January 16, 2013 / 9:46 PM / 5 years ago

Goldman, JPMorgan fourth quarter commods risk dives versus 2011

NEW YORK (Reuters) - Goldman Sachs Group Inc (GS.N) on Wednesday said its commodities revenue suffered in the final quarter of 2012, while JPMorgan Chase & Co (JPM.N) reported a plunge in trading risk from a year ago.

Analysts said falling oil, metals and grains prices as well as higher trading uncertainties as the United States appeared headed for a fiscal crisis toward year-end created a weaker trading environment for commodities.

Goldman Sachs, Wall Street’s leading investment bank, said its value-at-risk (VaR) in commodities stood at $20 million in the fourth quarter, down from $22 million in the third quarter and $26 million a year ago.

It said net revenues in fixed income, currency and commodities client execution totaled $9.91 billion for 2012, or 10 percent higher than in 2011.

“These increases were partially offset by significantly lower net revenues in commodities and slightly lower net revenues in currencies,” Goldman said, without providing details.

It was a rare admission for a bank that was once a powerhouse in various aspects of the commodities trading business.

JPMorgan, the largest U.S. bank, said its commodities VaR was $14 million in the fourth quarter compared with $13 million in the third quarter and $20 million in the fourth quarter of 2011.


Analysts have said falling commodity prices in the fourth quarter may be to blame.

“As commodity prices come down, the risk factor diminishes so it’s not surprising to see banks reporting lower VaR numbers,” said Peter Cardillo, chief market economist at Rockwell Global Capital in Melville, New York.

Commodities prices as indicated by the Thomson Reuters-Jefferies CRB index .TRJCRB fell nearly 5 percent in the fourth quarter of 2012 following a 9 percent gain in the third quarter.

In the fourth quarter of 2011, the CRB, which tracks 19 commodities, rose more than 2 percent.

Market fears of the “fiscal cliff” and another U.S. economic recession in 2013 also kept markets on tenterhooks through December. A last-minute deal avoided tax hikes and spending cuts that were scheduled to take effect on January 1.

“A lot of trading positions in oil, metals and grains were possibly not taken up in the last quarter due to anxiety over the U.S. ‘fiscal cliff,’ and that would have played into the risk levels,” said Wojtek Zarzycki, chief investment officer at Optimal Investing in Toronto.


Over the past two years, commodity trading risks have fallen more than they have risen at U.S. banks, after new laws passed to limit excessive risk-taking by financial institutions.

    In their heyday, Goldman and Morgan Stanley (MS.N) ruled Wall Street’s commodities business with a scale, savvy and expertise unmatched by their peers.

    The two ran physical commodity operations, such as oil pipelines and crude shipping, and also managed huge proprietary trading books that bet large sums of the banks’ own money on energy, metals and agricultural derivatives.

    But their fortunes in commodities began dwindling after the 2008 financial crisis prompted U.S. regulators to crack down on risk-taking by banks. Since then, many Wall Street banks have dumped their proprietary trading desks, while trading and hedging only on clients’ orders.

    In recent years, JPMorgan has stolen some of commodities’ luster from Goldman and Morgan Stanley.

    Trading mostly metals, before pushing into oil in 2009, JPMorgan has made a series of risky acquisitions and hires to ramp up its commodities business. In 2011, it reported bumper revenue from the sector.


    Morgan Stanley will disclose its fourth-quarter commodities trading risk in quarterly results due on Friday.

    Two other banks - Bank of America Corp (BAC.N) and Citigroup Inc (C.N) - will issue results a day earlier, but their fourth-quarter risk in commodities trading will be made known later in a regulatory filing.

    The following table lists commodities VaR at leading Wall Street banks over the past two years (in $ millions):

    Reporting by Barani Krishnan; editing by John Wallace, G Crosse

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