SocGen’s Bache deal signals Commodity Woes

Société Générale SA is picking apart Bache–a commodities house and the last link to a historic Wall Street name–in another sign of how trading in raw materials has fallen on hard times.

Disappointed in Bache’s poor performance, executives at Jefferies LLC put the unit on the block, eliciting interest from the French bank. But SocGen is just taking some pieces of the business for a nominal sum, setting off a scramble among Jefferies Bache’s employees and clients, people familiar with the situation said.

SocGen anticipates taking more than 300 of Bache’s top clients by revenue, which include producers and end users of everything ranging from crude oil to aluminum and wheat, said a person familiar with the French bank’s plans. On the list as well are other financial institutions that act as counterparties.

Many brokers on Jefferies Bache’s energy team are moving to U.K. brokerage ED&F Man Capital Markets after SocGen decided to absorb just a third of client assets, the people said. Metals brokers have approached Australian bank Macquarie Group Ltd. and R.J. O’Brien & Associates LLC, a brokerage based in Chicago, these people said. A group that caters mostly to financial clients has made overtures to ADM Investor Services, a unit of Archer Daniels Midland Co., these people said.

The disintegration of Bache, one of the first New York investment banks to make a foray into raw-materials markets, is the latest example of how commodities trading is on the decline on Wall Street amid shrinking profits and heightened regulation. J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley have shed commodity assets in the last year.

“This year has been a reality check for the industry,” said Matt Simon, head of futures research at consulting firm TABB Group LLC. “It’s a simple case of what the profitability is going to be. There’s lower commissions, fewer instruments you can profit on, stronger capital commitments and growing pressure on the business. That leaves an ugly picture for senior-level executive management.”

Founded in 1879, Bache became publicly traded in 1971, and Prudential Financial Inc. bought it 10 years later. Over the years, Bache was whittled down to a brokerage specializing in commodity and financial derivatives. It was sold to Jefferies for $430 million in 2011.

Bache posted operating losses for its four years under Jefferies ownership, said people familiar with the unit’s performance. In 2014, the brokerage took a $50 million hit when a client, ship-fuel supplier OW Bunker, suffered losses on a bet on fuel prices, according to filings and current and former employees familiar with the loss. OW Bunker filed for bankruptcy protection in November amid an alleged internal fraud unrelated to the bet and couldn’t come up with the money to pay off its losing position, leaving Jefferies on the hook.

Jefferies, a unit of Leucadia National Corp., began seeking buyers for the unit in December and laid off several employees earlier this year. Macquarie, which has grown aggressively in commodities as Wall Street banks have pulled back, made an early offer but later withdrew the bid, said people familiar with the talks.

SocGen is expanding its commodities business. In May 2014, it bought out Crédit Agricole SA’s 50% stake in a joint venture for derivatives brokerage Newedge.

In its April 9 news release announcing the deal to acquire Bache from Jefferies, SocGen said it would take “selected assets.” In its own release, Jefferies said SocGen would acquire “most” of the business.

Jefferies also said it would wind down any remaining Bache operations through the transaction’s close at the end of the second quarter.

The New York bank filed a notice with New York state saying it intends to lay off 120 employees by July 8.

Although the roughly 300 clients chosen by SocGen make up a majority of the unit’s revenue, they constitute a fraction of the unit’s thousands of clients, said people familiar with the matter.

SocGen has been allowed to review accounts and reach out to clients it wants, according to people familiar with the process. Accounts are being transferred to SocGen within 30 days unless clients object. Clients passed over by SocGen have been told to find new firms to handle their business.

SocGen has made job offers to only some Jefferies Bache brokers. SocGen interviewed about a third of the 40-member metals team, and even fewer got offers to join, according to a Jefferies Bache broker.

“They thought they could just press a button and make all the accounts go away,” said a senior Jefferies broker. “But there’s thousands of accounts, it’s not going to be that simple and it’s all taking a lot more time.”

Source: MarketWatch