Beginning Thursday, the U.S. Senate’s Permanent Subcommittee on Investigations will hold two days of hearings related to its own report on the activities of big Wall Street banks in the commodity markets. The hearings precede a decision by the Federal Reserve that may reduce or restrict altogether the banks’ participation in the physical commodities markets.

The Senate subcommittee said:

The United States has a long tradition of separating banks from commerce. The Subcommittee’s case studies show how that tradition is eroding, and along with it, protections from a long list of risks and potentially abusive conduct, including significant financial loss, catastrophic event risks, unfair trading, market manipulation, credit distortions, unfair business competition, and conflicts of interest. The investigation also highlights how the Federal Reserve has identified financial holding company involvement with physical commodities as a significant risk, but has taken insufficient steps to address it. More is needed to safeguard the U.S. financial system and protect U.S. taxpayers from being forced to bailout large financial institutions involved with physical commodities.

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The case studies were done on three big banks that had active involvement in the physical commodities market: Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS).

Beginning in 2009, the Fed identified the risks these banks were taking in physical commodities markets as an area of concern and commenced a multiyear investigation that has yet to produce any new rules to reduce the risks.

Of course the horse left the barn a long time ago, and the best the Fed can do is lock the door now that the barn is empty. Goldman put its Metro International aluminum warehouses up for sale last May. Morgan Stanley has already sold its global oil trading business to Russia’s OAO Rosneft and its stake in TransMontaigne Partners L.P. (NYSE: TLP) to NGL Energy Partners L.P. (NYSE: NGL). And J.P. Morgan sold most of its physical commodities assets to Swiss trading firm Mercuria and the rest to other buyers.

The banks gave up without much of a fight because the red-hot commodities market they bought into has become stone cold. Besides, most people believe the Fed will return to the pre-2003 rules that prohibited the banks from holding physical commodities.

Among the report’s 11 recommendations, six begin with the words, “The Federal Reserve should,” a clear indication of where the Senators think the blame lies for banks’ misbehavior and the responsibility resides to fix it. Fed Governor Daniel Tarullo is scheduled to appear before the subcommittee on Friday.

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