By David Sheppard and Jonathan Leff
NEW YORK, July 26 JPMorgan Chase & Co is
exiting physical commodities trading, the bank said in a
surprise statement on Friday, as Wall Street's role in the
trading of raw materials comes under unprecedented political and
After spending billions of dollars and five years building
the banking world's biggest commodity desk, JPMorgan said it
would pursue "strategic alternatives" for its trading assets
that stretch from Baltimore to Johor, and a global team dealing
in everything from African crude oil to Chilean copper.
The firm will explore "a sale, spinoff or strategic
partnership" of the physical business championed by commodities
chief Blythe Masters, the architect of JPMorgan's expansion in
the sector and one of the most famous women on Wall Street. The
bank said it will continue to trade in financial commodities
such as derivatives and precious metals.
Pressured by tougher regulation and rising capital levels,
JPMorgan joins other banks such as Barclays PLC and
Deutsche Bank in a retreat that marks the end of an
era in which investment banks across the world rushed to tap
into volatile markets during a decade-long price boom.
But JPMorgan is the first big player to exit physical
commodities entirely and attention will now turn to Morgan
Stanley and Goldman Sachs, which face similar pressures.
Friday's announcement follows a week of intense scrutiny of
Wall Street's commodity operations, with U.S. lawmakers
questioning whether banks should own warehouses and pipelines,
and the U.S. Federal Reserve reviewing a landmark 2003 decision
that allowed commercial banks to trade in physical markets.
JPMorgan's own review, which began in February, concluded
that the profits from the business were too slight to be worth
the risks and costs of dealing with regulators in multiple
jurisdictions, according to one person familiar with the matter.
Although the commodity division's $2.4 billion in reported
revenue last year surpassed those of long-time rivals Goldman
Sachs Group Inc and Morgan Stanley combined, some
have queried its profitability due to the costs of running a
huge logistical operation. One analyst estimated that physical
trade accounted for half or more of overall commodities revenue.
A sale could help JPMorgan Chief Executive Jamie Dimon make
good on his promise to put the bank back on course after a
series of costly and embarrassing trading moves and regulatory
run-ins, including a potential $410 million settlement over
alleged power market manipulation.
But securing a sale may not be straightforward. Several
other large energy trading operations are also on the block, at
a time when tough new regulations and low volatility have
dampened interest in commodity trading. Rival investment banks
are unlikely suitors.
Morgan Stanley, which said it had its worst quarter in
commodities in decades in the fourth quarter of 2012, has been
trying to sell its business since last year. Goldman has looked
at divesting its metal warehouse unit Metro since March.
"Where just a few years ago the bulge bracket (banks) were
expanding and hiring at a breakneck pace, now retrenchment is
the order of the day," said George Stein, managing director of
New York-based recruiting firm Commodity Talent LLC.
The news will also bring questions about the future for
Britain-born Masters, who started as an intern on JPMorgan's
London trading floor two decades ago. After long lagging rivals,
she transformed JPMorgan's commodity arm into a global
powerhouse in less than five years.
JPMorgan spokesman Brian Marchiony said the bank had
"considered many different factors" before deciding to exit the
business, "including the impact of potential new rules and
REVERSAL OF FORTUNE
The announcement came just three days after a powerful
Senate banking committee heard from experts who said that metals
warehouses owned by Wall Street and other commodities traders
were distorting markets and even driving up the cost of aluminum
cans for beer and soda. Some said allowing them to trade in
physical markets was a risk to the financial system.
"This could be good news for consumers and taxpayers," said
Senator Sherrod Brown, member of the Senate Banking Committee.
"Banks should focus on core banking activities," he said.
The Department of Justice and the U.S. Commodity Futures
Trading Commission have also both launched probes into metal
warehousing. When JPMorgan bought the company in 2010, Henry
Bath's warehouses were the second largest in the London Metals
JPMorgan's decision is a sharp and unexpected reversal for a
bank that has pushed aggressively into the sector since 2008,
when it first inherited a host of power trading assets through
its acquisition of Bear Stearns during the financial crisis.
That was followed by the acquisition of RBS Sempra
Commodities in 2010, allowing the bank to quickly become the
largest commodity business on Wall Street, with a global
footprint in oil and one of the biggest metal trade desks. Its
staff swelled to 600 people across 10 offices.
The bank initially struggled, however, to integrate the
entrepreneurial trading unit, and a number of senior traders
left. That same year a bad trade in coal markets lost hundreds
of millions of dollars, which Masters called a "rookie error."
But it seemed to have found its footing last year, securing
new deals and stemming the exodus of talent.
During its short peak, JPMorgan's global commodity operation
was considered the largest on Wall Street, supplying crude oil
to the biggest refinery on the East Coast and holding enough
electricity contracts to power Indiana's 2.8 million homes. It
was one of the 10 largest U.S. natural gas traders.
The tide seemed to turn this year.
Already under pressure in Washington following its $6.2
billion "London Whale" loss on derivatives trades last year, in
March it learned that the U.S. Federal Energy Regulatory
Commission was preparing to charge its power traders with
manipulating markets in the Midwest and California.
The bank has since scaled back its power business and sold
off half of its power trading contracts, Reuters reported
earlier this week. Earlier this month its longtime global oil
trading head Jeff Frase left the bank.
The decision to move out of the raw materials trade comes
months after Dimon vowed to resolve multiple government
investigations and correct problems that regulators have found.
Big banks are taking a more conciliatory stance in general
with regulators who continue to impose new rules more than five
years after the start of the financial crisis.
The impact of the decision may be modest for the bank as a
whole, analysts have said. JPMorgan shares ended down 0.8
percent at $56.05 on Friday.
Overall commodity trading at the bank is around 15 percent
of total fixed income, currency and commodity trading revenue
(FICC), with physical-related trading around 5 to 10 percent of
that, bank stock analyst Matt O'Connor at Deutsche Bank said in
a report this week after meeting with Dimon. FICC revenue made
up less than 15 percent of total bank revenue in the latest
Still, getting good value for the commodity business may be
tough as the market is already crowded.
Morgan Stanley, facing even tougher regulatory pressure over
its vast oil division, has been trying to sell its commodities
division without success since last year. It may learn by
September whether the Federal Reserve will allow it to keep its
business, including the logistics unit TransMontaigne.
Hetco, the physical trading shop half owned by Hess Corp
, is also in the midst of being sold as Hess is split up.
And the energy trading unit of Omaha, Nebraska-based Gavilon may
also be for sale after Marubeni Corp excluded it from
its takeover of the grains trader this year.
The value of its Henry Bath warehouses, once considered the
crown jewel of Sempra, is said to have slumped as the LME
prepares to implement tougher rules that are meant to end the
lengthy queues that have helped bolster earnings.
"There are questions about the return on capital now," said
a senior executive in the warehousing industry. "I don't see
many deploying their money."
Industry executives say that there are two types of buyers
for these vast, capital-intensive businesses: private equity
groups like Carlyle Group, which have recently moved into
the space, and sovereign wealth funds like that of Qatar.
But the group could also be a target for one of several
merchant traders looking to quickly expand into metals and
Freepoint Commodities, a privately owned merchant founded by
the original Sempra team, bought back a metals concentrates
business from JPMorgan last year. Swiss-based Vitol and
Mercuria, two of the world's largest energy traders, have both
expanded into metals in the last year.