Commodities at the bank: an initial OK, and criticism
Banks have found another arena to enter: commodities brokerage.
Last week the Federal Reserve Board decided J. P. Morgan & Co., the parent of Morgan Guaranty Trust Company, the nation's fifth-largest bank, could begin to offer commodities brokerage services to its corporate customers.
Bankers Trust in New York has likewise applied for permission. And a host of other banks, including First National Bank of Chicago and Continental Illinois Bank, have been waiting to see how the Fed would react to Morgan's request.
Specifically the banks would like to be able to deal in gold and silver futures, financial futures, and currency futures. They can now do this for their own accounts. The bankers will leave pork belly futures to the brokers on La Salle Street in Chicago.
Predictably, the banks' attempt to move into the brokers' area has prompted an outcry. The Futures Industry Association and the Securities Industry Association have told the Federal Reserve and the Comptroller of the Currency that allowing banks to trade commodities might endanger the whole banking system. The association had this to say about banks and commodities in its letter to the Fed late last year when Morgan Guaranty Trust applied for permission to trade commodities:
''To allow a wholesale entry into the business of commodities brokerage by all bank holding companies would assuredly lead to an endangering of the soundness of the banking system, as the intricacies and the risk involved in this type of business would prove to be too much for overly ambitious, smaller, less well-capitalized, unsophisticated bank holding companies.''
George Lamborn, co-chairman of Refco International, a commodities brokerage house, was particularly outspoken about allowing banks to participate in the commodities markets. Mr. Lamborn, who is also chairman of the New York Coffee and Cocoa Clearing Association, told the Monitor in an interview, ''My reason for opposing the entrance of the banks at this point is because there are no regulations in place.'' He added, ''The banks are not qualified yet and the proof of that is what they did in the silver situation with the Hunts.'' With the right control systems in place, however, he would have no objections to having banks deal in commodities.
Mr. Lamborn said the banks were to blame for problems that developed with the Hunt family. In 1979 and '80, the family purchased large amounts of silver and silver futures, helping push up the price of silver dramatically. When the silver market crashed, they had to borrow $1.1 billion guaranteed by the government to make good on their loans to buy silver futures. Lamborn blames the banks for never checking to see if their loans to the Hunts were for hedged future purchases.
If smaller banks are allowed to trade commodities for their clients, he says, ''it will make the 1973 options scandals look like a nursery game unless certain restrictions and requirements are brought in.''
Brokers were also concerned that banks would use their lending ability in a manner that might put the brokers in an unfair position. For example, a bank might tell a trade customer it would lend money to them only if they used the bank to trade futures contracts. The Futures Industry Association complained that this would give the banks an unfair advantage.
A spokesman for J. P. Morgan replied that ''in our view this is a logical extension of tha banking business.'' He said the contention that banks are not experienced seemed unfair, since ''banks deal with the basic outlook and direction of the money markets all the time.''
The stock market is ''nutsy,'' investment adviser John Winthrop Wright says. ''It is not a good0judge of value.''
Mr. Wright, head of an investment firm managing nearly $1 billion, most of it institutional money, out of Bridgeport, Conn., was speaking of the short term. He reckons that the stock market is not so ''efficient'' as academics maintain. Individual stock prices can easily vary some 20 percent, plus or minus, from true value, depending on investor fads and opinions.
Over the longer run, however, Mr. Wright figures that the value of good-quality stocks will be reflected in stock market prices. Wright Investors' Service has operated on this basic thesis for more than 21 years. Over those years it has selected some 676 stocks according to specific tests for quality. For instance, they must have twice the average return on equity, twice the average growth rate, half the average debt ratio, and so on. The result from 1961 to 1981 was an average annual growth for those recommended stocks of 10.4 percent, compared with 7 percent for the New York Stock Exchange composite index , 6.7 percent for the Standard & Poor's 500 stock composite, or 5.1 percent for the Dow Jones industrial average.
At the moment, Wright Investors' has had 50 percent of its money invested in the short-term money market, safely out of the weak stock market. But Mr. Wright has decided to put another 5 percent of the managed funds into stocks and expects to be fully invested in stocks by the end of the year.
''If interest rates go back to normal,'' he told the Monitor's business editor, David R. Francis, ''the Dow will double in two or three years.'' He expects a major rise in stock prices at the end of this year or early next year, but would not be surprised if it fell to 750 before then. ''I don't believe we are far from the final bottom,'' he says.
Mr. Wright figures investors in most deep-discount bonds ''will have a nice profit'' as interest rates decline. But, he warns, more companies will go broke.
Traditionally, in a patriotic gesture Wall Street rallies the week before the Fourth of July. But last week, the rally fizzled. The Dow Jones industrial average closed at 796.99, down 6.09 points for the week. Traders found it hard to set off any fireworks while the Treasury was selling some $8 billion in new securities. Interest rates generally rose last week.