Regulator Pressure Causing Goldman, Morgan Stanley To Scale Back Physical Commodities Businesses

Over the last few months, the Federal Reserve has been turning the heat up on investment banks with a significant presence in the physical commodities trading market following a string of allegations that these banks were manipulating the prices of commodities by creating an artificial shortage. And even as the Fed drafts a new set of guidelines restricting the involvement of investment banking giants – more specifically JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C) – in the physical commodities trading and warehousing business, the responses of these banks to the impending regulation have been quite varied.

JPMorgan was the first one to throw in the towel and announce its decision to exit the physical commodities business in late July (see Why JPMorgan Might Sell Its Physical Commodities Unit). On the other hand, Citigroup chose to remain silent about this issue, while Goldman and Morgan Stanley vehemently opposed the move – claiming that the business has been integral to their business models from well before they converted into bank-holding companies in late 2008. At least until now.

Reports over the last week indicate that both Morgan Stanley and Goldman Sachs are exploring options to sell some units which are a part of their physical commodities business. This piece of news is not entirely surprising, as the investment banks had been dealing with low returns from their commodities business for quite some time now and the added pressure from the regulatory watchdog really doesn’t help things in the long run.

See the full Trefis analysis for Goldman Sachs | Morgan Stanley

Goldman Likely To Get Rid Of Its Metal Warehouse Business Soon…

Under investigation for alleged malpractices in its warehousing business, Goldman definitely has had a good set of reasons to dispose of the business for quite some time now. But what actually seems to have gotten the investment banking leader thinking about a sale is the list of suitors the unit has attracted without officially going on the block. ^[1] The current poor run in the commodities business and simplified valuation rules by the London Metal Exchange (LME) would mean that the bank will likely have to settle for roughly half of the $540 million it paid for the warehouse business in 2010 in case it decides to go through with a sale.

It should be mentioned that the warehouse business forms but a small part of Goldman’s physical commodities business which reported $11.7 billion in assets at the end of 2012. That’s roughly 4% of the combined FICC trading assets for the bank. You can understand the impact of these assets on Goldman’s overall share price by making changes to the chart below.

… While Morgan Stanley Plans Sale Of Oil Business To Rosneft

Morgan Stanley is reportedly in talks with Russian petroleum giant Rosneft to sell its global oil business. ^[2] The business includes TransMontaigne and a 49% stake in Heidmar. Both these companies deal with petroleum and chemical transportation, with TransMontaigne also handling storage. Morgan Stanley will likely sell most of the oil business while retaining some oil derivative units.

Besides the oil business, Morgan Stanley’s physical commodities business includes a gas and power unit as well as a metals unit. The bank reported that it had $7.3 billion in combined assets under all these business at the end of 2012 – nearly 4% of its total FICC trading assets.

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1. Goldman set to step up warehouse sale talks, Financial Times, Nov 18 2013 [↩]
2. Morgan Stanley Said in Discussions to Sell Oil Unit to Rosneft, Bloomberg, Nov 20 2013 [↩]