JPMorgan Chase & Co. announced the sale of its commodity trading arm to Mercuria for $3.5 billion, cementing the 10-year-old trading company’s entry into the top ranks of commodities firms. Bloomberg’s Andy Hoffman and Hugh Son note that JPMorgan sold the unit “amid pressure from regulators to leave the business.” That’s a measured way of putting things. The commodities trading business is profitable. It’s also potentially toxic to the reputation of a mega-bank.
Investigations like the one that cost JPMorgan $410 million are what big commercial banks have to look forward to if they stay in commodities trading. International commodities trading can be an ugly endeavor. Metals and oil extraction often takes place in unpleasant places presided over by unsavory regimes. Big players like Vitol SA and Glencore Xstrata Plc have been hammered for doing business with Iran (Vitol has stopped, Glencore hasn’t).
On top of that, when the economy heads south and energy prices turn up, inevitably traders face accusations of profiteering. Citigroup Inc. let go of its profitable Phibro unit largely to end the headlines about their highest-paid trader, $100 million man Andrew J. Hall. (It’s not yet clear whether Mercuria will also hire Blythe Masters, JPMorgan’s powerful and controversial commodities trading chief.) The awkward scrutiny of the business is likely to increase as U.S. and European regulators expand their investigation of price-fixing in the market for Brent crude
The constant threat of a public relations fiasco and the common perception of unseemly profiteering by traders who tend to prosper in times of shortage are a big incentive for the JPMorgans and Citigroups to stay away from physical commodities trading. The public has sent them a clear message: This isn’t worth the risk to your reputation. That leaves this kind of trading largely to specialists like Mercuria, Vitol, Trafigura Beheer BV, and Glencore — the first three privately held — who have a lower profile and less consumer brand equity. In the long run, that might make commodities trading an even less transparent business, but we will just have to take that up later.