Last week we noted that Goldman posted a 'yuge' miss in fixed income trading of $335 million (see "Goldman Misses As FICC Disappoints, Stock Slides As Average Banker Comp Hits $360K"):
Broken down by key operating group, most segments reported numbers that beat expectations with the exception of FICC:
- FICC sales & trading revenue was $1.695bn, missing estimates of $2.03bn
- Overall sales and trading revenue $3.36 billion, missing estimates of $3.62 billion
- Investment banking revenue of $1.7bn beating estimates of $1.56bn.
- Investment and Lending, formerly known as prop, reported $1.48bn in revenue, virtually unchanged from a year ago.
The full breakdown of Goldman's various revenue segments is shown in the chart below:
The massive miss perplexed wall street as other banks posted solid YoY gains in fixed-income trading revenue...
...which caused a nasty little selloff in Goldman's stock.
When pressed on the issue during Goldman's earnings call, CFO Martin Chavez attributed the massive miss to "underperformance in commodities and currencies" and "business mix."
"Sure, as I said, we underperformed this quarter, and the underperformance was driven by commodities and currencies. We note that some of our competitors have bigger financing businesses and more significant corporate footprints as a result of larger lending books. But again, it's one quarter, and business mix differences might reflect relative performance quarter to quarter. But we believe our model has lots of leverage. It's improving client activity. Harvey, would you like to add anything?"
But, at least according to Bloomberg, the CFO's non-specific attribution to "underperformance in commodities and currencies" can loosely be translated into the more specific reason for Goldman's miss which was massive losses on coal, energy and retail bonds on the company's distressed trading desk.
Goldman Sachs held roughly $200 million in Peabody bonds, about 10 times more than other major dealers, as the coal miner prepared earlier this year to exit bankruptcy protection, according to data from Securities and Exchange Commission filings and a person with knowledge of the restructuring’s terms. Those bonds would have lost about $40 million this year as their value slumped.
The bank also got hurt by Energy Future after Texas regulators blocked the sale of a key unit that was designed to pay off some debts. The debacle prompted about $1 billion in losses for a roster of creditors including hedge funds Elliott Management and York Capital Management.
In retail, debts owed by teen and children’s clothing chains Rue21 and Gymboree have traded lower this year as their private-equity owners prepared the companies for potential bankruptcy filings. Neither of their bonds trade for more than 13 cents on the dollar. Bonds from tween jewelry retailer Claire’s have been trading below 45 cents on the dollar as it tries to keep up with more than $2 billion in debt.
Of course, we're quite certain that holding 10x the inventory of any other large investment bank in Peabody bonds was simply what Goldman needed to satisfy trading flow and was compliant with the Volcker Rule. However, as Bloomberg notes, those pesky Volcker lines can be 'blurry'.