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During the financial crisis in 2008, the government made a supremely generous move that most likely saved Goldman Sachs from collapse.

Six years later, Goldman is still reaping benefits from the special provisions that came with that act of mercy, according to the findings of a Senate report that was released on Wednesday.

As panic paralyzed the financial system in September 2008, the government, with a stroke of the pen, allowed Goldman and Morgan Stanley to change their statuses from vulnerable, stand-alone Wall Street firms to regulated banks operating within the taxpayer safety net. With that change, the government sent a strong signal that it stood stoutly behind the two companies. As a result, Goldman and Morgan Stanley stood a far greater chance of avoiding the fate Lehman Brothers suffered a few days earlier.

But the emergency change did far more than save Goldman and Morgan Stanley. Incredibly, it also bestowed special privileges that have persisted.

One of them has to do with how Wall Street trades commodities, the subject of the report issued on Wednesday by the Senate’s Permanent Subcommittee on Investigations.

The report spends a lot of time examining how the 2008 transformation gave Goldman and Morgan Stanley extra leeway as they aggressively expanded their commodities business after the crisis. The two banks bought up what Wall Street calls physical commodities assets. In the physical business, banks hold actual commodities like oil, gas, coal or electricity. They can even own the plants that produce such commodities or transport them.

Regulations place some limits on the physical assets that the banks can hold. But Goldman and Morgan Stanley have benefited from an exemption that even their Wall Street rivals that also hold physical commodities don’t enjoy. The exemption originates with the Gramm-Leach-Bliley Act, which Congress passed in 1999.

The legislation relaxed crucial banking regulations. It also contained a clause that effectively allowed any firm that became a regulated bank to continue conducting physical commodities business if certain conditions were met.

Such “grandfather” clauses typically aim to allow financial firms to maintain existing businesses, at least for a while, after they become regulated banks. But according to the Senate report, Goldman and Morgan Stanley used the clause to support the expansion of their physical commodities activities after the financial crisis.

The Senate report says:

Federal Reserve analyses have noted that the banks’ expansive interpretation of the grandfather clause has not only enabled them to conduct new, high risk physical commodity activities not otherwise permitted by law, but also created a competitive disparity between Goldman Sachs and Morgan Stanley, on the one hand, and financial holding companies on the other hand that cannot invoke the grandfather clause.





The report says that a Fed analysis found that some of Goldman’s commodities activities, like owning power plants and storage facilities, were generally not permitted under the Bank Holding Company Act. In its analysis, the Fed added that Goldman had asked the Fed to determine if the grandfather clause permitted the activities to continue. But the analysis said that the Fed’s lawyers were still considering that request.

As a result, it appears that Goldman still has the legal basis to pursue physical commodities activities, even as other banks, including Morgan Stanley, have pulled back sharply from this business, partly because of pressure from regulators.

Earlier this year, the Fed sought public comment on whether it should draft a new rule to cover commodities.

With a hint of impatience, the Senate report noted: “Despite passage of nearly a year, however, the Federal Reserve has taken no further action on this rule-making effort to curb risks associated with grandfathered commodity activities not otherwise permitted by law.”