Let's Hear It For The Volcker Rule: Goldman Loses Over $1 Billion In FX Trade Gone Bad In Q3

Tyler Durden's picture

With such a spectacular source of impeccably timed, if always wrong, FX trading recommendations as Tom Stolper, who has cost his muppets clients tens of thousands of pips in currency losses in the past 5 years, and thus generated the inverse amount in profits for Goldman's trading desks, the last thing we expected to learn was that Goldman's currency traders, who by definition takes the opposite side of its Kermitted clients - because prop trading is now long forbidden, (right Volcker rule?) and any prop trading blow up in the aftermath of the London Whale fiasco is not only a humiliation but probably illegal - had lost massive amounts on an FX trade gone wrong. Which is precisely what happened.

According to the WSJ, "a complex bet in the foreign-exchange market backfired on Goldman Sachs Group Inc. during the third quarter, people familiar with the matter said, contributing to a revenue slump that prompted senior executives to defend the firm's trading strategy. Revenue in Goldman's currency-trading business fell sharply in the third quarter from the second. Within that group, the firm's foreign-exchange options desk posted a net loss during the period, the people said." The trade in question: "A structured options trade tied to the U.S. dollar and Japanese yen steepened the decline, according to the people. It isn't clear how large the trade was or how long it was in place."

Curious: does this perhaps explain why just after Q3 ended, on October 3, Goldman's head FX strategist Tom Stolper came out with an FX trade in which Goldman "recommend going short $/JPY at current levels of about 97.30 for a tactical target of 94.00, with a stop on a close above 98.80." Obviously, we promptly took the inverse side: "The only question we have: will the length of time before Stolper is once again Stolpered out be measured in days, or hours?" Naturally, Stolper was stolpered stopped out in a few short days, leading to a few hundred pips in profits for those who faded Stolper... and yet we wonder: was Goldman merely trying to offload its USDJPY exposure gone wrong on its clients in the days after the "trade tied to the USD and the JPY steepened the decline"? If so, that would be even more illegal than Goldman pretending to be complying with the Volcker Rule.

As for the size of the total loss we had a hint that something had gone very wrong when we reported Goldman's Q3 earnings broken down by group. Back then we said "the only bright light were Investment banking revenues which were $1.7 billion, unchanged from a year ago, if down 25% from Q2. It's all downhill from here, because the all important Fixed Income, Currency and Commodities group printed just $1.247 billion, down a whopping 44% Y/Y, well below expectations." Indicatively, Goldman had made $2.5 billion in FICC the prior quarter, and $2.2 billion a year prior. Obviously something bad had happened.

We now know that that something was an FX trading crashing and burning in Goldman's face. Reuters added:

Goldman Sachs Group Inc lost more than $1 billion on currency trades during the third quarter, recent regulatory filings show, offering some insight into why the firm, considered one of Wall Street's most savvy traders, reported its worst quarter in a key trading unit since the financial crisis.

 

Goldman's currency-trading problems came from the way the bank had positioned itself in emerging markets, two sources familiar with the matter said.

 

Specific positions could not be learned, but the bank was anticipating that the Federal Reserve would begin winding down its monetary-easing programs, the sources said. When the Fed unexpectedly announced that it would keep its massive bond-buying program in place, Goldman was left with positions that, "absolutely got annihilated," as one person familiar with the matter put it.

Since as the WSJ first reported the position involved the USDJPY, which first spiked then plunged following the Fed's non-taper announcement, and kept sliding until it hit 96.50 in early October just when Stolper suggested putting on the short USDJPY trade (when USDJPY soared), it seems that at least this one time both Goldman's prop traders and the trade recommended by Stolper were on the same side.

Which resulted in a $1+ billion loss for Goldman.

Congratulations Tom: that in itself is worth ignoring that Goldman completely made a mockery out of any and all Volcker prop-trading prohibitions. In fact, keep it up and keep those trade recommendations coming.

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nmewn's picture

They should have hired fonestar...lol.

Deo vindice's picture

Guess that proves they are serving the wrong 'god'.

If you're going to be doing 'God's work' you better make sure which god you're working for...

Groundhog Day's picture

 

 "a complex bet in the foreign-exchange market backfired on Goldman Sachs Group Inc"

Why don't they just cancel the trades.  I didn't work out for them some just undo them.  They've done it before, all they need to do is clear it with god

Crash Overide's picture

I thought Lloyd had a "god" button to push for assistance in these hard times?

Say What Again's picture

Volcker -- Schmolker.

We are GS. We are Bad Mo-Fo's and we do whatever we want with anybody's money.  In case you are wondering how we get away with this check out who we give money to.

http://www.opensecrets.org/industries/indus.php?Ind=F

DeadFred's picture

And yet they lost money. This is really interesting if you think about it. Current theory is that GS owns .GOV and the Fed both and yet the Fed blindsided them and the gov let it happen. My theory is that there is war in the nether world and the TPTB are duking it out. It would be nice to have a scorecard showing who the players on the teams are. It makes me happy to think about the knives being slipped into unsuspecting but very deserving backs :)

Richard Chesler's picture

Or maybe an arrangement similar to that of drug cartels with corrupt gov agencies. We'll loose a billion here. You just make sure to look the other way while we steal hundreds of billions there.

 

NoDebt's picture

I don't think anyone's looking deep enough on this.  Banks are BUILT to manipulate earnings.  It's what they do, it's why they exist.  Even the Tylers are missing it this time, I think.  Grasping for a single answer.  There isn't one.

This is a good old-fashioned "kitchen sink" quarter.  When you have a little bad news (FX), you throw ALL the bad news in at once (every other marginal losing thing they've been looking to off-load).  And then ride the bounce the following quarter.

Think like the squid.  If you're scratching your head, you're having the exact response they want you to have.

AlaricBalth's picture

Well at least Tom Stolper can always get a job as a Taper. I've read somewhere there is a high demand.

Crash Overide's picture

Couldn't of happened to a nicer bunch of guys...      *spits in the general direction*

merizobeach's picture

While I appreciate your spitting at GS, please replace 'of' with 'have' in such comments.  'Could of' is a thoughtless and unnecessary butchering of English.

ebworthen's picture

What?

A whale lost at the casino?

Too bad they have the room, the food, and the whores 'n coke comp'ed by:  the FED, Treasury, CONgress, Executive Branch, and the Supine Court.

Bastiat's picture

Did they rape themselves?

medium giraffe's picture

No one else left to rape I guess...

max2205's picture

Too big to jail...

Somebody call Jamie to see how this ends...

Downtoolong's picture

at least this one time both Goldman's prop traders and the trade recommended by Stolper were on the same side.

Maybe Kermit finally wised up and decided not to drink Stolper's Koolaid this time, leaving Goldman holding the front running bag.

Now I think it's about time for another multi-billion fine for breaking the Volker Rule. Come on DOJ, the government can't run on taxes you know.

 

Running On Bingo Fuel's picture

Goldi read the comments on The Hedge from last year.

Goldman Sachs Group Inc lost more than $1 billion. But Goldman Sachs FXHF Inc made over 24B as the anti-trade.

The loss was theater for the Muppets, Muppets.

Over.

Quinvarius's picture

They will never admit that it was gold that got them.  All you know is that they took a big loss.  You really don't even know how big.  They would never admit what really happened.  Certianly they would never admit something that appeared to be a big win was a net loser.  But screaming to short gold at 1200 then having it run over 1400 will do it every time.

Yen Cross's picture

  I heard there was a shortage of lube on Wall Street. Now we know why. Stolper got his ass reamed like the 'Lincoln Tunnel'.

DirkDiggler11's picture

Goldman lost $$$ on a trade ? I smell a rat. Must be political cover for something big. They must have bought the Senate out with this "loss". A nice $10MM "Christmas Bonus" in the envelope for each Senator they just bought off for the next 3 years.

The next trading "loss" will be GS renewing their "contract" with the House of Representatives.

GrinandBearit's picture

lol - pocket change for them.

Say What Again's picture

Ignore this post....

 

Hello People world

TestX TestY

How come the "line through" & the Underline style doesn't work for me?

holdbuysell's picture

Do it again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again! And again!

SillySalesmanQuestion's picture

Sounds like they got "Stolnanked."

BringOnTheAsteroid's picture

Hang on, isn't Brnanke working for Goldman Sachs. Doesn't seem right that Goldman should have a trading loss. How can you donate to Goldman, I neeeed, to, maaaake them whole again . . . . . . . <stares blankly into space> . . . . . . . .Golman can't lose, Goldman must always win. <Suddently blinks, shakes head> . . . . . . . .  Anyone have the time, I seem to be blanking out every now and then. What were we talking about?

spinone's picture

Geee, that means that they only got (3x85-1) billion dollars for free from the FED last quarter.  How do they stay in business?

Colonel Klink's picture

Wait for it.....by the grace of god, because they're doing its work.

maw53704's picture

    I'll give odds they bought implied volatility  priced  from the     second derivative   of  the price changes  for the    may---july         time frame and  sold the nonvolatility option to square the books .  They probably  lost  money  on both sides.

Colonel Klink's picture

Wonder if they got Finked or Dimoned.  Either way I'm desperately trying to choke back that first tear.

q99x2's picture

Arrest Goldman Sachs executives, Shut them down. Turn their offices into free range chicken ranches.

No GMO.

q99x2's picture

Arrest Goldman Sachs executives, Shut them down. Turn their offices into free range chicken ranches.

No GMO.

Golden_Rule's picture

"When the Fed unexpectedly announced that it would keep its massive bond-buying program in place, Goldman was left with positions that, "absolutely got annihilated," as one person familiar with the matter put it."

 

They either- a) were right and made a profit, or b) were wrong and the fed would keep throwing money at them.  Rough fucking life...

Spankrupt's picture

Executives leaving GS somehow manages to leave with their scaly skin replaced with teflon - John Corzine, Mario Draghi, Robert Rubin, Henry Paulson. Put em in all in a room and ask them the price of a gourmet cheeseburger, 5 -1 odds, they are not within 25% of $8.99. (Includes one side of wavy chips)