* Weak commodity revenues weigh on fixed income for Q3
* Goldman says employed higher risk for trading commodities
By Barani Krishnan
Oct 16 Goldman Sachs Group Inc said
significantly lower revenues from commodities dragged down its
trading businesses in the third quarter, singling out weak
performance by an unit that had once been a pride of Wall
Street's biggest investment bank.
Goldman posted a profit for the quarter, saying trading of
fixed income, currency and commodities done on behalf of its
clients contributed nearly 30 percent more revenue compared with
the second quarter.
But Goldman -- also one of the largest proprietary traders
at one time in commodities -- implied that the figure would have
been more if not for its weak performance in commodities.
During the third quarter, there were "significantly higher
net revenues in mortgages and higher net revenues in credit
products, currencies and interest rate products, partially
offset by significantly lower net revenues in commodities",
Goldman said, without breaking down numbers.
Goldman said client activity remained generally low during
the third quarter as broad market concerns persisted amid
monetary easing by central banks.
The bank has cited negative impact from commodities in
previous earnings. But rarely has it drawn this much focus to
the asset class for being a drag on revenue.
Goldman's performance contrasts with strong commodity prices
in the last quarter. The Thomson Reuters-Jefferies CRB index
, a commodities bellwether, posted its biggest gain in
nearly two years during the quarter, helped by economic
For years, Goldman had ruled commodities trading on Wall
Street with a scale, savvy and expertise matched only by top
rival Morgan Stanley. Operating physical commodity
operations such as oil pipelines and crude shipping, the two
also ran huge proprietary trading books that bet large sums of
their own money on the energy, metals and agriculture markets,
Their fortunes in commodities began dwindling after new U.S.
financial laws were passed in 2010 to limit excessive
risk-taking by banks, prompting Wall Street's best to dump their
"prop desks" and cater exclusively to client needs in trading
Fast-growing new competitor JPMorgan Chase has also
stolen some of the luster in commodities from Goldman and Morgan
Stanley, reporting a bumper revenue from the sector last year.
Trading mostly metals before pushing into oil in 2009, JPMorgan
has made a series of risky acquisitions and hires to ramp up its
HIGHER COMMODS RISK, LOWER REVENUE
In the third quarter, the lower commodity revenue at Goldman
came despite higher risk levels employed by the bank for trading
the asset class.
Goldman said its Value-at-Risk (VaR) in commodities averaged
$22 million per day in the three months to September, versus the
$20 million averaged in the second quarter and the $25 million
of 2011's third quarter.
VaR is an important consideration for investment banks when
making trading and hedging decisions for an asset class.
In Goldman Sachs' case, its VaR readings are based on a 95
percent confidence level of the potential loss it could make in
trading commodities and other assets over a one-day time
The following lists commodities VaR at leading Wall Street
banks over the past two years (in $ millions):
Average commodities VaR by quarter
3Q12 2Q12 1Q12 4Q11 3Q11 2Q11 1Q10 4Q10 3Q10
* Goldman Sachs 22 20 26 26 25 39 37 23 29
* JPMorgan 13 13 21 20 15 16 13 14 13
* Morgan Stanley n/a 34 31 28 32 29 33 26 30
* Bank of America n/a 11.9 13.1 12.1 15.7 23.7 23.9 17.7 19.4
** Citigroup n/a 17 14 18 22 25 23 27 26
* Value-at-Risk based on a 95 percent confidence level
** Value-at-Risk based on a 99 percent confidence level
Note: Citigroup has issued third quarter results but its
VaR readings are reported in a separate regulatory filing. Bank
of America, which will release Q3 results on Oct. 17,
also reports VaR in a later filing.