| NEW YORK
NEW YORK Aug 6 Morgan Stanley is
exploring various options for its multibillion dollar
commodities business, with the sale of a minority stake being
one possibility, three sources familiar with the situation said
The business, which includes three U.S. power plants, a 49
percent stake in a tanker fleet and a pipeline and logistics
firm, has been shopped for more than a year. But the bank is not
in any hurry to sell a stake at any price and is not close to a
deal, the sources said.
Morgan Stanley has been vague about what it plans to do with
the business, though executives have said that all options are
on the table. The sources said the bank is not being pressed to
sell the entire business, despite increasing scrutiny of Wall
Street's commodity trade in Washington.
Still, it has also been more blunt than its rivals Goldman
Sachs and JPMorgan Chase & Co about the pressures
on the business - both in terms of rising capital requirements
and falling trading margins - as well the regulatory question
marks over its commercial activities beyond derivatives.
The most critical regulatory decision rests with the Federal
Reserve, which by September is expected to decide how much
latitude to grant Morgan Stanley and Goldman Sachs to invest and
trade in physical commodity markets such as metals warehouses
September marks the end of a five-year grace period to
comply with commercial banking regulations after the two gave up
their independence at the height of the financial crisis.
It is not clear how much, if any, of its commodities
operations the Fed may force Morgan Stanley to sell. That
deadline comes at a time when the banks are also being pressured
to restrict their risk taking as a result of the Dodd-Frank
financial reform law.
"Under Dodd-Frank, the ability to continue to acquire real
assets and trade around those real assets is restricted for us
and for the industry. We've had a very difficult cyclical
period, in full candor, in the last six months," Chief Executive
James Gorman said in June.
The sources said they don't believe the bank will be forced
by regulators to sell the business. The Federal Reserve has
declined to comment on its deliberations.
Gorman detailed plans to double or even triple returns in
other businesses by shedding assets and increasing market share,
but did not give a forecast for returns in commodities trading.
That business has a return on equity below 5 percent - less than
half of what it needs to meet its cost of capital.
While Gorman said he expects performance to improve as
volumes recover, "we continue to explore strategic structures
that may make sense for us as we move to an institution which is
less able to prosecute on the acquisition of physical assets and
more focused on the trading side of the business."
The future of the business will depend on regulations that
have not yet been finalized, Gorman said.
Morgan Stanley declined to comment beyond what executives
have said publicly. The sources spoke on the condition of
anonymity because they are not authorized to speak on the matter
Although the banks say they should be allowed to own
physical commodity trading assets because of an exemption
granted to investment banks in a 1999 law, it is unclear how
much the Fed will allow - particularly after an unexpected
uproar in Washington last month over their deep role in
After a high-profile Senate banking committee hearing
questioned whether banks should be allowed to own pipelines,
warehouses and other commercial assets, a small but vocal cadre
of critics have stepped up calls for pushing banks out of the
physical trading and investment business.
"The Fed should do this, and if they don't, Congress
should," Bart Chilton, a Democratic member of the Commodity
Futures Trading Commission, said on Monday.
Amid the tumult, JPMorgan announced plans to sell or spin
off its physical commodities trading arm, an abrupt about-face
after five years and billions of dollars worth of acquisitions.
The decision followed a months-long review, and was prompted in
part by the uncertain regulatory outlook for the business.
Since last year, finding a buyer for Morgan Stanley's
business has only gotten harder. In addition to JPMorgan's
division, smaller energy trading operations including Hess
Energy Corp's Hetco and privately held Gavilon have also
been put for sale.
NO FORCED SALE
A letter from Morgan Stanley to the Federal Reserve in
September 2012, obtained by Reuters under the Freedom of
Information Act, showed the bank is still in discussions about
conforming or divesting activities that fall outside the normal
scope of financial holding companies.
Morgan Stanley has the longest pedigree of trading physical
commodities of any Wall Street institution, with large and
active physical oil and electricity desks stretching back to the
early 1990s. In 2006 it bulked up the business by buying
TransMontaigne, a large oil terminal and transport
The bank said in June that it would trim its commodities
division by exiting areas such as trading of agricultural
products, freight and some European power and gas.
But facing an uncertain future, some of the bank's other
75-plus traders in core areas such as oil are also looking
elsewhere. Two of its top European crude oil traders, Pasi
Siitonen and Simon Hutchinson, left the bank last month to join
merchant commodity trader Noble Group.
"For a long time, commodities trading was a huge source of
profit for these banks going back to the 1990s," said James
Malick, a partner at The Boston Consulting Group who provides
strategic advice to financial firms. "But it's just a very
different space now and it's not nearly as attractive for banks
to remain in the business, especially in physical commodities."
Malick pointed out that under new trading rules, the amount
of money that has to be set aside to cover losses on complicated
commodities derivatives trades goes up by 200 percent. That
added buffer reduces profit in what used to be one of the most
lucrative areas of commodities trading.