Bloomberg News

Wall Street Had Proprietary-Trading Loss Since ’06, GAO Says (1)

July 13, 2011

(Updates with proportion of total revenue in 14th paragraph.)

July 13 (Bloomberg) -- The six largest U.S. banks had a net loss of about $221 million from standalone proprietary trading from June 2006 through the end of 2010, according to the Government Accountability Office.

The business of betting money for banks’ own accounts produced positive net revenue in 13 of the 18 quarters examined, totaling $15.6 billion, and generated losses of $15.8 billion in the other five quarters, the Washington-based GAO said today in a report.

Congress called for the study to help regulators draft policies needed to enforce the so-called Volcker rule, which bans proprietary trading and limits banks’ investments in private equity and hedge funds. The Volcker rule passed last year as part of the Dodd-Frank financial regulatory overhaul.

“Compared to these firms’ overall revenues, their standalone proprietary trading generally produced small revenues in most quarters and some larger losses during the financial crisis,” the GAO wrote in the report.

The standalone proprietary-trading groups at the six companies -- Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley -- lost money in the last two quarters of 2007, as well as the first, third and fourth quarters of 2008, the report said.

Banks including JPMorgan, Goldman Sachs and Morgan Stanley have shut down or made plans to spin off standalone proprietary- trading groups to prepare for the Volcker rule.

Other Businesses

The study didn’t address proprietary trading done in other areas of the banks. The GAO said regulators will need more data from the firms to ensure companies don’t take proprietary positions in their client-trading businesses.

“The GAO study is a major disappointment,” Democratic Senators Jeff Merkley of Oregon and Carl Levin of Michigan said in a statement. “GAO has examined in detail only proprietary trading which occurs on distinct ‘standalone’ proprietary- trading desks and gave only passing consideration to the risks and conflicts of interest associated with proprietary trading more broadly.

‘‘Just a fraction of all proprietary trading occurs on stand-alone desks, as the Financial Stability Oversight Council noted in January and as GAO itself acknowledges,’’ the lawmakers said.

One Firm’s Losses

A single firm that the GAO didn’t identify accounted for the largest quarterly revenue from proprietary-trading groups, with $1.2 billion, the report said. That same firm had the two largest quarterly losses of $8.7 billion and $1.9 billion, according to the report.

Excluding that one firm, the other five banks generated revenue of $9.4 billion over the 4 1/2-year period, according to the report. Of the five other banks, the largest quarterly revenue for one firm was $957 million, and the largest loss was $1 billion, the GAO said.

Morgan Stanley posted its first quarterly loss as a public company in the fourth quarter of 2007, as it wrote down subprime-related holdings by $9.4 billion, with then-CEO John Mack saying ‘‘virtually all writedowns this quarter were the result of trading by a single desk in our mortgage business.” Morgan Stanley later shut down the desk.

Mark Lake, a spokesman for Morgan Stanley, declined to comment on whether the New York-based company was the firm referred to by the GAO report.

Trading Revenue

Standalone proprietary trading accounted for as much as 12.4 percent of trading revenue at the six banks in a quarter, and as much as 3.1 percent of total revenue, according to the report. In the fourth quarters of 2007 and 2008, the groups accounted for about 66 percent and 80 percent of total trading losses, according to the report.

Standalone proprietary trading produced $4.8 million in quarterly revenue for every $1 million in value-at-risk, a measure of how much the bank could lose in a single day, according to the report. That’s less than a quarter of the revenue-per-VaR of the banks’ total trading operations, which was $21.9 million per $1 million of VaR, the GAO said.

--Editors: Steve Dickson, William Ahearn

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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