Goldman Sachs (GS) FICC-trading income was an unexpectedly ugly blemish on what was already a poor Q2 earnings report. And while the FDIC-backed hedge fund initially blamed the decline on lower trading revenues, lack of volatility and depressed client activity...

... there was more to the story. The Wall Street Journal has uncovered what really happened: A $100 million bet on regional natural-gas prices gone awry after production problems at a local pipeline sent prices soaring, decimating Goldman’s position.

“Goldman wagered that gas prices in the Marcellus Shale in Ohio and Pennsylvania would rise with the construction of new pipelines to carry gas out of the region, said people familiar with the matter. Instead, prices there fell sharply in May and June as a key pipeline ran into problems.”

More specifically…

“Goldman’s key miscalculation last quarter was betting that natural-gas prices in the Marcellus Shale would rise relative to the national benchmark price in Louisiana known as the Henry Hub, the people familiar with the matter said.”

The quarter was the worst ever for the bank’s commodities unit, which, as WSJ notes, has been one of the firm’s most consistent profit centers, and a training ground for many of its top executives, including Chief Executive Lloyd Blankfein. The trading loss “extended a broader slump at a company once known as Wall Street’s savviest gambler.”

Goldman shares fell 2.6% on the day of the report, which analysts largely attributed to the miss in trading revenues, despite a stronger-than-expected bottom-line profit.

The investment bank has held on to its commodities-trading business even as most other American banks exited following the financial crisis. It is currently the seventh-largest market maker for natural gas in North America, larger than some energy giants like Exxon Mobil. According to WSJ, trading oil, metals and other physical commodities is increasingly dominated by smaller firms like Glencore PLC and Gunvor Group Ltd. that don’t face as much government regulation.

“The loss highlights the trade-offs Goldman made in sticking with the risky commodities-trading business, even as other large banks retreated following the financial crisis. Goldman is the seventh-biggest marketer of natural gas in North America, up from 13th in 2011, according to Natural Gas Intelligence—bigger than U.S. energy giants such as Exxon Mobil Corp. and Chesapeake Energy Corp. It has been the only U.S. bank in the top 20 since 2013, when J.P. Morgan Chase & Co. left the business.”

WSJ explains that Goldman’s position would've produced a profit if a pipeline being built to carry natural gas out of the Midwest had been completed on time. Instead, it faced multiple delays after a series of fluid spills and the accidental bulldozing of a historic Ohio home.

“Essentially, it was a bet on the timely completion of pipelines under construction to ferry a glut of gas out of the region.

But one of those pipelines ran into trouble this spring: the 713-mile Rover, which would transport gas from the Marcellus to the Midwest and beyond.

Its developer, Energy Transfer Partners, in February bulldozed a historic Ohio home without notifying regulators, and scrambled to finish clearing trees before the roosting season for a protected bat species. In May, federal regulators barred Energy Transfer from drilling on some segments of the route after a series of fluid spills.

The first leg of the pipeline, which had been set to come online in July, isn’t expected until at least September. Energy Transfer said it has “been working efficiently and nonstop to remediate” problems and expects to have the entire pipeline operational in January.”

In all likelihood, part of Goldman’s position was accumulated to offset the risk-management needs of the bank’s clients, WSJ reported. Goldman’s counterparties, the drillers operating in the Marcellus shale, reported strong gains in their derivatives books.

“Goldman was in part likely catering to gas producers in the region that wanted to lock in steadier revenue through swaps and other contracts. Many Marcellus drillers reported big gains in the value of their derivatives portfolios in the second quarter—meaning their trading partners lost money in that period, at least on paper.”

Of course, the bank’s executives would have you believe the loss was solely the result of Goldman fulfilling its duty to help its clients manage risk, and that the bank’s trades didn’t violate the Volcker Rule (a ban on proprietary trading that was part of Dodd-Frank). As WSJnotes, whether or not a trade violates the Volcker rule depends on who initiated it, how long the bank held the position, and myriad other factors.

But with President Trump in the White House and with future Fed Chairman Gary Cohn's only nemesis getting the boot earlier today, soon Goldman will be empowered to take much more trading risks with the explicit blessings of 1600 Pennsylvania.