Congressional scrutiny of Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS)’s commodities businesses is another strain for units that already saw revenue drop by two-thirds from peak years.
Goldman Sachs produced $1 billion of revenue from its commodities unit and investments in commodity businesses in 2012, down from $3.4 billion in 2009, according to a Senate Permanent Subcommittee on Investigations report released today on banks’ involvement in those markets. Morgan Stanley’s commodity revenue fell for four straight years, from $3 billion in 2008 to $912 million in 2012, according to the report.
The Senate subcommittee, led by Michigan Democrat Carl Levin, conducted a two-year investigation of banks’ physical-commodities businesses as part of scrutiny from lawmakers and the Federal Reserve. The panel’s report found that big Wall Street firms have used such units to take advantage of markets and are failing to guard against potential catastrophes.
The investigation provides an insight into businesses that banks don’t typically report separately in their disclosures to investors. Goldman Sachs and Morgan Stanley include commodities-trading results in their broader fixed-income, currency and commodity revenue lines. The commodities revenue figures include revenue from trading in physical and financial products, as well as some investments.
Unit’s Margin
Goldman Sachs said in a 2011 presentation to its board that the commodities unit produced more than $10 billion of pretax earnings in the previous five years, with a margin of about 60 percent, according to the report. The bank said in that presentation that margins were shrinking amid increased competition.
The report didn’t provide 2014 figures, or commodity revenue for JPMorgan Chase & Co. (JPM), which also was part of the investigation. New York-based JPMorgan’s physical-commodities activities had a “total dollar value” of about $10.2 billion at the end of 2013, down from $16.2 billion a year earlier, the report said.
Goldman Sachs had $1.3 billion in revenue from its commodities unit for an unspecified portion of 2013, according to a presentation to the firm’s board of directors in September of that year, the Senate report said. The bank also has revenue in other units that is tied to commodities assets.
The firm’s special situations group, which invests in assets from middle-market loans to illiquid debt to equity stakes in private companies, had 19 investments in commodities assets as of September 2013, according to the report. Those stakes totaled $683 million, out of the group’s $13 billion total portfolio, the report said.
Morgan Stanley produced $676 million from its oil-trading desk in 2012, about half what it did in 2008, the report said. The New York-based firm’s natural gas and electricity unit generated $314 million in 2012 revenue, down from $921 million in 2008.