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In October 2011, things were looking bleak at Goldman Sachs Group Inc.’s commodities business. Revenue was down, competition was up, employee attrition was at an all-time high and new regulations were on the horizon.

Beyond the usual rivalries with Morgan Stanley and JPMorgan Chase & Co., Goldman Sachs executives saw an upstart doing deals they couldn’t do and throwing lots of cash at traders: Glencore Plc. The commodities company wasn’t tied down by rules that applied to banks and had become even more of a presence since a $10 billion initial public offering earlier that year. It boasted strong growth and higher stock multiples than Goldman Sachs was receiving for its commodities unit.

“Glencore competes with GS Commodities but has a broader business mix, including significant production, refining, storing and transport activities,” Goldman Sachs executives said in a presentation that month to the bank’s board later made public by the Senate Permanent Subcommittee on Investigations. “May be model for evolution of commodities trading.”

Four years later, that envious assessment is looking wrong, and Goldman Sachs executives are probably breathing a sigh of relief. Glencore shares plunged 29 percent Monday, extending their decline to 78 percent in the past five months. The Baar, Switzerland-based company is seeking to sell assets and cut debt to avert a credit-rating downgrade. It has sold new stock and scrapped its dividend as part of a $10 billion debt-reduction program amid a broad commodity rout spurred by China’s economic slowdown. Last week, Goldman Sachs analysts said the company’s efforts were inadequate, sending the stock lower.

Fed Scrutiny

Goldman Sachs and other banks have the U.S. Congress and the Federal Reserve to thank. While you won’t hear many bankers praising regulation that limits their activities, the Fed’s scrutiny of banks’ physical commodities units came at a fortuitous time for the largest Wall Street firms.

The Fed was already overseeing the commodities units of Goldman Sachs and Morgan Stanley as a result of their 2008 conversion to bank holding companies when Senator Sherrod Brown, an Ohio Democrat, held hearings in 2013 on the risks those businesses posed to lenders and markets. He pushed regulators to review banks’ commodities activities and the exemptions that allowed firms to own such businesses.

Gregory Agran, co-head of the global commodities group at Goldman Sachs, during the Senate Subcommittee hearing. Photographer: Andrew Harrer/Bloomberg

The Senate subcommittee held hearings last year and released findings from a two-year investigation that concluded Wall Street’s role in owning physical commodities provided unfair trading advantages and could threaten the financial system if a bank’s business suffered an industrial catastrophe. While the Fed still hasn’t introduced its promised new rules, banks didn’t wait to act.

Morgan Stanley in July 2014 sold its stake in oil-transportation company TransMontaigne Inc. and some physical inventory to NGL Energy Partners LP for about $750 million, in part because of the regulatory attention. It booked a $101 million gain on the sale. Since then, the publicly traded subsidiary of TransMontaigne has dropped by a third and oil has fallen by $60 a barrel.

JPMorgan Sale

JPMorgan sold part of its physical commodities business to Mercuria Energy Group Ltd. in October. Morgan Stanley tried to sell its oil merchanting business to OAO Rosneft last year. After that deal fell apart because of U.S. sanctions against the Russian company, the bank found another buyer in Castleton Commodities International LLC earlier this year.

“We don’t think we need to be in the physical oil assets or merchanting business to be effective,” Morgan Stanley Chief Financial Officer Jonathan Pruzan said at an investor conference in June. “Ten years or 15 years ago it was important, and we thought it was a competitive advantage, but we don’t think that’s the case today.”

Spokesmen for Morgan Stanley, Goldman Sachs and JPMorgan declined to comment. Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

When Glencore went public in 2011, the stakes of the company’s top six

executives were valued at $23 billion, surpassing the wealth generated by Goldman’s own IPO 12 years earlier. Goldman Sachs executives told their board that year that the combination of commodity production and trading was proving attractive to investors and that Goldman’s business would be valued more highly if it looked more like Glencore.

Goldman’s commodities business at the time boasted more than 1,000 clients in dozens of countries and had earned more than $10 billion in pretax profit over the previous five years, more than Amazon.com Inc. and Starbucks Corp. combined. Still, trading across the industry was in a decline that has continued. Commodities-trading revenue at the 10 largest banks generated $12 billion in the two and a half years ended in June, less than it produced in 2009 alone, according to data from industry research firm Coalition Ltd.

‘Dangerous Business’

While Goldman Sachs hasn’t expanded as it may have wanted and sold two of the largest physical commodities operations it owned, it has cut back less than others. Deutsche Bank AG and Barclays Plc are among banks that have slashed their commodities units, and Goldman Sachs CFO Harvey Schwartz said earlier this year that the firm saw less competition in commodities trading from other banks.

In 2007, then-CFO David Viniar dismissed the threat of other banks bulking up in commodities.

“It’s a dangerous business to be in if you’re not expert,” Viniar said at the time. “It’s a dangerous business to be in even if you are expert.”