file a complaint against Goldman over the warehouse issue, doing so in mid-2011, and many people in and around the industry weren't surprised that it was the world's biggest and most powerful corporate consumer of aluminum that came forward first. Other manufacturers, many believe, kept their mouths shut out of fear the banks would punish them. "It's very likely that commercial companies deliberately avoided an open confrontation with Goldman because it was a Wall Street powerhouse with which they had – or hoped to establish – important credit and financial-advisory relationships," says Omarova. One government official who has investigated the issue for Congress said even some of the country's largest aluminum users have been reluctant to come forward. "When some of these huge transnationals don't want to talk about it, it makes you wonder," the aide noted.

SStill, a few days after the Times published its aluminum-storage exposé in late July 2013, Sen. Brown held hearings to investigate the causes of the alleged manipulation. (One executive, Tim Weiner of MillerCoors, would testify that global aluminum costs for manufacturers had been inflated by $3 billion in just the past year.) After those hearings, and after word leaked out that regulatory agencies had launched investigations, Goldman curtly announced new plans to reduce the delivery times of its aluminum stocks. The bank has consistently maintained that its interest in the warehouse company Metro is not "strategic," that it only bought the firm "as an investment," and will sell it within 10 years. JPMorgan Chase and other banks announced that it might be getting out of the physical commodities business altogether. The LME, meanwhile, had already come up with plans to force its member warehouses to increase their output of aluminum.

A few weeks later, on August 9th, 2013, a company called CME Group – one of the world's leading derivatives dealers – announced that it would henceforth be selling a new kind of aluminum swap futures contract. The new instrument, the firm said, would be "the first Exchange product that enables the aluminum Midwest premium to be managed."

What this signaled was that before that moment, no one in the financial sector wanted to get within a hundred miles of selling price insurance against the Midwest premium, because it was so obviously corrupt. But then the Times let the cat out of the bag, and next thing you knew, now that everyone was watching, a major derivatives purveyor suddenly felt confident enough to sell a hedging insurance against the Midwest premium, given that it was now presumed, once again, to be free from manipulation and subject to market forces.

"That should tell you a lot about how completely people in the business understood that the metals market was broken," says Wotkyns.

One other bizarre footnote to the aluminum scandal: According to the Bank Holding Company Act of 1956, any company that becomes a bank holding company must divest itself of certain commercial holdings it may own within two years. To that two-year grace period, the Fed may add up to three additional years. This was done for both Goldman and Morgan Stanley. The aluminum scandal broke, coincidentally, just a few months before Goldman's five-year grace period was scheduled to end. There was some expectation that the Fed might order the banks to divest some of their commercial holdings.

But there was a catch. "Congress in its infinite wisdom left an ambiguity," says Omarova. Although the Bank Holding Company Act mandated that the companies had to be compliant at the end of the review period, it didn't actually specify what the Fed had to do if they weren't. When Goldman's review period passed, "the Fed took the position that nothing had to happen," says Omarova. "So nothing happened."

The aluminum delays were not just an isolated incident of banks scheming to boost rent revenue. Recently, evidence has surfaced that the same kinds of behavior may be going on across the LME. In order for a parcel of metal to be traded on the LME, it has to be what's called "on warrant." If you are the owner of a metal that you no longer want to be traded, you can "cancel the warrant" – essentially taking it out of the system. It's still in the warehouse, but in a kind of administrative limbo.

When the world LME supply of a metal features high percent­ages of canceled stock, that typically means someone is moving metals around a lot even after they've been put into storage – perhaps in a Goldman-style "merry-go-round," perhaps for some other reason, but historically it has not been something seen often in functioning, healthy metals markets.

In January 2009, before the American too-big-to-fail banks and the shady Swiss commodities giants bought into all of these warehouses, less than one percent of the total global supply of LME aluminum was "canceled warrant." Today, with world supplies of aluminum about double what they were then, 45.2 percent of the total stock is classified as canceled. In Detroit, where Goldman is supposedly cleaning things up, the percentage is even crazier: 76.9 percent of the aluminum stock has canceled warrants.

You can see hints of the phenomenon in other LME metals. Five years ago, just 1.3 percent of the LME's copper stocks had canceled warrants. Today, 59 percent of it does. In January 2009, just 2.3 percent of zinc stocks were canceled; it's at 32 percent today. Zinc incidentally has something else in common with aluminum – a shipping-and-handling-like premium, called the U.S. zinc premium in the United States, which has skyrocketed in recent years, increasing by 400 percent between the summer of 2012 and the summer of 2013, when the price plateaued just as the aluminum scandal broke.

Then there's nickel. Thirty-seven percent of the global stock is now classified as canceled. Five years ago, 0.5 percent was. One industry insider, who is very familiar with and utilizes the nickel market, says that despite the fact that there is a massive global oversupply of the metal, prices are being artificially propped up as much as 20 to 30 percent.

He blames the banks' speculative weigh stations, saying that nickel producers, despite low global demand, are cheerfully selling their stocks to bank-run warehouses, which are paying above-market prices to put raw materials into the merry-go-round. "They are happy to sell to the banks and to the warehouse supply, while they pray for demand to pick up," the insider said.

This leads to the next potentially disastrous aspect of this story: What happens if the Fed suddenly raises interest rates, and the banks, their access to free money cut off, can no longer afford to sit on piles of metal for 16 months at a time?

"Look at nickel," says Eric Salzman, a financial analyst who has done research on metals manipulation for several law firms. "You could see the price drop 20 to 30 percent in no time. It'd be a classic bursting of a bubble."

But the potential for wide-scale manipulation and/or new financial disasters is only part of the nightmare that this new merger of banking and industry has created. The other, perhaps even darker problem involves the new existential dangers both to the environment and to the stability of the financial system. Long before Goldman and Chase started buying up metals warehouses, for instance, Morgan Stanley had already bought up a substantial empire of physical businesses – electricity plants in a number of states, a firm that trades in heating oil, jet fuels, fertilizers, asphalt, chemicals, pipelines and a global operator of oil tankers.

How long before one of these fully loaded monster ships capsizes, and Morgan Stanley becomes the next BP, not only killing a gazillion birds and sea mammals off some unlucky country's shores but also taking the financial system down with them, as lawsuits plunge the company into bankruptcy with Lehman-style repercussions? Morgan Stanley's CEO, James Gorman, even admitted how risky his firm's new acquisitions were last year, when he reportedly told staff that a hypothetical oil spill was "a risk we just can't take."

The regulators are almost worse. Remember the 2008 collapse happened when government bodies like the Fed, the Office of the Comptroller of the Currency and the Office of Thrift Supervision – whose entire expertise supposedly revolves around monitoring the safety and soundness of financial companies – somehow missed that half of Wall Street was functionally bankrupt.

Now that many of those financial companies have been bailed out, those same regulators who couldn't or wouldn't smell smoke in a raging fire last time around are suddenly in charge of deciding if companies like Morgan Stanley are taking out enough insurance on their oil tankers, or if banks like Goldman Sachs are properly handling their uranium deposits.

"The Fed isn't the most enthusiastic regulator in the best of times," says Brown. "And now we're asking them to take this on?"

Banks in America were never meant to own industries. This principle has been part of our culture practically from the beginning of our history. The original restrictions on banks getting involved with commerce were rooted in the classically American fear of overweening government power – citizens in the early 1800s were concerned about the potential for monopolistic abuses posed by state-sponsored banks.

Later, however, Americans also found themselves forced to beat back a movement of private monopolies, in particular the great railroad and energy cartels built by robber barons of the Rockefeller type who, by the late 1800s, were on the precipice of swallowing markets whole and dictating to the public the prices of everything from products to labor. It took a long period of upheaval and prolonged fights over new laws like the Sherman and Clayton anti-trust acts before those monopolies were reined in.

Banks, however, were never really regulated under those laws. Only the Great Depression and years of brutal legislative trench warfare finally brought them to heel under the same kinds of anti-trust concepts that stopped the robber barons, through acts like Glass-Steagall and the Bank Holding Company Act of 1956. Then, with a few throwaway lines in a 1999 law that nobody ever heard of until now, that whole struggle went up in smoke, and here we are, in Hobbes' jungle, waiting for the next fully legal catastrophe to unfold.

When does the fun part start?

This story is from the February 27th, 2014 issue of Rolling Stone.

From The Archives Issue 1203: February 27, 2014