Commodities rush loses lustre for Wall Street The veteran banking analyst Brad Hintz published a set of research reports in 2005 about commodities trading at Goldman Sachs and Morgan Stanley. "With every near-term event that caused volatility in the late 1990s and so far in the 2000s, the environment has been tailor-made for these two firms to coin money in their commodities books," wrote Mr Hintz, of Bernstein Research. Wall Street's top brass were listening. As oil and gas markets rose and volumes grew, top banks including Lehman Brothers, Deutsche Bank and JPMorgan Chase invested billions to challenge the reigning commodities "duopoly." The gold rush has now cooled. Deutsche this month said it would axe 200 jobs worldwide as it abandons most of its commodities business. JPMorgan is seeking a buyer for its physical commodities business. Even Morgan Stanley is in retreat as it sells its global oil business to Rosneft, the Russian state-controlled energy company. Headcount at the 10 largest investment banks has fallen by a fifth since 2011, while commodities revenues this year will total less than $5bn, down from $12bn at the end of the last decade, according to Coalition, a research company. A combination of new regulatory pressures, fierce competition and a changing market structure are the reasons. The question is what will take their place. The Federal Reserve is weighing whether to allow banks to hold physical commodities, potentially reversing a string of approvals over the past decade. When the financial crisis hit Goldman and Morgan Stanley converted into bank holding companies, subjecting them to Fed oversight, too. For banks such as Morgan Stanley and JPMorgan, which lease millions of barrels of oil tank capacity, a more immediate concern is pressing on profits. Oil futures used to spend long periods in "contango," market jargon for when prices for future delivery exceed spot prices. The leases enabled banks to store oil in tanks and sell it forward for an almost riskless profit. In 2006, Morgan Stanley bought TransMontaigne, which owns 48 tank terminals with 23.6m barrels of capacity. Now, futures prices for gasoline and diesel are lower than spot prices, turning banks" leases into albatrosses. "Your contracts are worthless," says a former Wall Street commodities banker. Morgan Stanley is looking to sell its physical oil business, including TransMontaigne. A perch at a Wall Street commodities desk used to allow traders to execute large client deals quietly and trade around the flow. Because of financial reforms, prices and volumes of these deals are now reported in swap data warehouses. "As that gets reported, people know what went through, so it's very hard to take on substantial risk," says a former banker. Not every bank is retrenching. Goldman is standing firm, though it may sell its metals warehousing business that attracted controversy over delivery delays. Brazil's BTG Pactual may be interested in commodities businesses that are being sold by banks, including JPMorgan's. Standard Chartered, the UK bank with an emerging markets emphasis, is also growing in commodities. The appetite among other banks appears limited, especially for owning physical inventories that have attracted controversy in the US. Ed Clark, chief executive of Canada's TD Bank, bluntly rules out a purchase of JPMorgan's business. "If banks start getting into things that aren't essential to their mission statement and put themselves at risk in doing this, and then say, "But Daddy, will you come and bail me out in the end?" - that is what has created the anger, the whole regulatory backlash," he says. Other bidders that have expressed interest in JPMorgan's physical commodities business are more commercial in nature. They include the commodities trading houses Noble Group, Gunvor and Castleton Commodities International, the latter backed by private equity group KKR, according to people familiar with the matter. JPMorgan seeks to close a deal by early 2014. Gunvor says it "has been examining potential investment opportunities in North America, [and] has reviewed some of the assets that JPMorgan has put up for sale." The other traders had no comment. As investment banks faced new oversight, banks whose main business is lending expanded into commodities derivatives. Canada's Bank of Nova Scotia boasts on its website of a "full-service product suite, from vanilla hedging to structured financing solutions." Wall Street executives say they cost less. If you are a sales guy or trader at Morgan Stanley or Goldman, your goal was at least $10m a year. At Bank of Nova Scotia, you make $2m and you're a hero. All these lending banks got bigger and the margins eroded," a veteran commodities banker says. Brian Porter, BNS chief executive, says the retrenchment in commodities could create opportunities. "When some of our American peer group were inward looking and focused on their own internal problems, we were looking after our clients," he says.