Tuesday, October 12, 2010

Chase's Commodities Chief Blythe Masters & Her Bad Bets

If you want to understand why it's so dangerous to allow US commercial banks with access to federal deposit insurance to engage in proprietary trading, you need look no further than this past weekend's article in the Wall Street Journal describing Chase commodities chief Blythe Masters' missteps, and the bank's continued support of her activities.

The Journal piece observes,

"One of J.P. Morgan's most powerful executives, the 41-year-old Ms. Masters is charged with turning around the commodities operation and building it into the biggest on Wall Street. And though the blunt executive has been given many resources, her division recently has suffered defections and miscues while falling far short of expectations in 2010.

Barring a remarkable turnaround, commodities will end the year far behind a $1.78 billion revenue goal. Part of the problem was a loss on a bad coal bet in the second quarter. The third quarter improved, with a gain of about $154 million in revenue through Sept. 30. But commodities is up only about $189 million in revenue for the year, said a person familiar with the results.

That disappointing performance comes after a costly and bold effort to build the commodities division, one of the bank's biggest bets. Since 2008, the bank spent more than $2 billion buying commodities-trading operations, including Bear Stearns, parts of UBS Commodities and, most recently, assets from RBS Sempra Commodities in 2010.

The bank's push into commodities roiled a lucrative sector dominated by Goldman Sachs Group Inc. and Morgan Stanley as J.P. Morgan poached executives from rivals and boosted its work force from roughly 125 in 2006 to 1,800 today. That makes the commodities desk the biggest on Wall Street that trades everything from power to silver.

Yet it remains trailing its top two rivals in market share. According to people familiar with the situation, the unit has duplicative systems and overlapping technical and support staff, despite 100 job cuts this year. Company executives, acknowledging the problems, are addressing them, the people say.

On a July 22 conference call with her group, she speculated about whether competitors had planted stories about the business and encouraged her employees to speak up if they knew the source, according to a recording of the call. She assured employees on the call that rivals are "scared s—less of us" and promised that "we are going to build and finish building the No. 1 commodities-trading franchise on the planet."

When she took over the commodities business in 2006, Ms. Masters clashed with several high-profile traders who weren't as enthusiastic about their new boss and where she wanted to take the unit, people familiar with the matter said."

Scary, isn't it? your tax dollars are basically underwriting Masters' risky plan to build Chase into a pre-eminent commodities trading presence. Competing with notionally-commercial, ex-investment banks Goldman Sachs and Morgan Stanley.
Doesn't this begin to smack of the mortgage financing bubble all over again?
Let's review the situation. Commodities are hot in part because of globally-competitive sovereign currency devaluations. As currencies are depreciated by their own governments, prices of commodities rise. Many central banks, notably the US Fed, claim that inflation is running below targets. However, as CNBC's Rick Santelli has explained earlier this year, and, again, recently, commodity prices are heading out of sight. Surely, these prices are a type of inflation. Just not what the Fed wants to measure and observe, because, well, it's an inconvenient exception to the Fed's chosen story line.
Of course, eventually, commodities of the non-investing sort, such as agricultural, steel and the like, depend upon demand. And if global economic demand isn't sustained, recent commodity price rises will turn out to be a bubble.
My point is, it's not such a simple, one-way bet. There's risk. But Chase's Masters is moving full speed ahead to become a major, risk-taking player in this always-risky market.
Does this sound like an activity which you want your federally-insured bank to be ramping up?

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