NEW YORK: Goldman Sachs Group Inc’s vast rates-trading business took a hit as interest rates surged in the wake of the US and Israel’s attacks on Iran, fuelling the disappointing results that took investors by surprise this week and put pressure on shares.
Losses from the bank’s US nonlinear gamma rates desk, overseen by Arvind Giridhar, were one of several factors that contributed to the division missing analyst expectations by nearly US$1bil in the first quarter, according to people familiar with the matter.
Gamma trading involves speculating on the speed at which an option’s exposure changes in response to movements in the underlying asset’s price. A spokesperson for the bank declined to comment.
The desk is part of the bank’s fixed income, currencies and commodities unit, which posted a surprise drop in revenue on Monday.
The US$4bil haul was 10% lower than the same period last year and more than US$800mil below a consensus of analyst estimates compiled by Bloomberg.
It’s also a test for Anshul Sehgal, one of the bank’s three co-heads of fixed income, currencies and commodities (FICC), who oversees agency mortgage trading and was promoted to the company’s top management committee last year.
Chief executive officer David Solomon defended his fixed income trading division, criticising analysts for setting the bar too high. “A lot of this has to do with expectations that are set in the research community,” Solomon said on a call with analysts, noting it was still the bank’s 10th-best FICC quarter ever.
But Goldman’s stock traders were able to trounce estimates, riding a wave of volatility to post US$5.33bil for the quarter –an all-time record for any bank on Wall Street in any quarter.
And as the week wore on, most of the bank’s peers posted results in their fixed-income trading divisions that surpassed expectations.
“In the period of time when you have a lot of volatility around rates in particular and commodities, you can get in traffic where things don’t go your way at any given moment in time,” Goldman president John Waldron said on Wednesday at a Semafor event in Washington.
“You have to end the quarter at a certain date and you show what happened. If you look at it in the fullness of time, I have no concerns about our FICC business.”
But with a relatively large rates desk that caters to some of the biggest hedge funds and risk takers on Wall Street, Goldman was more vulnerable to geopolitical shock than some of its peers, according to the people familiar with the matter.
By comparison, JPMorgan Chase & Co – which also saw a drop in income from its rates division in the quarter but is less reliant on that business – reported a 21% increase in revenue from its fixed-income unit overall.
On Monday, Goldman’s chief financial officer Denis Coleman only briefly referred to the dip in fixed income trading revenue, attributing it to “significantly lower” revenue from the rates and mortgages desks, while noting currencies and commodities results were strong.
Indeed, revenue from the commodities unit was up by more than 60%, according to a separate person familiar with the matter, joining a bonanza across Wall Street. — Bloomberg
