Goldman Sachs on Tuesday blamed its commodities trading desk for much of the massive drop in trading profits in the second quarter, even after its own analysts correctly called for a pull-back in prices.

In a sign of how an abrupt slump in commodities and energy prices caught out many big players, Goldman said it had significantly lower results in its commodities and mortgage businesses.

The reverse, rare from a segment that often drives earnings, led fixed-income, currency and commodity (FICC) revenues to slump 53 percent, to the lowest level since 2008.

Goldman, long renowned as one of the largest and savviest commodity derivatives traders, provided no further details on the decline, though it did disclose that it took greater risks during a particularly tumultuous quarter for raw materials.

The firm closely guards any information about its trading profits. In a statement, Goldman said its fixed income, currency and commodities client-execution businesses generated net revenue of $1.6 billion, down $1.8 billion from the second quarter of 2010, resulting in the significant drop in results.

Chief Financial Officer David Viniar told a conference call the commodities business, in particular, was negatively impacted by asset price fluctuations.

The comments were the most forthcoming Goldman has used to describe the J. Aron commodities trading division in at least a decade, according to a review of its earning statements, suggesting it may have fared even worse than in the market collapse of 2008 during the depths of the financial crisis.

It seems to me like they made some bad bets in there this time, said Keith Davis, bank analyst and principal at money manager Farr, Miller & Washington in Washington. Commodities trading is like a black box on Wall Street, where you'll never know the details, unless the banks tell you.

It was a tumultuous quarter for commodity markets, with major indices taking their biggest losses since 2008 as oil prices failed to recover from a near record slump in early May while the booming corn market tumbled from an all-time peak.

Goldman had said commodities revenues were higher or unchanged in eight of the past 14 quarters, although it has posted lower revenues in five of the last eight quarters, according to its earning statements. (Spreadsheet of commods results: )


The bank, which typically tops tables for the amount of its own money at risk in commodity markets, also boosted Value at Risk sharply from a year before, in contrast to other markets.

Goldman risked an average of $39 million per day to trade the energy, metals and agricultural markets during the quarter, up $2 million from the first quarter and versus $32 million a year ago.

It was the highest commodities VaR since early 2010, before the Dodd-Frank financial law pushed U.S. banks to cut back on proprietary trading and risk taking. It also was at odds with the rest of the bank, which pared risk-taking.

Total VaR fell to $101 million from $113 million in the first quarter and $136 million a year ago.

High levels of uncertainty and decreased levels of liquidity during the quarter contributed to difficult market-making conditions, particularly in mortgages and commodities, and prompted the firm to operate at generally lower levels of risk, Goldman said.

There was no explanation of how and why it took more risks in commodities trading.


The slide in most commodities and energy prices occurred after Goldman Sachs' commodities research team -- famed for making bullish calls -- surprised markets in mid-April by suggesting clients lock-in trading profits, a recommendation it reinforced several times in the following weeks.

It also recommended they underweight commodities over a three- to six-month period, but maintained a longer-term bullish outlook. The rebound arrived slightly earlier than expected, with crude oil prices having risen some $15 a barrel from their June low.

What Goldman may have not foreseen was another tumble in prices in the third week of June, around the time the United States and other major Western consuming nations announced they were releasing emergency crude stockpiles.

I believe they were caught out there, said Gary Townsend, chief executive at fund manager Hill-Townsend Capital in Chevy Chase, Maryland. They might have covered their positions later but they were probably leaning in the wrong direction at first, as many were.

(Reporting by Barani Krishnan; additional reporting by David Sheppard: Editing by Jonathan Leff and David Gregorio)