By Cezary Podkul
NEW YORK Aug 1 When the Reverend Seamus Finn
got an email from Goldman Sachs last week, the giant Wall
Street bank was addressing an issue that was already on his
"We were getting ready to go back to them and talk to them
about commodities anyway," said Finn, who heads up
faith-consistent investing for the Missionary Oblates, a
Washington DC-based Catholic group that owns Goldman shares.
Driven by a determination to invest in a socially conscious
way, Finn's group has been concerned about banks' commodities
activities since 2008, when a spike in energy and agricultural
products caused food riots in Africa. The issue is whether
banks' trading activities artificially drive up food prices.
The pre-emptive message from Goldman, sent ahead of last
week's Senate hearing on banks' commodity activities, asserted
that the firm's investments in physical assets such as aluminum
warehouses do not drive up prices. But it left unanswered many
of Finn's questions about what the bank is doing in the sector.
(Goldman moved on Wednesday to address criticism of its
Metro International metals business, announcing it would offer
customers immediate access to stored aluminum. )
The statement sent to Finn and later released widely did not
address one of his broader concerns: that no one outside the
banks themselves knows for sure how big their commodity trading
arms are, how much they trade, or how much money they make.
"We would like more disclosure on that," Finn said.
He is unlikely to get his wish. While the country's largest
banks are required to disclose their activities in some
consumer-facing businesses such as mortgages, there is no
similar requirement for them to do so on the commodities side.
Commodity "revenue" figures reported to securities and
banking regulators can differ wildly - and may not provide an
accurate reflection of the size of the business.
Most banks report some numbers, but one of the biggest -
Morgan Stanley - hasn't put a dollar figure on its commodities
revenues in more than a decade, reporting only the year-on-year
percentage change in its securities filings. None provide cost,
salary or bonus figures, making it impossible to guess at
"I don't think you have any banks that are properly
disclosing commodities revenue," said George Kuznetsov, head of
research and analytics at Coalition, a British consulting firm
that employs more than 100 researchers to scrutinize public
disclosures and conduct interviews to estimate trading revenues
for investment banks.
The issue is becoming increasingly important as politicians
press the banks for more insight into the risks they are taking
by owning metals warehouses or chartering oil tankers, and as
some seek buyers for their physical commodities holdings. On
Friday, JPMorgan said it was selling out.
"Their physical commodities activities are not
comprehensively or understandably reported...they're often
buried in arcane regulatory filings," Senator Sherrod Brown,
Democrat for Ohio, said at last week's hearing.
The lack of clarity over trading operations has long been a
vexing issue across other desks as well, such as foreign
exchange and equities. But the current debate over whether banks
should be allowed to continue trading so actively in raw
material markets has only sharpened focus on this area.
In sum, it's big money: the top ten global banks
collectively made about $6 billion trading commodities last
year, down 24 percent from in 2011, according to Coalition.
The banks say that they are providing regulators and
investors with all the information they are required to give.
"Our disclosures are in line with all relevant reporting
requirements and provide investors with all material
information," said a spokesman for Morgan Stanley. He said the
bank provides data on the main drivers of results across its
three core business lines but does not break down earnings to a
"product" level like commodities.
Critics say the disclosures still leave much to be desired.
"They really don't tell us much," said Robert McCullough, an
energy economist who spent six years litigating an electricity
market manipulation case against Morgan Stanley.
"If you wanted an estimate of what their position was in
electricity in 2001, six years of litigation was not sufficient
to get it," he said.
In terms of financial system risks, the Federal Reserve,
which regulates banks, has the power to make on-staff visits and
request data sets from the banks on their commodities
activities. The agency also keeps on-site staff at the banks who
are dedicated to monitoring commodities.
But that is not enough, according to some former examiners.
"There's a sophistication gap between the regulator and the
bank that they regulate," said Mark Williams, a former Federal
Reserve bank examiner and energy executive who now teaches
finance at Boston University.
"The commodities are where the more sophisticated
transactions take place," he said.
Y-9C? BECAUSE THEY HAVE TO
One bank filing collected by the Fed is called "FR Y-9C."
The detailed questionnaire requires banks to tell the Federal
Reserve everything from how much money they spend on postage to
how much money they make trading commodities.
But because regulatory accounting rules may vary from the
way banks report their earnings to investors, the Fed's
questionnaire can often bear little resemblance to banks'
Securities and Exchange Commission filings.
Goldman Sachs, for instance, reported only $100 million in
"commodity and other" trading revenues to the Fed in 2012. In a
separate filing with the SEC, the bank said it made $575 million
trading commodities. Industry sources actually pegged Goldman's
commodity revenues closer to $1.25 billion for the year.
Asked about the different figures, a spokesman for Goldman
Sachs said: "We disclose figures in the way we are required.
That may not correspond to the way we actually measure the
performance of certain trading businesses." He declined to
provide a figure for the bank's commodity trading revenues.
JPMorgan Chase and Citigroup Inc provide
similar commodity trading figures to the Fed and the SEC. But
like Goldman, both banks warn investors in their SEC filings
that the figures don't fully represent their performance because
they exclude earnings on interest, an "integral" part of trading
JPMorgan reported nearly $2.4 billion in commodities trading
revenues for 2012, which on paper was more than Goldman and
Morgan Stanley combined. But several analysts say actual
revenues are likely closer to this year's $1.5 billion target.
Spokesmen for JPMorgan and Citi declined comment.
With so much uncertainty around the headline numbers,
attempting to separate banks' paper bets on commodities from
physical trading - the segment most at risk from regulators - is
all but impossible. Analysts at Deutsche Bank estimated in a
report last week that JPMorgan's physical book accounted for
somewhere between a third and two-thirds of its overall
commodities trading operation.
Some other banks have taken the view that their commodity
businesses are too small to merit much attention.
At Deutsche Bank and Barclays Bank,
commodities revenues may show up in an occasional earnings
transcript or investor presentation, but neither bank discloses
in filings how much money it makes trading in the sector. In its
2012 annual report, Deutsche Bank simply notes commodities
"revenues were lower" compared to 2011. Barclays makes no
mention of the segment's performance in its annual report.
Spokespeople for Deutsche and Barclays declined to comment.
ANALYSTS VS. NUNS
The lack of detail on banks' commodity trading revenues does
not seem to worry some on Wall Street. It's just one part of a
mosaic of items analysts look at in evaluating the firms.
"It's just not been a significant issue for me," said David
Hilder, who covers banks for brokerage Drexel Hamilton.
And some experts say even the limited disclosure by banks is
better than the alternative. Many of the big global commodity
traders, such as Vitol and Trafigura,
are privately held and therefore subject to no disclosure at
"The (trading) activity will not go away," said Randall
Guynn, a banking lawyer at Davis Polk, who testified at last
week's hearing. "You're better off having it in regulated
companies where there is some disclosure."
That hasn't stopped some influential groups from calling on
banks to step up their reporting.
Last year, the CFA Institute - which confers the Chartered
Financial Analyst credential to investment professionals
worldwide - endorsed a report calling for banks to improve their
risk disclosures to investors. Banks' trading books, in
particular, remain "very opaque" to investors, said Vincent
Papa, the institute's director of financial reporting policy.
"In many cases, they give you a figure which they deem to be
meaningless from an internal management standpoint," Papa said.
"They just give it for compliance reasons. That's not beneficial
to investors. It's about giving relevant information, rather
than just ticking the boxes."
For some of the banks' investors, commodity trading data is
very relevant indeed. The Interfaith Center on Corporate
Responsibility (ICCR) represents $100 billion worth of
institutional investors like Finn, the DC reverend. The group
openly calls for corporations to avoid speculating on food
But with disclosures being so lacking, ICCR members like
Sister Nora Nash of the Sisters of St. Francis of Philadelphia
have little idea whether their investments in big banks like
Goldman Sachs comply with this philosophy.
"I would absolutely hope that they would disclose what is
happening to those of us who are shareholders," Nash said.