JPMorgan commodities sale: Bambi, Godzilla and Blythe

By:
Jon Macaskill
Published on:

Will Blythe join Bambi and Godzilla at Mercuria to create a new commodities trading dream team? The fate of Blythe Masters, head of commodities at JPMorgan, is in the spotlight now that the sale of the bank’s physical commodities business to Mercuria for $3.5 billion has been confirmed.

If she does follow the physical assets to Mercuria, Masters will work for Marco Dunand and Daniel Jaeggi, the two former oil traders who earned the nicknames Bambi and Godzilla for a contrasting good-cop/bad-cop approach to dealing when they worked together at Goldman Sachs and elsewhere before setting up their own independent trading firm in 2004.

Jaeggi, who won the Godzilla billing for his aggression, is reportedly a keen equestrian. This gives him a common interest with Masters, who is an experienced horse rider. Masters also shares Jaeggi’s reputation for being extremely assertive, which has given her a high profile that has been a double-edged sword, both for her own progress and in terms of her value to her long-time employer, JPMorgan.

She first became widely known as head of marketing for credit derivatives when JPMorgan bankers were at the forefront of development of a market for synthetic trading of credit. A product that started as a way to offload bank exposure and improve liquidity soon metastasized into a Frankenstein’s monster that was widely blamed for exacerbating the credit crisis of 2008. That turned Masters’ reputation as a credit derivatives evangelist into a liability, even though JPMorgan itself was able to avoid losses on the scale of firms such as AIG, Merrill Lynch, Morgan Stanley and UBS.

Masters had already moved on, after a stint as CFO of JPMorgan’s investment bank, to a role as global head of commodities with a mandate to match or exceed the earnings generated by Goldman Sachs and Morgan Stanley, the two traditional bank leaders in commodity trading.

Once again she proved to be a magnet for attention and controversy. JPMorgan’s drive into commodities featured some quick early wins after Masters took the reins in 2007. The bank was already established as a commodity derivatives dealer and had deployed its trademark combination of financing firepower and an ability to value multiple positions to take over the books of failed energy hedge fund Amaranth for a substantial trading profit in 2006.

Masters led a drive to build scale in all large existing commodities markets such as oil and gas and to supercharge the development of new areas such as coal trading. Trading books and staff were inherited from Bear Stearns and acquired from RBS Sempra as part of this expansionary push, and dealing lines were increased for many businesses.

This led to a sharp increase in commodity-trading volumes and revenues at JPMorgan, although also to some trading hiccups. These included a loss of around $130 million on coal that attracted attention not because it had much of an impact on JPMorgan’s bottom line, but because it became obvious that the bank was running big directional positions in a market that was in its infancy.

This approach to rapid growth might seem to tailor Masters perfectly for a senior role at Mercuria. The Geneva-based firm has joined in the explosion in scale of independent commodity traders over the past decade, but it is still smaller than rivals such as Glencore, which has trading revenues roughly twice those of Mercuria, and Vitol, which is around three times as large. And independent commodity trading firms have historically shown few signs of squeamishness about the reputational issues that have become a growing concern for JPMorgan’s top management.

Glencore was founded by Marc Rich, a US tax exile who based the firm in Switzerland in part because he was accused of breaching oil sanctions on Iran; other commodity traders have seemed equally unconcerned about the James Bond villain image that they sometimes project.

But JPMorgan did not decide to scale back in commodities purely because of the increase in reputational issues affecting the bank while the Masters plan was being implemented, or because of the rise in capital costs for trading positions under new regulation.

There were also questions over whether or not the bank could make a sustainable profit from a big commodities trading operation, even before regulatory costs increased.

Masters certainly delivered revenue, although JPMorgan, like most banks, does not disclose how much commodities contribute to its overall fixed-income franchise. It is not clear how much this outpaced a substantial cost base, however. Commodities heads at rival banks have done back-of-the-envelope estimates of the costs associated with JPMorgan’s franchise, based on their knowledge of the terms offered to some staff hired under Masters, the number of front-office employees and the revenues in different sectors in recent years. They have come to the conclusion that it is unlikely that the bank made much profit, unless it was via undisclosed directional bets of the type that bankers including Masters now disavow.

And the revenue side of the equation has been under pressure recently. Coalition, a consultancy firm, estimates that the top-10 investment banks generated just $4.5 billion in commodity revenue last year. That might be a slight undercount, depending on how related banking revenue is measured, but it is still a far cry from a few years ago, when leading firms such as Goldman, Morgan Stanley, Barclays and latterly JPMorgan each comfortably generated in excess of $1 billion a year from commodities.