By Cezary Podkul
NEW YORK, July 19 An Australian bank is quietly
beating Wall Street's powerhouses in a game they have long
dominated: trading in the staples of the world economy.
Sydney-based Macquarie Group earned about $720
million trading commodities in the financial year to March, for
the first time exceeding onetime standard-bearer Goldman Sachs
Group Inc, which reported $575 million in revenue in
2012, the firms' filings show.
While direct comparisons are difficult because banks report
their earnings differently, the contrast in their trajectories
is stark: Macquarie's commodity earnings have more than doubled
since 2007. Goldman's have slumped almost 90 percent since
hitting $4.6 billion in 2009, battered by rising regulation and
tougher competition. At Morgan Stanley, earnings tumbled
two-thirds in four years, to around $1 billion in 2012.
Citigroup and Wells Fargo earn much less than
Macquarie, filings show.
Nearly 60 percent of Macquarie's trading income now comes
from gas, oil, power, metals and the like - more than double
that of most rivals with much bigger balance sheets, and a level
some analysts say may be risky.
A lighter U.S. regulatory burden may be helping the bank
leapfrog larger rivals hobbled by increasing restrictions on
their business. Macquarie executives also credit their growth to
a strong balance sheet and a readiness to get their hands dirty
trading vast amounts of oil and gas from the U.S. energy boom.
"We are a commodity company within a bank," said Walter Pye,
who heads up Macquarie's fixed-income, currency and commodities
division for the Americas.
Pye said Macquarie is willing to do "unconventional things
that may be more akin to a physical commodity company than a
bank," like moving large shipments of commodities across
pipelines, seaways and railroads.
The Australian bank, best known for financing infrastructure
deals, boasts a 220-strong energy trading division that moves
50,000 barrels per day (bpd) of oil across North America. It is
opening new trading routes, such as shipping Texas crude to
Canada, and sells nearly twice as much natural gas as No. 2
producer Chesapeake Energy. Its commodities arm owns $1 billion
of loans and private equity investments in the U.S. oil and gas
Envious rivals say Macquarie is unencumbered by the many new
regulations being imposed on its bigger rivals, ranging from a
ban on trading for their own profit to salary caps and
investment restrictions. That's because Macquarie hasn't set up
a traditional commercial bank subject to U.S. banking
As the impact of the 2008 financial crisis continues to
reverberate - just last week, U.S. regulators proposed a plan to
force the country's largest banks to hold twice as much equity
capital as is required under global capital standards - banks
like Macquarie may be gaining an unexpected advantage.
Thirty years ago, Goldman and Morgan Stanley built large
physical trading desks for their commodity operations, allowing
them to dominate the space for decades. But amid the financial
crisis in 2008, both converted to bank holding companies.
The conversion gave them access to the Fed's discount
lending window - at a cost.
They've been forced to strip out proprietary trading; trader
bonuses have been cut sharply, prompting some notable staff
departures; Morgan Stanley may be forced to sell its prize oil
terminal and transport unit, TransMontaigne - all of which has
cut deep into commodity earnings.
Macquarie doesn't have to worry about any of that: It has
opted not to operate as a commercial bank in the United States,
remaining outside the remit of the Federal Reserve and other
U.S. banking regulators.
"You can be much deeper into the commodities business if
you're not regulated as a bank or bank holding company," said
Scott Cammarn, an expert on foreign banking law at Cadwalader,
Wickersham & Taft in Charlotte, North Carolina, whose firm has
done work on behalf of Macquarie.
That doesn't mean Macquarie is entirely exempt from new
rules. In December, for example, the bank voluntarily submitted
its energy trading arm to greater reporting requirements under
the 2010 Dodd-Frank financial reforms.
But it does allow the bank latitude that irks rivals.
"It's the guys with access to cheap capital and fewer
restrictions" like Macquarie that are becoming a competitive
threat, said one senior commodities executive at a global bank.
Some analysts warn Macquarie may be getting too comfortable
with its exposure to the volatile commodities sector.
At JPMorgan Chase & Co., now the biggest commodity
trader on Wall Street, the segment accounted for about 50
percent of its total trading revenue in 2012, but only because
more than $5.8 billion in trading losses took a big bite out of
the bank's earnings. Even at that inflated level, Macquarie's
nearly 60 percent share is higher.
None of the global banks tracked by consultants Coalition
had a higher share than Macquarie over the past four years.
"If it's 60 percent of your (trading) revenue, it does
present quite a significant risk," said George Kuznetsov, head
of research and analytics at Coalition.
Senior Macquarie executives cite the bank's balance sheet,
rather than any regulatory advantage, as the key to its success.
As of the end of March, Macquarie had $2.9 billion more than the
$9 billion Australian regulators require it to keep on its
books, according to an investor presentation.
They also say that while the bank's financing is an
advantage, Macquarie is not reviving Wall Street's wilder side.
"We just don't have this notion of people just having the
right to punt the bank's balance sheet," Pye said. Proprietary
trading, he said, is not in the firm's "DNA." Position limits
are small, risk management is tight and oversight is intense
even for small transactions, he said.
Former employees interviewed by Reuters did not dispute Pye.
"A lot of their business is much less risky than speculative
trading. It's really just connecting producers and consumers,"
said one former Macquarie gas trader.
Some shareholders say the bank's U.S. growth resembles its
roots in Australia, a resource-rich country where Macquarie got
its start in commodities by trading bullion in 1978.
Investment manager Oliver Ansted recalls competing against
Macquarie for loans in the mining sector in Australia during the
1990s. He said he would often see Macquarie bankroll "bite-size"
deals of A$15 million to A$20 million to small-scale miners.
"We'd scratch our heads and ask, 'How can these guys get
excited about these deals?'" said Ansted, who today manages a
position in Macquarie and other stocks for First State
Investments in Sydney.
"To me, it sounds like a pretty similar example to what
they're doing in energy in the U.S.," he said.
In North Dakota, Macquarie lent $18 million to oil
prospector American Eagle Energy Corp. last year, when
regional banks offered no more than $10 million.
"They're comfortable with that risk, for whatever reason,"
said Steve Dille, land manager for American Eagle.
ASIA CURRENCIES TO U.S. TANKERS
The push into U.S. energy markets has been led by Nicholas
O'Kane, a 40-year-old Melbourne native who cut his teeth trading
currencies for Macquarie amid the 1997 Asian financial crisis.
He launched Macquarie's energy trading desk in London six
years later and took over managing energy markets globally in
2007. Two years later, Macquarie bought the natural gas trading
operations of utility Constellation Energy, nearly trebling its
small West Coast gas trading team.
O'Kane argues Macquarie is not too exposed to commodity risk
because his business revolves around trading physical goods -
not betting on paper profits.
"The physical businesses give us that access to the
customer. ... They need to buy gas, they need to buy oil or they
need to sell gas, oil or power," O'Kane said in an interview at
his 160-strong trading floor in Houston.
The Everglades oil tanker is one example of how the business
On a muggy Friday in late April, the tanker makes a call at
the Sunoco Logistics terminal on the Sabine-Neches waterway in
Nederland, Texas. Macquarie chartered the Marshall
Islands-flagged tanker to deliver 500,000 barrels of crude oil
"It's our second loading at this terminal," says Anton
Vorobev, captain of the vessel's 28-person Russian crew.
Hauling a mix of domestic crudes, the Everglades makes its
way some 5,664 nautical miles to a Newfoundland refinery called
Come-By-Chance. The shipment helps fulfill a supply contract
Macquarie won for the 115,000 bpd refinery in 2011, shortly
after the bank began U.S. physical oil trading.
Some three weeks later, another tanker - the Mt. Rainier -
calls in Boston Harbor, dropping off 210,000 barrels of
At least four other banks, including Goldman and Morgan
Stanley, have similar arrangements in place with refineries. See
None, however, are believed to be exporting U.S. crude, as
"They're doing trades that date back to the heyday of
commodities at a Morgan or a Goldman Sachs," said Brad Hintz,
Wall Street analyst at Sanford Bernstein & Co in New York and a
former treasurer of Morgan Stanley.
"It's almost a throwback to the days of a much more creative