* Firm has been exploring stake sale for a year or more-CNBC
* Blackstone one of several parties in discussions
* Morgan Stanley and Blackstone declined comment
June 6 Morgan Stanley is considering
selling a stake in its vaunted commodities trading division,
according to a news report that, if true, would reflect the
bank's most radical plan yet to ease mounting regulatory and
The investment bank has been exploring a partial sale since
at least last year and has talked to several parties, including
private equity firm Blackstone Group LP, CNBC television
reported Wednesday, citing sources.
A source familiar with the matter told Reuters that although
Blackstone met with Morgan Stanley to discuss its commodities
unit, it was not considering an investment in the business.
Morgan Stanley and Blackstone declined to comment.
The commodities unit at Morgan, one of the original "Wall
Street refiners" that pioneered the modern energy derivatives
market two decades ago, has earned the bank $17 billion in
estimated revenue over the past decade, trading both financial
contracts and physical markets like diesel.
But with a deepening role in illiquid cash markets and
physical assets through subsidiaries TransMontaigne Inc and
Heidmar Inc, the unit has also become a weight on the bank's
capital base at a time it is facing a potential credit downgrade
-- one that could force a multibillion-dollar margin call.
Still, many analysts and rivals questioned whether it would
ultimately agree to part with a piece of the valuable unit,
which has long been one of the most dominant and profitable
commodities trading operations on Wall Street.
"They made a mint at it for a long time," said Dan Dicker, a
former oil trader who is president of the wealth management firm
MercBloc. "The business is changing, they're not making as much
money as they used to, but - holey croley, I know a lot of guys
over on that desk and they're still the best."
CNBC cited regulatory reforms as the reason for a possible
sale, without explaining how selling just a stake of the
commodities business would help Morgan Stanley on the regulatory
front since the bank would still be involved in trading.
Selling a stake could help the bank boost its capital base
as it prepares for a costly credit downgrade by Moody's Inc
that is expected this month. In a May securities filing,
Morgan Stanley said it might have to post as much as $9.6
billion worth of additional collateral and terminations payments
in the event of a three-notch downgrade, the biggest cut
threatened by Moody's.
Still there are signs that Morgan's competitive position is
slipping, with its division apparently suffering more than its
rivals' from weaker trading volumes as well as new regulations
that will limit U.S. banks' trading for their own account and
may force them to divest commodity assets.
Morgan Stanley fell to fourth place in the over-the-counter
market for commodity derivatives among corporations and
investors, behind JPMorgan, Goldman and Barclays Plc,
according to a recent survey by Greenwich Associates.
"The regulatory strictures and capital requirements are
leading many banks, I'd imagine, to look at their commodities
business and wonder if it's still worthwhile," said Sharon
Brown-Hruksa, vice president at Nera Economic Consulting and a
former acting chairman of the U.S. Commodities Futures Trading
Commission. "The passage of Volcker, position limits and capital
requirements may make it difficult to maintain the commodities
Morgan Stanley and Goldman Sachs Group Inc were the
leading commodity trading firms on Wall Street in the two
decades preceding the financial crisis. Since then they have
come under pressure from JPMorgan Chase & Co, which has
expanded aggressively in the sector following their acquisition
of Bear Stearns in 2008 and RBS Sempra in 2010.
Morgan Stanley's commodities trading revenue dropped nearly
60 percent from 2009 to 2011. Based on Reuters' calculations,
revenues peaked at around $3 billion in 2008 and slumped to
about $1.3 billion last year, the lowest since 2005. The bank
attributed the decline to "lower levels of client activity."
JPMorgan had commodity trading revenues of $2.8 billion last
year, while Goldman reported $1.6 billion in commodity trading
revenue. The figures exclude expenses, which can vary widely.
Private equity firms, unencumbered by new capital rules and
trading restrictions, have eagerly pushed into the trading
sphere in recent years. Stone Point Capital helped fund the
start-up merchant Freepoint Commodities last year, while First
Reserve has been a major investor in Caribbean oil storage
facilities and refineries in Europe and the U.S. East Coast.
Blackstone Group has already shown interest in getting into
commodity trading. In 2010 it gave $150 million in seed capital
to George "Beau" Taylor, a former senior natural gas trader at
JP Morgan and Credit Suisse, to launch a hedge fund.
Because of the nature of Morgan Stanley's large physical
commodities business, it may face greater regulatory pressure
than some of its Wall Street peers, whose businesses are far
more reliant on derivatives -- or "paper" -- trading.
One concern is the Volcker Rule, which would limit the
ability of federally protected banking institutions from using
their own money to trade in the markets, possibly preventing
Morgan Stanley from taking risks in the illiquid, opaque cash
markets for commodities. Regulators have issued a draft proposal
for the Volcker rule, but it has not yet taken effect.
In a February letter to the U.S. Securities and Exchange
Commission, Simon Greenshields, the global co-head of Morgan
Stanley's commodities unit, said the bank was "deeply concerned"
about how the rule would affect the bank's business.
"Commodity markets provide little opportunity for agency
transactions, and customers depend upon the participation of
large liquidity providers that are able to manage principal
risk," Greenshields said.
In agency transactions, market makers like Morgan Stanley
would match buyers and sellers of an asset before agreeing to
take on a trade. Greenshields described that approach as
"unworkable" in commodity markets because there is not always an
immediate buyer and because large transactions could negatively
Separately, Federal Reserve regulations restricting non-bank
investments could force Morgan Stanley to divest assets.
Morgan Stanley has long run the largest physical oil and
energy trading desk on Wall Street, making it one of the biggest
distillate importers in the United States. With its purchase six
years ago of logistics firm TransMontaigne, it became a major
player in the inland market at a time of bumper profits.
In the early 1990s, Morgan Stanley oil trader Olav Refvik
earned the moniker "King of New York Harbor" by securing a host
of leases on storage tanks at the key import hub, giving the
company an enviable position in the market. Refvik left Morgan
in 2008 and now works for commodity trader Noble. Morgan Stanley
continues to lease and operate dozens of oil storage facilities
across the United States through TransMontaigne.
Morgan Stanley's physical commodities business has been
squeezed by shifting trade patterns and the bank's deteriorating
credit rating. Morgan was traditionally a big player in the
trans-Atlantic gasoline arbitrage market, but this business has
declined sharply with the United States' greatly reduced need to
At the same time, more costly credit has eaten into returns
in other physical trading businesses. Better capitalized global
commodities trading firms, as well as other banks like JP
Morgan, have been able to grab market share.
Meanwhile the client business has suffered. Although Morgan
Stanley does not have any major, branded commodity indices, it
has one of the biggest operations in selling such indices to
investors; however, demand for passive exposure to commodities
has dwindled in recent years.