Banks Make A Bundle In FX in Latest Two Weeks Rumors Abound, Goldman's $200 Million Coup?

"One thing is for sure," says Credit Suisse's Francoise Soares-Kemp about the recent turmoil in the foreign exchange market, "banks made a lot of money." In fact, though bank officials refused to comment on the exact amount their institutions generated in the last two weeks, most confirmed that trading gains would likely soar to record levels for the third quarter as a result.

The market has been abuzz with reports of huge trading gains. Most notably, market sources report that Goldman Sachs was particularly well positioned for the fall out. "They were all over this mark/lira trade," one U.S. foreign exchange official says, to the tune of some $200 million. "Basically," this source explains, "they'd been selling lira against marks and Swiss and everything for weeks before the EMS deteriorated." Goldman Sachs officials declined to comment on the reports.

Some sources also note that Shearson Lehman Hutton racked up some pretty impressive gains on the turmoil. "They had some big positions on the right way in the British forwards and cleaned up big time," says one source close to the firm. Chris Deuters, global treasury director for Lehman Brothers, was in New York on Black Wednesday and confirms that the investment bank did very well, though he declined to comment further.

But, isolated reports aside, banks appear to have benefited almost universally. "Our foreign exchange unit has done spectacularly in the last two weeks," says one source at Continental Bank in Chicago, in remarks echoed by officials at banks across the country in the wake of the EMS crisis.

"Some big, big money went through, certainly some of the biggest money all year in terms of the P&L swings," says a managing director at a foreign exchange broker in New York. "I didn't really hear anybody complaining, other than the market conditions were horrible (see related article, this issue), but I think everybody was able to take money out of the market."

"People made some very big amounts of money off the central banks' back last week when things blew through," says a managing director at a foreign exchange broker in New York. "I think customer business was big, they made some good money on the margins, but in terms of the actual trading between banks, I think they probably gave some of it back," he says.

"The banks that had more customer business made the big money," he continues, "the banks who proprietarily positioned against it made the big money and the ones who were semi-clever about it made some big money, but the ones who sat there and tried to trade got their faces ripped off," he notes.

Market participants were delighted and largely in need of such a windfall, those surveyed say. "It was the shot in the arm the market needed," one observer notes. In an industry which has grown increasingly competitive and faces technological and structural changes that threaten to shrink it considerably, many note that it comes as a great relief. "It looks like traders are going to be keeping their jobs next year," says one observer.

It is expected to lift bonus payouts as well. "Traders who typically make in the 10's or 100's of thousands were making in the millions last week," one market observer says.

Reports, which surfaced last week in London that currency speculators made £2 billion on the bank of the Bank of England's open market intervention, were likely an exaggeration, market sources who asked to remain anonymous say. Some maintain that speculators may have made a more modest, though still stunning, $1 billion in sterling as a result of the turmoil and the Bank of England's attempts to prop up the currency.

The large U.K. clearing banks are each believed to have raked in as much as £100 million in the last two weeks, market observers say. Officials from those banks declined to comment. The large market makers, like Citibank and Chemical were also said to be big winners.

One source, who asked to remain anonymous, says that the Bank of England told the clearing banks not to hike mortgage rates, in essence tipping their hand that interest rates wouldn't stay that high. "It was an invitation to go short," this observer says. A Bank of England official denied those reports.