Macaskill on markets: Cutting credit corners won’t sustain commodities boom
There is a near consensus that 2010 will be a banner year for commodities trading. Energy analysts are hard pressed to see anywhere for prices to go but up. TV ads urge householders to cash in their gold to exploit the boom. And banks of all types are scrambling to win a share of the commodities revenue that was once largely the preserve of investment banks led by Goldman Sachs and Morgan Stanley.
Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks
But concern is mounting among industry veterans that the latest commodities rush bears one of the hallmarks of other bubbles that ended in disaster for banks: a willingness to cut credit valuation corners in order to win business. Established players say that banks looking to break into commodities dealing are increasingly mispricing the counterparty credit component of derivatives trades with clients. By posting flat prices for commodities trades, regardless of client quality, some banks are allowing themselves to be exploited by canny specialists in individual energy and metals markets.
The slackening of standards is reminiscent of the credit boom of the last decade, when dealers such as Merrill Lynch mystified competitors with their steady accumulation of market share in sectors such as CDOs, only to have their pricing errors exposed in the eventual downturn.