Macaskill on markets: Commodities chiefs keep their heads down

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

Isabelle Ealet heads commodities at Goldman Sachs, where she has risen on the back of the same principle that propelled former commodities traders Lloyd Blankfein and Gary Cohn to their current roles as group chief executive and president: making more money than other employees. Ealet, who is French, joined Goldman as an oil trader from Total in 1991, was made a partner in 2000 and at the end of 2008 was appointed to the bank’s management committee. During the banking crisis of 2008, when there was a sharp drop in the price of oil, Ealet presided over a mid-year doubling of Goldman’s commodities value at risk. Successful bets on oil price direction and exploitation of energy volatility help to explain her elevation to Goldman’s management committee. Goldman is rumoured to have generated $1 billion of commodities revenue in January 2009, which would have exploded any monthly record for a single firm. This did not signal a quadrupling of annual commodities revenue for the bank in 2009, but it will have done Ealet no harm in the continuing struggle for positioning in a firm that is dominated by traders.

Blythe Masters started her career in the commodities group at JPMorgan but took a circuitous route to her current role as head of the division. She is best known as one of the founders of the credit derivatives market, which she helped to develop and publicize from the late 1990s. JPMorgan dodged the worst of the effects of the downturn of the structured credit markets in 2007 and 2008, and Masters had moved to run commodities after a spell as CFO for the investment bank, but she still found herself briefly cast as one of the villains of the credit crisis when The Guardiannewspaper bizarrely dubbed her a "destroyer of worlds" for her role in developing synthetic securitization.

Masters was installed as head of commodities at JPMorgan at the end of 2006. Her appointment ruffled some feathers internally – energy trading head Beau Taylor resigned to join Credit Suisse soon after Masters was slotted in above him. Masters also rattled some of her rivals with an unusually aggressive hiring policy that helped to underpin industry-wide compensation levels for commodities specialists even during the worst of the investment banking downturn. One of her tasks has been to add some stability to commodities earning flows at JPMorgan, which had developed a reputation for erratic trading performance. The bank was the main victim of a plunge in the price of EU emissions allowances in 2006 and has experienced big swings in its oil trading results. Masters has long been tipped as a potential bank chief executive, in part because she is comfortable testifying before politicians and regulators and plays an industry-wide role on trade group boards. However, speculation about her future at JPMorgan developed after her long-time mentor, investment bank co-head Bill Winters, was fired last September by group chief executive Jamie Dimon.

Masters might be advised to hunker down for a period running a profitable division, if the example of former Morgan Stanley commodities head Neal Shear provides a lesson. Shear was rewarded for over 20 successful years as a commodity trader with a promotion to head of fixed income at the bank in 2005, then a $35 million pay package for 2006. But credit traders under his nominal watch racked up big losses in 2007, resulting in a demotion for him and eventual departure from the firm in 2008.

Benoit de Vitry, the architect of the successful bid by Barclays Capital to challenge the commodities duopoly enjoyed by Goldman Sachs and Morgan Stanley, has retained control of his power base at the bank. He added emerging markets and quantitative analytics group responsibility to a role overseeing all European trading, but has not given up his position as global commodities head.

The current managers of the leading bank commodities groups try to avoid projecting the swashbuckling trading image that has become associated with the sector. They are career bankers with an interest in protecting the reputations of their employers.

Andrew Hall, the British head of Citi’s recently sold Phibro unit, seems refreshingly unconcerned with these banking proprieties. He presents a near-caricature of a successful trader, complete with a castle in Germany, a history of antagonizing his neighbours in Connecticut with his deployment of oversized modern sculptures and a penchant for sponsoring arthouse movies.

But while some flamboyant commodities traders might feel more comfortable with independent firms in the new era of increased scrutiny of bank compensation, there is still plenty of room for risk-taking dealers at banks.

The only model that has provided success on any scale in commodities for banks is an old-fashioned one that involves significant proprietary exposure, whether in the form of plant purchases, oil storage, derivatives trading or simple directional bets.