Energy Markets: Frustrated Senators Ask If Wall Street Is Friend or Foe

The Federal Reserve, tasked with overseeing U.S. banks, has been probing the commodities holdings, including energy, at large financial firms for more than two years.  Michael Gibson, the director of the Federal Reserve's Division of Banking Supervision and Regulation, said high-level staff conversations led up to the release of the advanced rulemaking notice yesterday.

One major question the agency has posed is whether Wall Street banks can shoulder the high costs and liabilities tied to major, billion-dollar energy disasters seen in recent years, including the deadly Deepwater Horizon oil spill in the Gulf of Mexico, the 2011 meltdown of three nuclear reactors in Japan following a massive earthquake and tsunami, and the San Bruno, Calif., pipeline explosion that killed eight people and damaged or destroyed more than 100 homes.

Financial holding companies have become increasingly active in physical energy commodities since 2007 -- as a result of mergers and acquisitions -- adding to the fear that an isolated market shock involving such an entity could spread like a "contagion" to other financial sectors, according to the Federal Reserve.

"The recent catastrophes accent that the costs of preventing accidents are high and the costs and liability related to physical commodity activities can be difficult to limit and higher than expected," the agency wrote.

Energy Markets:  Frustrated Senators Ask If Wall Street Is Friend or Foe