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Fed Urges U.S. Ban on Wall Street Buying Stakes in Companies

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Wall Street New York Stock Exchange

Goldman Sachs Group Inc. and other banks that invest in companies are officially on notice: The Federal Reserve wants that ability taken away.

Among several recommendations issued by U.S. banking regulators, one from the Fed urged Congress to prohibit merchant banking, in which firms buy stakes in companies rather than lend them money. In a report released Thursday, the agency also pushed 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.

The report — based on a multi-agency study of banks’ investment activities required by the Dodd-Frank Act — highlighted ways to fix potential risks that regulators didn’t think were handled by the law’s Volcker Rule ban on certain trading and investments. The need for Congress to pass legislation presents the greatest hurdle to the Fed’s recommendations on merchant-banking and the ability of Goldman Sachs and Morgan Stanley to operate mines, warehouse aluminum and ship oil.

“Congress has an obligation to give their recommendations serious attention,” U.S. Senator Sherrod Brown, the most senior Democrat on the Banking Committee, said in a statement.

A 2014 Senate investigation into banks’ commodities businesses revealed Goldman Sachs had almost $15 billion in merchant banking investments. The firm’s most recent filings show it booked $1.2 billion in revenue through the first six months of this year in its division that houses merchant banking, with equity investments contributing $626 million of that.

Copper Investments

Another agency that participated in issuing the report, the Office of the Comptroller of the Currency, said it plans to restrict lenders’ holdings of the hard-to-value securities. The OCC also proposed a rule Thursday that would curtail banks’ investments in certain industrial metals including copper and aluminum.

The Fed called for the repeal of exemptions for industrial loan companies, which are lenders generally owned by non-financial firms, that allow them to operate outside of rules that affect banks. The Fed’s section of the report said its aim was to level the playing field among financial firms and “help ensure the separation of banking and commerce.”

Spokesmen for Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. — another bank that could be affected by the recommendations — declined to comment on the regulators’ report.

A coalition of financial industry associations called the recommendations “unfortunate and ill-considered” in a statement. The groups — including the Clearing House Association, American Bankers Association and Securities Industry and Financial Markets Association — said merchant banking has financed startups and fueled job growth. The groups also argued that it hasn’t been shown to pose a risk to the financial system.

Congressional Gridlock

The Fed and the U.S. Treasury Department adopted a merchant-banking rule in 2001 after the 1999 Gramm-Leach-Bliley Act gave banks the right to make such investments. But making statutory changes to merchant banking and other industry laws would require intervention from lawmakers — a tall order in a politically-divided Congress that has passed only a few significant bills affecting the financial system in recent years. That leaves any immediate impact of the report in doubt.

The Fed, OCC and the Federal Deposit Insurance Corp. were required by Dodd-Frank to dig into further risks from bank investments, and they were supposed to issue the report almost five years ago.

The document was called for by a provision tucked more than 200 pages into Dodd-Frank under section 620. Lenders’ government watchdogs had to review the industry’s investment activities to determine whether they “could have a negative effect on the safety and soundness” of the financial system. But the mandate was easy to lose track of next to the passage that preceded it: section 619, which is better known as the Volcker Rule.

Goldman Sachs, Morgan Stanley and JPMorgan were the targets of criticism that led to the 2014 Senate review of their commodities businesses. It found lenders 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 — an advantage the Fed is seeking to end.

Morgan Stanley sold off its oil business last year and backed away from industrial metals trading, while JPMorgan shed a big part of its physical commodities business in 2014. While Goldman Sachs dumped a coal-mining operation in 2015, Chief Executive Officer Lloyd Blankfein has maintained that commodities trading is a “core” part of his firm’s business.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Markets

OPEC Agrees to Increase Oil Supply by 500,000 Barrels Per Day Ahead of Surge in Demand

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Nigeria's economic Productivity

OPEC and allies finally agreed to ease their 7.7 million barrels per day production cut by 500,000 barrels per day starting from January 2021.

This will now bring the oil cartel’s total production cuts to 7.2 million barrels per day starting from next year.

Oil prices rose after the news as the market believed the approval of Pfizer COVID-19 in the United Kingdom will kick start a series of approvals and helped restore confidence, increase business activities and demand for the commodity across the globe.

After the outcome of the meeting was made public on Thursday, Brent Crude Oil against which Nigerian oil is priced gained 1.35 percent on Friday after gaining 1.4 percent on Thursday to $49.37 per barrel at 11.35 am Nigerian time on Friday.

The US West Texas Intermediate gained 1.29 percent to $46.23 barrel on Friday.

500,000 bpd from January is not the nightmare scenario that the market feared, but it is not what was really expected weeks ago,” said Rystad Energy senior oil markets analyst Paola Rodriguez Masiu. “Markets are now reacting positively and prices are recording a small increase as 500,000 of extra supply is not deadly for balances,” she added.

Investors King increased business sentiment in the energy sector to boost investment, increase activity in the sector and most important improve crude oil demand enough to accommodate the 500,000 barrels per day extra that would be hitting the global market starting from January.

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Communities in Delta State Shut OML30 Operates by Heritage Energy Operational Services Ltd

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Oil

The OML30 operated by Heritage Energy Operational Services Limited in Delta State has been shut down by the host communities for failing to meet its obligations to the 112 host communities.

The host communities, led by its Management Committee/President Generals, had accused the company of gross indifference and failure in its obligations to the host communities despite several meetings and calls to ensure a peaceful resolution.

The station with a production capacity of 80,000 barrels per day and eight flow stations operates within the Ughelli area of Delta State.

The host communities specifically accused HEOSL of failure to pay the GMOU fund for the last two years despite mediation by the Delta State Government on May 18, 2020.

Also, the host communities accused HEOSL of ‘total stoppage of scholarship award and payment to host communities since 2016’.

The Chairman, Dr Harrison Oboghor and Secretary, Mr Ibuje Joseph that led the OML30 host communities explained to journalists on Monday that the host communities had resolved not to backpedal until all their demands were met.

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Crude Oil Recovers from 4 Percent Decline as Joe Biden Wins

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Oil Prices Recover from 4 Percent Decline as Joe Biden Wins

Crude oil prices rose with other financial markets on Monday following a 4 percent decline on Friday.

This was after Joe Biden, the former Vice-President and now the President-elect won the race to the White House.

Global benchmark oil, Brent crude oil, gained $1.06 or 2.7 percent to $40.51 per barrel on Monday while the U.S West Texas Intermediate crude oil gained $1.07 or 2.9 percent to $38.21 per barrel.

On Friday, Brent crude oil declined by 4 percent as global uncertainty surged amid unclear US election and a series of negative comments from President Trump. However, on Saturday when it became clear that Joe Biden has won, global financial markets rebounded in anticipation of additional stimulus given Biden’s position on economic growth and recovery.

Trading this morning has a risk-on flavor, reflecting increasing confidence that Joe Biden will occupy the White House, but the Republican Party will retain control of the Senate,” Michael McCarthy, chief market strategist at CMC Markets in Sydney.

“The outcome is ideal from a market point of view. Neither party controls the Congress, so both trade wars and higher taxes are largely off the agenda.”

The president-elect and his team are now working on mitigating the risk of COVID-19, grow the world’s largest economy by protecting small businesses and the middle class that is the backbone of the American economy.

There will be some repercussions further down the road,” said OCBC’s economist Howie Lee, raising the possibility of lockdowns in the United States under Biden.

“Either you’re crimping energy demand or consumption behavior.”

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