Abigail with attitude: Rise of opaque commodity houses

By:
Abigail Hofman
Published on:

Another banker whose surname begins with “M” hit the headlines in April. Blythe Masters, the veteran JPMorgan banker, left the US firm.

Forty-something, Blythe is part of the commodities clear-out on Wall Street. Some would say that is a harsh epitaph to a gilded career. Masters, after all, was the youngest female managing director at JPMorgan and made her name as one of the pioneers of the credit default swap market.

In 2006, Masters stepped up to run the bank’s commodities operation, which expanded with the Bear Stearns acquisition as well as with the purchase of Sempra Commodities from Royal Bank of Scotland in 2010. “We need to be active in the underlying physical commodity market in order to understand and make prices,” she claimed at the time.

But things have not gone according to plan. JPMorgan became embroiled in a messy dispute with the Federal Energy Regulatory Commission, which accused the firm of manipulating power markets in California. The bank paid $410 million last year to settle the charges, without admitting or denying wrongdoing. And now, this April, JPMorgan has sold its physical commodities unit to Mercuria, a Swiss-based trading house. Apparently, Masters is not joining Mercuria and will take some time away from the industry to consider other opportunities.

JPMorgan is not alone in dismantling its commodities franchise. Many of the big players are rethinking their presence in the physical commodity market. This is prompted by tighter regulation, capital constraints, lower profitability and hostile public opinion. Coalition, a consultancy, estimates the revenues of the top-10 banks in commodities fell last year to $6 billion from a record $14 billion in 2008.

As Deutsche, UBS and Morgan Stanley and others pull away, we may be witnessing a shift towards the privately owned, and intrinsically more opaque, commodities trading houses such as Trafigura, Louis Dreyfus and Vitol. These entities are augmenting their power base and consolidating control over the supply chain for agriculture, oil and metals. Can this really be a good thing for the long-term prosperity of global economies?