Goldman Plays Outdated Debt Game: Lisa Abramowicz

The third quarter should have been comeback time for fixed-income trading on Wall Street.

Banks had been complaining for years about torpid bond markets. Yields were too low. Investors weren’t trading enough. Central banks were making everyone too complacent.

Then volatility stirred. Corporate-bond yields, especially in energy-related debt, have been bouncing all over the place. Trading volumes of U.S. government debt edged up, and corporate-debt activity increased 5 percent in the third quarter compared with activity in the period a year earlier, according to primary dealer data collected by the Federal Reserve.

One could be forgiven for imagining debt traders rubbing their hands together at the prospect of bigger commissions.

But a funny thing happened on the way to the trading ATM. JPMorgan Chase and Bank of America reported double-digit declines in debt trading this week, and then Goldman Sachs dropped the bombshell on Thursday, reporting a surprising drop of 34 percent in revenue from its fixed-income, currencies and commodities business.

The trading powerhouse responded by reiterating its commitment to fixed-income trading and said it expected profits to rebound down the line. Given the shifting market landscape, that may be more wishful thinking than trenchant analysis.

Other banks have been cutting back on their fixed-income operations, with good reason.

A rise in computer-generated activity has been taking business and profits away from big banks. U.S. government debt is increasingly traded by hedge funds and other investors through high-frequency trading systems.

In company debt, activity is more focused on exchange-traded funds and the frequently traded bonds they track and less on esoteric debt transactions that can be more profitable for big banks. And the largest Wall Street brokers can’t use as much of their own money to make bets anymore because of new regulations.

To the extent that Wall Street firms still hold riskier securities on their books, the bets have not always paid off. Goldman and Jefferies are among those that have suffered some multimillion-dollar losses this year on some of their distressed-debt positions.

Bank of America CEO Brian Moynihan doesn’t see much advantage to increasing the proportion of riskier assets held by the bank, regardless of regulations. “It’s made the industry tremendously more” safe and simple, he said in a Bloomberg Television interview with Erik Schatzker that aired Thursday.

Goldman spent a good chunk of time on a Thursday conference call trying to convince analysts and investors that it’s still dedicated to its fixed-income business. In fact, Goldman suggested that shrinking trading desks at other big banks should be a boon for the firm in the long run.

That may take a long, long time. Goldman may not be able to afford to just wait around.

(This column does not necessarily reflect the opinion of
Bloomberg LP and its owners.)

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