Well it has finally come to pass, Goldman Sachs commodities unit has agreed to a sale of its highly controversial but hugely profitable Metro International Trade Services, its Detroit-centered warehouse business.
Goldman bought the business in 2010 for an estimated $550 million dollars but as regulatory scrutiny intensified and revenues from commodities generally declined, Goldman put the business up for sale earlier this year. According to the FT the bank concluded a sale to Swiss-based but British-born brothers David and Simon Reuben. The sales price is undisclosed at the moment but even if Goldman gave it away, which they won’t have done, they will have earned handsomely from the deal.
Metro was an integral part of Goldman’s highly profitable commodities business. In a 2011 presentation prepared for its board, and cited in a US Senate report, Goldman said that over the past 5 years commodities had generated more than $10 billion in pre-tax earnings with an average margin of about 60%.
However, revenues were declining, and were reported as $1 billion in 2012, down from $3.3 billion in 2008. Although Banks were supposed to have rules in place to prevent their trading divisions from gleaning first-hand knowledge of physical trading activities in their own logistics operations, no one believes for a moment that such rules worked, opening the banks to a growing chorus of complaints about unfair advantage and insider dealing.
A 403-page, 2-year US Senate investigation into banks’ commodities business published this Fall alleged nearly 50 Goldman employees, including commodities executives and traders, had access to confidential information from the warehouse company about metal movements, stock levels and the like. If rules against such activity were to be more rigorously enforced and greater controls over load-out rates and manipulation of queues by operators applied by the London Metal Exchange, banks obviously decided the game wasn’t what it used to be and rapidly moved out of the sector selling warehouses, trading desks and other infrastructure assets.
The sale doesn’t mean Goldman is moving out of the commodities sector altogether. Unlike many other banks, the Wall Street supremo has commodities in its very DNA and will continue to make money out of the sector even if its activities are slimmed down during the current down cycle.