Goldman, Morgan Stanley bet on commodities

By Christine Harper, Bloomberg - Tuesday, June 17, 2008


NEW YORK -- On Wall Street, where just about everyone has lost confidence in financial assets, Goldm

an Sachs Group Inc. and Morgan Stanley are making money the old-fashioned way: Buying and selling commodities.

Goldman and Morgan Stanley are expected by analysts to report the best second-quarter earnings of the world's biggest securities firms this week, having limited their losses from the collapsing credit market. They also lead Wall Street in commodities trading, where crude oil futures doubled in the past year and the price of products from gold to corn soared to record highs.

Surging prices are attracting investors, as well as companies hedging their positions by buying derivatives. That's played to the strength of Goldman and Morgan Stanley, which dominate the market for commodity derivatives. The two New York-based companies accounted for about half of the US$15 billion of revenue that the world's 10 largest investment banks generated from commodities last year, said Ethan Ravage, a financial-services industry consultant in San Francisco.

Commodity trading "is very large for them, and that is even more important now given what's happening with the rest of the businesses," said Frank Feenstra, a consultant at Greenwich Associates, the Greenwich, Connecticut-based research firm whose survey last month found Goldman and Morgan Stanley were the preferred dealers of corporate users of commodity derivatives. "There are more commodities used, more hedging by companies, and the investor population has increased significantly as well." Goldman probably will report a 32 percent drop in second-quarter profit today, and Morgan Stanley may say on June 18 that net income fell 59 percent from a year earlier, according to the average estimate of analysts surveyed by Bloomberg.

Blankfein and Mack

That's relatively good news for Goldman Chief Executive Officer Lloyd Blankfein, 53, and Morgan Stanley CEO John Mack, 63, when compared with the US$2.8 billion second-quarter loss reported last week by Lehman Brothers Holdings Inc. Bear Stearns Cos. was forced to sell itself to New York-based JPMorgan Chase & Co., the third-biggest U.S. bank, after almost going bankrupt in March.

"Fixed-income is really, really tough right now," said Ralph Cole, a senior vice president of research at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which manages US$2.7 billion and holds Goldman shares. "The two names that had so much trouble were big fixed-income shops, whereas Goldman obviously has commodities." Goldman, the only one of the 10 biggest investment banks to show a gain in its stock price last year, fell 17 percent so far in 2008, and Morgan Stanley tumbled 23 percent in New York Stock Exchange composite trading. By contrast, Merrill Lynch & Co. dropped 29 percent and Lehman fell 61 percent.