FORTUNE — Every day a wholly owned subsidiary of Morgan Stanley pumps 300,000 barrels of gasoline from its 49 terminals (a fraction of their total storage capacity of 26.7 million barrels) into trucks to be delivered around the country. It’s also a major supplier of fuel to cruise lines. It already owns a 67-mile pipeline that moves gas from Missouri to Arkansas.
Another division of Morgan Stanley (MS) is the managing partner of the largest port in Montreal, a power plant in Boston and a 6,000-mile natural gas pipeline in the Midwest. On top of that, the bank owns 49% of a fleet of 115 ships and tankers, which is the largest independent fleet of “finished product,” i.e. gas, diesel, and ship fuel, carriers based out of the U.S.
And, oh yeah, it also does some financial stuff that makes it one of the largest banks in the world.
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A decade ago, regulators passed a rule that allowed banks to go outside their normal realm of financial markets and buy up companies that facilitate the actual buying and selling of commodities, doing things like shipping and storing oil and metals. And since then, the banks’ commodities businesses grew, largely unnoticed. That appears to be changing.
Recently, the New York Times accused Goldman Sachs (GS) of using its network of warehouses in Detroit to slow the global aluminum supply chain in order to boost the rent it collects from owners and drive up the price of the metal around the globe. On Thursday, JPMorgan Chase (JPM) paid $410 million to settle charges by the Federal Energy Regulatory Commission that it used power plants to manipulate electricity markets in California and Michigan. The Wall Street Journal says hard-charging U.S. Senator Carl Levin has launched an investigation into Wall Street’s commodities operations.
Much of the scrutiny so far has focused on whether banks are using commodities operations to influence prices to their advantage. But there is a less devious reason to be worried about all this. The banks’ reach into basic workings of core commodities industries adds to their vitalness to the economy, and their too-big-to-fail status. The flip side of that is the commodities business, with exposure to prices swings and in the case of oil and gas potential for environmental disasters, which adds risks for the banks.
“It certainly adds to systemic risk,” says Josh Rosner, who heads research firm Graham Fisher and was early in warning about the mortgage crisis.
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Goldman owns coal mines in Columbia and a railroad to ship the coal to port. But no bank on Wall Street has dived more deeply into the physical commodities business, focused on the transport of oil, than Morgan Stanley.
The petroleum storage and terminal business that Morgan Stanley owns, TransMontaigne, would rank as the 17th-largest private company in America were it a stand-alone business, according to Forbes. It has 20,000 employees and generated $14 billion in revenue last year. TransMontaigne has a publicly-traded master limited partnership called TransMontaigne Energy Partners (TLP) that owns some of the company’s assets but is managed by TransMontaigne and as a result owned by Morgan Stanley. TLP has a market cap of $671 million. Its shares are up 16% in the past year, compared to about 22% for the S&P 500 (SPX) in the same time.
Morgan Stanley also owns 49% of tanker company Heidmar. Like TransMontaigne, Heidmar specializes in gasoline and other refined oil products. The concentration of Morgan Stanley’s assets in a particular area of the oil market could give the investment bank an informational advantage over other traders. At a Senate hearing last week on Wall Street and its commodities business, Senator Sherrod Brown, an Ohio Democrat, said there was a concern that Morgan Stanley would use its commodities businesses to influence prices.
“You scale back the number of those tankers delivering oil, and you’re also in a position to wager on oil prices. Is that a concern to you?” Brown asked a witness.
There is no evidence that Morgan Stanley has used its commodities operations to manipulate prices, or do anything else improper. A Morgan Stanley spokesperson declined to comment about whether or not the firm is planning on exiting the commodities business. He said the port of Montreal and other assets were bought by a Morgan Stanley investment fund and are owned by the firm’s clients, not Morgan Stanley.
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Morgan Stanley, though, has at times seemed uneasy with its commodities businesses. Last year, Morgan Stanley’s CEO James Gorman, who has moved the firm toward asset management and away from some of Wall Street’s riskier businesses, hinted that the firm might sell its commodities operations. No deal has happened. In June, the company eliminated positions for 30 traders that dealt in agricultural products and European power markets. But that represented just 10% of its overall commodities staff.
And at a time when Morgan Stanley is still struggling to show investors it can boost profits amid new regulations, the firm may find it tough to exit its commodities business. Morgan Stanley doesn’t break out what it makes from TransMontaigne, Heidmar, or its other commodities businesses. Instead it lumps the revenue in with its bond sales and trading unit. That unit has generally lagged Wall Street rivals. But Morgan Stanley’s large commodities business may be making the unit look better than it is. Last year, $10 billion, or about a third, of the firm’s overall revenue came from the bond and commodities division.
