By Joseph A. Giannone and Megan Davies
NEW YORK (Reuters) - A senior Credit Suisse <CSGN.VX> commodity executive and a team of traders have left the bank to set up a hedge fund backed by Blackstone Group, the latest shake-up resulting from tough financial reform.
The departure by eight traders including George 'Beau' Taylor, a rainmaker renowned for making big bets on energy markets at a series of Wall Street firms, is the latest response to lawmakers in July passing new rules that essentially ban proprietary trading at U.S. banks.
The move may not leave a large hole at Credit Suisse, which had already begun scaling back on riskier trade and still has a sizeable customer-oriented venture together with global commodities trading giant Glencore. But it may unfetter Taylor, who has long advocated strategies focused on star traders.
Two people familiar with the matter said investment firm Blackstone Group <BX.N> will provide $150 million to back the as-yet unnamed fund started by Taylor, who was global head of commodities arbitrage trading at Credit Suisse, and top energy arbitrage trader Trevor Woods.
Credit Suisse and other investment banks with proprietary trading desks are taking a hard look at whether their trading businesses comply with the Volcker rule. While the rule applies only to banks whose operations have U.S. government backing, its repurcussions have been felt much more widely.
Credit Suisse's proprietary-trader ranks have thinned from as many as 250 to just 100, a person familiar with the firm told Reuters.
Credit Suisse and Blackstone declined to comment on the moves, first reported by the Wall Street Journal on its website on Thursday.
"Welcome to the new world of high regulation. A lot of these banks are getting out of the commodity business despite the fact that this is where they made a lot of their profits," said Phil Flynn, analyst at PFGBest Research in Chicago.
"The talent is going to go, creating a new type of animal."
The Journal reported that Taylor's new fund, as yet unnamed, will trade in commodities and energy markets and make macroeconomic bets in areas like currencies, citing people familiar with the new firm.
The Volcker rule is widely expected to shake loose a number of trading teams from banks, creating opportunities for investment firms like Blackstone.
Last month, JPMorgan Chase & Co <JPM.N> told its proprietary commodities traders that their desk will be shut down, as it looks to comply with new U.S. banking laws. Other proprietary desks will also be shut down over time, one source said at the time.
Individuals at Goldman Sachs Group Inc's <GS.N> proprietary trading desk are in talks with several groups to join them with the desk in limbo as the company works to comply with the new rules, sources have said.
This is the latest in a string of big moves for Taylor, who built his career as a natural gas trader at Morgan Stanley <MS.N> before starting up JP Morgan's <JPM.N.> commodities business in early 2005 as it sought to catch up with rivals.
His unit helped generate record profits for the bank, but he left for Credit Suisse within two years after taking JP Morgan on a risk-taking roller-coaster.
JP Morgan's maximum one-day commodities Value at Risk -- a measure of how much money the bank estimated it could lose in a single day's trade -- surged to a high of $128 million in 2006, more than triple the year's max for its foreign exchange trading, according to SEC filings.
While at JP Morgan, he told Reuters in a 2005 interview: "What we need to add (are) the proper rainmakers in the right seats to operate effectively".
At Credit Suisse, he rose to co-head of its global commodities business in 2007 with a focus on building up its proprietary trading business -- the same type of trade that regulators are now banning for investment banks.
Recently, however, the Swiss bank appeared to have been paring its risk, and reported a loss in its commodities trading in the first quarter.
Credit Suisse's average one-day VaR in commodity markets fell to 14 million Swiss frank in the second quarter of this year, down from 23 million a year ago, accounting for about 12 percent of its total risk. The total exposure is relatively modest compared to heavyweights like Goldman Sachs <GS.N>, which was $32 million in the second quarter.
(Reporting by Joseph A. Giannone, Megan Davies, Jonathan Leff, Eileen Moustakis: writing by Edward McAllister; Editing by Marguerita Choy and David Gregorio)