After a two-year investigation, a U.S. Senate subcommittee said Wednesday it is concerned about the involvement of three of the nation’s major bank holding companies in the commodities markets, claiming they engaged in risky activities and unfair trading advantages, and have inadequate safeguards in place to avert a financial disaster.

In a 396-page report, the U.S. Senate Permanent Subcommittee on Investigations leveled criticism at Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley. The investigation found that over the last five years, Morgan Stanley had run amok in the natural gas market by using shell companies and merchant banking investments controlled by the bank to invest in several businesses.

“Wall Street’s massive involvement in physical commodities puts our economy, our manufacturers and the integrity of our markets at risk,” said Sen. Carl Levin (D-MI), the subcommittee’s chairman. “It’s time to restore the separation between banking and commerce and to prevent Wall Street from using nonpublic information to profit at the expense of industry and consumers.”

According to the subcommittee, in 2013 Morgan Stanley launched plans to build a $355 million compressed natural gas (CNG) facility in Freeport, TX, with plans to export CNG to countries in Central America and the Caribbean. The bank created three wholly-owned shell companies — Wentworth Compression LLC, Wentworth Gas Marketing LLC and Wentworth Holdings LLC — to build and operate the facility.

The investigation found that in May, the bank filed an application with the Department of Energy’s (DOE) Office of Fossil Energy for authorization to export 60 Bcf of CNG annually — for a 20-year period — to countries that have a free trade agreement with the U.S. The CNG would be exported using intermodal containers used by trucks and ocean vessels.

The subcommittee said the Federal Reserve first became aware of the CNG project through a media report in August, nearly one year after Morgan Stanley began working on it.

“By using shell entities with no employees or physical presence of their own, and installing its own senior executives as the shells’ directors and officers, Morgan Stanley essentially created a corporate alter ego to operate a new commercial business…equally troubling is that Morgan Stanley embarked on this course of action, despite its novel elements, with only an ‘initial oral notice’ to [the Federal Reserve].”

The subcommittee said the Federal Reserve was still considering whether the Wentworth companies were grandfathered under the Gramm-Leach-Bliley Act.

“Since the Wentworth companies represent Morgan Stanley’s first foray into the physical CNG industry, it cannot contend that the grandfather clause is protecting against the forced disinvestment of an existing commodity activity,” the subcommittee said. “In fact, it is difficult to see how the word ‘grandfather’ applies. If Morgan Stanley is permitted to proceed, it will represent a major expansion of the ability of financial holding companies with grandfather authority to enter into commercial businesses. They will no longer have to buy an existing enterprise; they can start the business themselves.

“Allowing financial holding companies to start commercial businesses using shell entities managed by their own personnel cannot be reconciled with the longstanding bar against mixing banking and commerce or the intended scope of the grandfather clause.”

The subcommittee added that, despite having no prior experience in the CNG export market, Morgan Stanley has an unfair advantage over its competitors because they aren’t banks. “Morgan Stanley has immediate access to inexpensive, ready credit through its bank subsidiary, enabling its borrowing costs to nearly always undercut those of a nonbank competitor,” the report said. “Less expensive financing and lower capital are two key factors underlying the traditional U.S. ban on mixing banking with commerce.

“Morgan Stanley’s direct competition with an energy company to construct a CNG export facility is simply not the type of activity that, under U.S. banking principles, is appropriate for a bank holding company. If Morgan Stanley sees CNG exports as a good market opportunity, it should be financing or investing in one or more of the companies entering that business rather than competing to run the business itself.”

The subcommittee said a media report in late October hinted that Morgan Stanley might sell the Wentworth companies and the CNG project to a third party.

Meanwhile, the subcommittee also found that an investment fund controlled by Morgan Stanley — Morgan Stanley Infrastructure Partners LP (MSIP) — purchased a 40% interest in Southern Star, a natural gas pipeline company in the Midwest, in 2010. The fund bought the remaining 60% stake and took full control of the pipeline company two years later.

The report said Southern Star owns about 6,000 miles of natural gas pipeline serving Colorado, Kansas, Missouri, Oklahoma, Texas and Wyoming. The system has a delivery capacity of approximately 2.4 Bcf/d. Southern Star also operates eight underground natural gas storage fields.

But the pipeline company, as well as the CNG export project, poses risks to the bank in case of a catastrophic event like an explosion, the subcommittee said.

“Morgan Stanley does not appear to be prepared for those types of unanticipated financial consequences. In 2012, the FRBNY [Federal Reserve Bank of New York] Commodities Team found that Morgan Stanley had insufficient capital and insurance to cover potential losses from a catastrophic event,” the subcommittee said, adding that the FRBNY report calculated Morgan Stanley’s potential losses would exceed capital and insurance by $1 billion to $15 billion. That shortfall leaves the Federal Reserve, and ultimately U.S. taxpayers, at risk of having to provide financial support to Morgan Stanley should a catastrophic event occur.”

“All of the financial holding companies examined by the Subcommittee have been involved with financial and physical natural gas activities. It is past time for the Federal Reserve to enforce needed safeguards on this high risk physical commodity activity.”