The Federal Reserve wants to take away the ability of Goldman Sachs and other banks to invest in companies rather than acting as bankers and lending. The U.S. banking regulators are urging Congress to prohibit merchant banking where firms buy stakes in companies rather than lend them money. They are pushing for limits on Wall Street’s ownership of physical commodities after lawmakers accused Goldman Sachs and other banks of seizing unfair advantages in metal and energy markets in recent years.

Merchant banking has generally become the business of making private equity investments in non-financial firms, in particular, equity investments that have a venture capital character. Based upon a report on a multi-agency study of banks’ investment activities required by the Dodd-Frank Act, they highlighted ways to fix potential risks that regulators didn’t think were handled by the Volcker rule ban on certain trading and investments. However, Congress needs to pass legislation and they are subject to bribes that we call lobbying, which presents the greatest hurdle to actually changing anything. The Fed’s recommendations on merchant banking would end the ability to operate mines, warehouse metals, and engage in shipping oil.

Indeed, there was a 2014 Senate investigation into banks’ commodities businesses. That revealed Goldman Sachs had almost $15 billion in merchant banking investments, not loans. Goldman Sachs’ most recent filings illustrated that it booked $1.2 billion in revenue through the first six months of this year in its division that takes equity investments under its merchant banking division.

This has been a wide-ranging agency investigation. The Office of the Comptroller of the Currency (OCC), said it must restrict lenders’ holdings of the hard-to-value securities. Indeed, such activity cannot be marked-to-market and becomes fertile territory to hide major losses. The OCC’s proposed a rule would curtail banks’ investments in certain industrial metals including copper and aluminum. They fear not merely price fixing, but the scandals of market manipulation.

The Fed has also called for the repeal of exemptions for industrial loan companies. These are generally lenders owned by non-financial firms, which allows them to operate outside of rules that effect banks. The Fed is seeking a fair and level the playing field among financial firms to separate banking and commerce, which was effectively the foundation of Glass-Steagall repealed by the Clinton Administration at the urging of Goldman Sachs’ Robert Rubin.

The bankers’ biggest savior is, of course, congressional gridlock. During the DOT.COM bubble crash back in 2001, the Fed and the U.S. Treasury Department adopted a merchant banking rule following the 1999 Gramm-Leach-Bliley Act, which actually gave the banks the right to make these very investments. Every crisis creates the solution that becomes the crisis for the next cycle. They allowed the bankers to get into these investments to support the banks. That led to the manipulation of markets and a host of scandals ever since.

Actually altering merchant banking and other industry laws requires Congressional intervention and they are only in this for whoever pays them the most. Therefore, the likelihood of any immediate impact is minimal. No one in Congress is willing to go after the bankers in times when they need their donations.

Let us make no mistake about this issue. Indeed, Goldman Sachs, Morgan Stanley, and JPMorgan were the very targets of public criticism that led to the 2014 Senate review of their commodities businesses. The bottom line was that they used their ownership of metals and other physical commodities to dominate markets and gain unfair trading advantages. The physical commodities businesses at Goldman Sachs and Morgan Stanley were protected by grandfathering that allowed them wider abilities than most banks. This is the very unfair advantage that the Fed is trying to attack under Yellen.

Morgan Stanley did sell-off its oil business last year and backed away from industrial metal trading. JPMorgan has also greatly reduced its physical commodities business in 2014. Even Goldman Sachs dumped its coal-mining operation in 2015, but that was because of the market shift toward cleaner fuels and anticipating that their support for Hillary would lead to a reduction in coal mines.

So that is perhaps some perspective on insider trading, but selling off before Hillary crosses the threshold makes it only a good guess. Nonetheless, Goldman Sachs has confirmed that trading commodities is a “core” part of the firm’s business and they have no intention of getting out of that business.

QUESTION #1: Marty, Greenspan reads you without a doubt. You warned back in 2012 that we have to be concerned about the USA moving into stagflation with deflation in Europe and Japan. He said the same on Bloomberg. He also said the crisis is the aging population, lower birthrate, and that will result in higher costs without economic expansion. That is everything you said two years ago.

QUESTION #2: Marty,