The story followed a Reuters article reporting that the Fed was now “reviewing” a landmark 2003 decision that first allowed regulated banks to trade in physical commodity markets. It was this, we always noted, that allowed for the emergence of a so-called physical loophole for a number of top Wall Street institutions active in commodity markets. The fact that they were swap dealers with physical exposures ensured they were eligible for exemptions (on such things as position limits) whilst other financial institutions were not.
When 2008 hit, and most commodity curves went into super-contango, this allowed those banks with commodity businesses to very profitably enter the warehousing space — which was now a securitised path towards yield enhancement, exploiting the fact that passive commodity speculators were prepared to pay the industry to store commodities no-one else wanted.
Gosh, that sure sounds like something we'd rather they didn't do.
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