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Goldman Sachs burned by bad currency bets

Daniel Acker | Bloomberg | Getty Images

Goldman Sachs Group lost more than $1 billion on currency trades during the third quarter, recent 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.

Foreign exchange was the only trading area that was a money loser, according to regulatory data. 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.

Goldman Sachs exchanges foreign currencies for clients, some of whom also pair the currency trades with trading designed to hedge interest-rate moves. But that type of currency trading at Goldman is separate from the performance of its currency trading business, which is headed globally by Guy Saidenberg.

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, "absolutely got annihilated," as one person familiar with the matter put it.

Goldman spokesman Michael DuVally declined to comment.

According to Fed data, Goldman had negative revenue of $1.3 billion in currencies, while JPMorgan was $65 million in the red. Morgan Stanley reported $594 million in currency revenue, Citigroup reported $558 million and Bank of America 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 Oct. 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.


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