Goldman Sachs and Morgan Stanley's Reliance on Commodities Demonstrate Potential Bubble

Goldman Sachs and Morgan Stanley's Reliance on Commodities Demonstrate Potential Bubble

Both Goldman Sachs and Morgan Stanley, two of the preeminent investment banks in Wall Street have turned to commodities to cushion their balance sheet from the mortgage implosion. Based on their financial's, vast amounts of money are flowing into commodities. Is this what's helping cause commodity prices to rise?

Bloomberg ran in interesting article entitled Goldman, Morgan Stanley Profits Conceal Reliance on Commodities on Monday (June 16) in which it dissected the earnings of Goldman Sachs and Morgan Stanley and found that a large portion of their revenue and profit was being generated by commodities trading.

"Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, estimates that commodity trading accounts for more than 7 percent of revenue at Goldman and Morgan Stanley. That would have added up to more than $3.2 billion at Goldman last year and $1.9 billion at Morgan Stanley."

What was really interesting, were the stats provided in just how much trading on commodities have increased, even in the past year:

"Global trading in commodity derivatives on exchanges rose 52 percent to 489 million contracts in the first quarter from a year earlier, according to data compiled by the Bank for International Settlements. Energy and agricultural products led the climb. In the over-the-counter market, the value of outstanding commodity- derivative contracts jumped 26 percent to $9 trillion in December 2007 from a year earlier, the most recent BIS data show."

The rise in the price of oil has also been tremendous.  Crude oil rose 697 percent since trading at $17.45 a barrel on the New York Mercantile Exchange in November 2001. That surpasses the 640 percent gain in the Nasdaq Composite Index before a reversal in technology stocks in March 2000 triggered a 78 percent decline.  So oil has now risen more than the bubble Nasqaq tech market.

Lastly, I think this quote is really interesting coming from David Viniar, the Chief Financial Officer of Goldman Sachs.  He's responding to questions about competitors entering the commodities trading market.

"`A lot of very smart people have gotten into a lot of trouble or lost a lot of money by getting into the commodities business,'' Viniar said at an investor conference in February 2007. Goldman has a ``long history of watching our competitors get into the commodities business at the top of the market.''

The implication of what he's saying is that we have reached or are near the top of the commodities market.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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Comments

  • soczie

    June 19, 2008

    What is interesting is that the investment banks are going to end up being much more heavily regulated and subject to capital requirements that are much more like the major commercial banks as a result of the credit crisis. They will quickly be compelled to take on very risky bets in order to maintain their return on capital. Then, they might not be able to unwind quickly enough because of their size. Arguably, the bets taken by MS and GS on commodities could be still more problematic very quickly as these companies are such large players in the commodities markets that they might not be able to unwind when things go bad.

  • Arthur

    June 20, 2008

    No bubble. Just smart investing. If you know there's scarcity, invest in it before the scarcity disappears.

  • Horst

    September 22, 2008

    Ok does this article make any sense?
    1. So their revenue from commodities trading is a few billion, like that has any impact on a 9 trillion $ market?
    2.This article seems to assume that GS and MS were only long in these commodities.They were TRADING, aka long/short. Not that it matters anyway (see 1.).
    3. During the nasdaq bubble market the underlying currency was not devalued, but in fact rising, meaning the nasdaq rose even more in real money. While the commodities rose during a time were the underlying currency lost about 50% of the value. You can subtract that from the rise.

  • bah

    September 22, 2008

    They are short silver and gold, this should be FUN!

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