Goldman Stumbles, Takes On More Commodity Risk
Source: Reuters, Barani Krishnan (7/19/11)
"The reverse led fixed-income, currency and commodity revenues to slump 53% to the lowest level since 2008."
Goldman Sachs blamed its commodities trading desk for much of the massive drop in trading profits in the second quarter, even after its own analysts correctly called for a pull-back in prices.
In a sign of how an abrupt slump in commodities and energy prices caught out many big players, Goldman said it had "significantly lower results" in its commodities and mortgage businesses.
The reverse, rare from a segment that often drives earnings, led fixed-income, currency and commodity (FICC) revenues to slump 53%, to the lowest level since 2008.
Goldman, long renowned as one of the largest and savviest commodity derivatives traders, provided no further details on the decline, though it did disclose that it took greater risks during a particularly tumultuous quarter for raw materials.
The firm closely guards any information about its trading profits. In a statement, Goldman said its fixed income, currency and commodities client-execution businesses generated net revenue of $1.6 billion, down $1.8 billion from the second quarter of 2010, resulting in the significant drop in results.
"It seems to me like they made some bad bets in there this time," said Keith Davis, bank analyst and principal at money manager Farr, Miller & Washington in Washington. "Commodities trading is like a black box on Wall Street, where you'll never know the details, unless the banks tell you."
It was a tumultuous quarter for commodity markets, with major indices taking their biggest losses since 2008 as oil prices failed to recover from a near record slump in early May while the booming corn market tumbled from an all-time peak.
Goldman had said commodities revenues were higher or unchanged in eight of the past 14 quarters, although it has posted lower revenues in five of the last eight quarters, according to its earning statements.