Publications

- March 1, 2019: Vol. 6, Number 3

Commodities given the dagger by Wall Street: Goldman Sachs decides to abandon one of its long-time signature businesses, joining an exodus made by other big banks

by Mike Consol

After commodities traders racked up their worst year on record in 2017, legendary Wall Street firm Goldman Sachs has decided to curtail its involvement with the asset class, a decision made by new CEO David Solomon.  A report in The Wall Street Journal noted the move came after a months-long review by Solomon that showed the commodities business’s dwindling profits did not warrant the costs involved. The Journal cited sources familiar with the matter.

Executives are discussing pulling back from trading iron ore, platinum and other metals, and are ordering cost cuts to the sprawling logistics network that handles the transport and storage of physical commodities. The decision is especially sobering coming from Goldman Sachs, which once counted its commodities operation as a huge moneymaker and training ground for a generation of executives, according to the Journal, including former chief Lloyd Blankfein. What’s more, until now Goldman held firm on commodities even as its peers pulled back since the global financial crisis, in part because of stricter regulatory requirements. For example, Morgan Stanley divested a fleet of oil tankers and pulled back energy trading, and J.P. Morgan Chase ceased trading commodities.

Goldman has been a major player in commodities since its 1981 takeover of J. Aron & Co., a coffee and metals trader, and the business proved wildly profitable in the 1990s and early 2000s, the Journal reports. Unlike his predecessors, however, Solomon and his executive team are not emotionally tied to the trading business, even as commodities trading has gone into decline. After a dismal 2017, Goldman’s traders performed only somewhat better in 2018, and Solomon and his adjutants think the business is unlikely to return to its glory days anytime soon, when commodities trading contributed as much as 15 percent of Goldman Sachs’ pretax profits.

The Journal concluded that traders have been handcuffed. Risk-taking by one measure — the amount of money its commodities traders stood to lose on a given day — is down by 60 percent since 2010. A hiring spree in 2017 meant to bring in star traders failed to spark a turnaround, and the firm’s co-head of commodities, Jeremy Taylor, recently left Goldman Sachs.

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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