How The World’s Greatest Investors Lost Billions

Proprietary trading is supposed to be the core of bank profits. That is one reason financial firms have been concerned about the need to rid themselves of their proprietary trading desks under new federal bank regulations. How will banks maintain strong earnings without them? It turns out that the business has been less than successful over the last four years, according to a report from the Government Accountability Office.

In the “Proprietary Trading” report it issued on July 13, which examined results from June 2006 to December 2010, the agency gave information pertaining to the six largest U.S. banks:

In 13 quarters during this period, stand-alone proprietary trading produced revenues of $15.6 billion—3.1 percent or less of the firms’ combined quarterly revenues from all activities. But in five quarters during the financial crisis, these firms lost a combined $15.8 billion from stand-alone proprietary trading—resulting in an overall loss from such activities over the 4.5 year period of about $221 million.

There are cases in which the loss of the proprietary desks may have been a real blow. According to Bloomberg, “The group reported results as part of Goldman Sachs’s fixed-income trading division. That division generated revenue of $13.7 billion in 2010, 35 percent of the firm’s total.” This data only takes into account results from a short period of time. The “Proprietary Trading” report would seem to suggest the Goldman numbers are either an “outlier” or a snapshot, meaning they tell less than the truth about the long-term results of its desk’s operations. The only alternative is that Goldman made huge profits while its competition suffered large losses.

One conclusion that is fair to take from the report is that the traders who were considered titans were no titans at all. Their gambles paid off only as often as they did not. That is about as often as a tossed coin turns up either heads or tails.

Douglas A. McIntyre