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“We made an error of judgment. Frankly, we made a bit of a rookie error. We got overexposed in the market and made ourselves vulnerable to a squeeze.” Blythe Masters. August, 2010.


Blythe Masters, JPMorgan Chase & Co.’s head of commodities, sought to reassure her team on an internal conference call after “extremely difficult” dismissals, defections and a first half in which some results were as much as 20 percent below expectations.

“Don’t panic,” she said in summing up the 35-minute call, a recording of which was obtained by Bloomberg News. “No one’s going to get screwed. We’re not going to do crazy things on compensation at the end of the year.”

Masters, who was named to run the business in late 2006, said the bank began dismissals on July 21, a day before the call, to trim overlap after buying parts of RBS Sempra Commodities LLP. The bank cut less than 10 percent of the combined front office, even as the oil unit lost “key people” who needed to be replaced, she said. She was discussing results with top executives after “we made a bit of a rookie error” that left the firm “vulnerable to a squeeze,” she said.

The 41-year-old banker, who helped develop credit-default swaps while at JPMorgan in the 1990s, delivered her talk from a conference room in New York, where the bank is based, less than a month after the firm closed its $1.7 billion RBS Sempra purchase. The deal almost doubled the number of corporate clients the bank can serve for commodities, Jes Staley, Chief Executive Officer of JPMorgan’s investment bank, said in February.

‘Loose Lips’

Commodities trading, the target of new rules from the regulators, can be volatile and unpredictable — “a dangerous business,” as Goldman Sachs Group Inc. Chief Financial Officer David Viniar put it three years ago. Hedge fund Amaranth Advisors LLC collapsed in 2006 under $6.6 billion of losses after wrong-way bets on natural gas and later sued JPMorgan, its broker at the time, for derailing a last-minute rescue by Citadel Investment Group LLC.

“It is a very, very difficult thing to trade for a living,” Masters said. “And it is very difficult to put on risk and try to generate results for the company that you work for in a difficult trading market where chitchats and loose lips and talk leads to widespread dissemination of both fact and rumor.”

JPMorgan spokesman Brian Marchiony declined to comment on the call and didn’t make Masters available for comment. JPMorgan’s investment bank, which houses the commodities division, employed 26,279 people as of June 30, according to the company. The firm doesn’t break out the number of employees within commodities.

‘Significantly Below Plan’

JPMorgan’s fixed-income revenue, which includes commodities, fell 27.7 percent year-over-year to $3.6 billion in the second quarter, compared with $4.9 billion a year earlier and $5.5 billion in the first quarter. The company attributed the drop to poor results in the credit and commodities markets, and a squeeze in interest rates.

“If you look at our overall client-driven results across the entire franchise over the first half of the year, the printed number leaves us 20 percent below plan,” she said on the call.

She said she hopes the second quarter “proves to be a record bad quarter for us in that there’s nothing but upside from here,” she said. “The outcome was both significantly below plan, significantly below last quarter and significantly below the year-ago linked quarter,” she said. The unit would have been in position to meet goals for the first half except for $83 million in revenue that the company deferred booking during the first six months “for a variety of sensible reasons.”

Competitors Are ‘Scared’

Masters said the market is still “choppy” and that competitors who exited the market have returned.

“We’ve got too many banks chasing too little volume and margins have compressed,” she said.

Even so, competitors are “scared shitless of us,” said Masters, who is based in New York and joined the bank in 1991 after internships that began in 1987. “They’d better be, because this is a platform that’s going to win.”

The layoffs, split about evenly between JPMorgan and RBS Sempra, weren’t evidence of “panicking” by the bank, said Masters, who received a bachelor’s degree in economics from Cambridge University’s Trinity College, which says it has produced 32 Nobel Prize winners.

Those who left of their own accord mostly came from RBS Sempra, Masters said, and were mainly in “global physical oil.” Many of them joined smaller commodity-trading firms with less capital, choices she characterized as “very interesting career decisions.” Masters didn’t name any of them.

Not ‘Running Away’

“You should think of this as business as usual and definitely not a reaction to losses in coal, or anything like that,” she said. “It’s not because we are panicking. It is not because we are changing our minds, backing off, backing out, backing down, running away, none of the above.”

Masters said had she spent the previous several days in meetings with Staley, Chief Executive Officer Jamie Dimon and the investment bank’s operating committee and was preparing a “deep dive” with JPMorgan’s board and Chief Financial Officer Doug Braunstein.

“When you have a bad quarter or a bad year, you should expect to spend a lot of time with senior management explaining yourself,” she said. “I have worked very hard, number 1, to own responsibility for what went on and to acknowledge it and not excuse it. We made an error of judgment. Frankly, we made a bit of a rookie error. We got overexposed in the market and made ourselves vulnerable to a squeeze.

‘Ain’t That Bad’

‘‘But if you take that out and recognize that we’re not going to allow that to happen to ourselves again, the rest of the story really ain’t that bad,” she said. “In fact, if you look through it all, it’s extraordinarily encouraging.”

Coal derivatives trader Chan Bhima made an error of judgment, not of character, in “taking a risk on our behalf,” she said. Coal prices plunged 24 percent from January through March and then surged 35 percent through June. Marchiony, the bank spokesman, said Bhima wasn’t available for comment.

The company took an oversized position both relative to their fledgling operation and relative to the market, Masters said. The error cost the company as much as $250 million, the New York Post reported June 8, without saying where it got the information.

‘Bigger Than Market’

The loss was “larger than appropriate for a relatively fledging business within the fabric of the overall commodities franchise,” said Masters, who didn’t specify the size of the loss.

JPMorgan “became bigger than the market,” said Robin Bhar, a metals and energy analyst at Credit Agricole CIB in London. “They were the coal market,” Bhar said, adding, “these mistakes could happen again.”

Masters chastised employees after news of Bhima’s wrong-way bet leaked to the media.

“I don’t want us talking to the press,” she said. “I don’t want us talking to the outside world, neither about successes nor about failures. It’s not what top-class businesses do to themselves. This constitutes treading on our own toe and then kicking ourselves in our own shin in recompense for that.”

Even if trading conditions don’t improve, the commodities unit could produce “a perfectly respectable return on equity, net income and overhead ratio,” she said.

“All it’s going to take is a little pop to the upside,” she said. “We could be producing a 30 to 35 percent ROE and looking like gods,” she said, referring to return on equity.

Jewel in Crown

JPMorgan missed out on opportunities in recent years, such as when oil prices surged in 2008, because it lacked the infrastructure to store and ship oil and other commodities, Masters said. JPMorgan has been expanding its commodities operations ever since, buying Bear Stearns Cos.’ energy business in 2008 and UBS AG’s global agriculture and Canadian commodities divisions, a purchase it completed in 2009. In March 2008, the bank bought U.K.-based ClimateCare, which helps clients reduce carbon emissions and trades reduction credits.

The London team has also since devised a way to provide “synthetic storage” and the company now has physical assets “at our fingertips” to store and ship commodities like oil and metals across the globe, she said.

RBS Sempra brought JPMorgan the Henry Bath metals warehousing unit, “one of the jewels in the crown” of the deal, said Bhar of Credit Agricole.

Restructuring Contracts

Banks are moving into physical commodities as regulators globally impose new rules on derivative markets, making them less attractive, Bhar said. JPMorgan could profit by renting the warehouses to traders betting on different metals forward contracts, he said. “Potentially there is a lot of money to be made,” Bhar said.

In the year’s first half, JPMorgan completed several large strategic structured transactions that have been in the works for several years, Masters said, without identifying them. They include storage transportation, long-dated power sales, commodity-linked financing, new JPMorgan index products and carbon derivatives, she said.

The company also provides commodities services to the airlines, a customer base it didn’t have in 2008, Masters said. Goldman Sachs Group Inc. and Morgan Stanley were able to make “a tremendous amount of money” as markets fell by restructuring their clients’ contracts, she said.

‘Gutsiest and Ballsiest’

“If that were to happen now going forward from here, we would be just as well positioned as the next player in terms of having opportunities to restructure business,” Masters said.

Although JPMorgan’s per-client revenue has dropped, the bank is doing business with more clients — 1,000 through the first half, compared with 1,200 for all of last year, Masters said. Once the merger with RBS Sempra is completed, JPMorgan will add about 1,100 entirely new clients as well as 1,000 existing clients who weren’t previously using its commodities services, she said.

“Every one of you needs to get away from the last six months, myself included, of pain associated with mergers and integration and the difficult market conditions, the losses that we’ve encountered, the nonsense that’s been in the newspapers,” Masters said. “Remember that you work for a business that is one of the boldest and gutsiest and ballsiest businesses that I’ve ever had the pleasure and privilege to work with.”

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