Goldman Sachs lost over $1 billion on bad currency bets in third quarter

NEW YORK (Reuters) - Goldman Sachs Group Inc lost more than $1 billion on currency trades during the third quarter, regulatory filings show, offering some insight into why the firm, considered one of Wall Street’s most savvy traders, reported its worst quarter in a key trading unit since the financial crisis.

A Goldman Sachs sign is seen over their kiosk on the floor of the New York Stock Exchange, April 26, 2010. REUTERS/Brendan McDermid

Foreign exchange was the only trading area that was a money loser, according to regulatory data issued in November. In the third quarter, Goldman reported its weakest revenue - $1.3 billion - in fixed-income, currency and commodities trading since the height of the financial crisis.

The data, which come from regulatory filings with the U.S. Securities and Exchange Commission and the Federal Reserve, are reported in aggregate and do not always reflect the way banks tally up their own profits and losses on trading desks.

In a statement on Thursday, Goldman Sachs said that the numbers in regulatory filings “are not representative of the manner in which the firm manages its business activities.” According to Goldman’s internal calculations, it did not suffer a loss in its currencies trading business in the third quarter.

Goldman’s trading businesses book profits and losses only on trades that originate within them. Profits and losses from currency trading transactions that originated in another division, and are paired with other kinds of trades, are attributed to that division.

“Accordingly, gains or losses in one product type frequently offset gains or losses in other product types,” Goldman said.

The SEC and Fed require banks to report data in aggregate, based on the product rather than the unit that originated a trade.

Goldman’s currency-trading problems came from the way the bank had positioned itself in emerging markets, two sources familiar with the matter said.

Specific positions could not be learned, but the bank was anticipating that the Federal Reserve would begin winding down its monetary-easing programs, the sources said. When the Fed unexpectedly announced that it would keep its massive bond-buying program in place, Goldman was left with positions that lost money, the sources said.

According to SEC data, Goldman had negative revenue of $1.3 billion in currencies, while JPMorgan Chase & Co was $65 million in the red. Morgan Stanley reported $594 million in currency revenue, Citigroup Inc reported $558 million and Bank of America Corp reported $215 million.

However, some of Goldman’s rivals also said they had a difficult quarter in currency trading, indicating that internal revenue calculations differ from government reporting requirements.

In a conference call to discuss earnings on October 17, Goldman Chief Financial Officer Harvey Schwartz blamed Goldman’s weak currency trading on “difficulty managing inventory,” as well as reduced client trading volumes.

On that call, multiple analysts asked Schwartz to provide more details about what went wrong in currency trading. Kian Abouhossein, an analyst with JPMorgan, asked why the bank held any inventory at all in what is “a very liquid market,” and asked him to explain whether Goldman had hedged or exited its troublesome currency positions.

Schwartz declined to provide details on Goldman’s positions but said the bank had reduced currency-trading risk during the quarter.

Goldman’s 47 percent drop in fixed-income, currency and commodities revenue last quarter surprised not only its investors but traders at rival firms, because it is typically one of the best trading firms on Wall Street. In research notes following Goldman’s results, analysts said they considered it a one-time event and not indicative of broader problems. The bank’s stock fell 2 percent that day, but has since risen about 4 percent. It closed at $165 on Wednesday.

“We expect FICC to rebound significantly in the fourth quarter of 2013 as Goldman Sachs’ franchise remains strong and predominantly FX related inventory management challenges are unlikely to recur,” said Sandler O’Neill analyst Jeffery Harte.

Additional reporting by Carrick Mollenkamp; Editing by Grant McCool