From the article:
“In retrospect we can understand why the inventor of the Credit Default Swap would only dare go out in public with a couple of armed gorillas covering her back.”
– Blythe Masters Under Investigation By Federal Prosecutors (ZeroHedge, April 10, 2014):
There is much new info in the just released Bloomberg profile on the infamous ex-JPMorganite Blythe Masters, among which the disclosure that she had made it clear that she had wanted to go along with the disposable JPM physical commodities unit (which as was reported recently, was sold to Swiss commodities giant Mercuria) and “and continue as the group’s chief”, a plan which did not work out as she had planned since she has no plans to “join the unit’s purchaser” (although joining Glencore is another matter entirely, and one which looks increasingly plausible) but what we find most striking is the following revelation: “Masters is under investigation by federal prosecutors in Manhattan, according to two people with knowledge of the matter. That probe was opened following a settlement with regulators that alleged JPMorgan manipulated power markets in the Midwest and California.”
This is somewhat ironic because it was none other than Zero Hedge which asked nearly a year ago if “JPMorgan’s “Enron” Will Be The End Of Blythe Masters?” Suddenly, the answer appears to be yes.
More from Bloomberg:
The existence of a probe surrounding JPMorgan’s role in the energy market has been known since August, when it was reported by several news organizations, including Bloomberg News, and subsequently disclosed by the New York-based bank. What wasn’t known was prosecutors’ interest in Masters.
We also learn that in addition to Mercuria, two other bidders for the JPM unit were Blackstone and Macquarie:
Blackstone appeared to have an inside track on Mercuria and Macquarie in the final round of bidding, according to three people involved in the process. The buyout firm had a significant banking relationship with JPMorgan through its history of acquisitions.
Its limited presence in commodities and energy trading also made it the most likely candidate to buy JPMorgan’s business in its entirety and bring Masters and her team on board to run it, the people said.
it is here that Masters’ legal liabilities reared their, or technically her, ugly head:
As the January deadline for bids approached, the question of Masters’s legal exposure to the federal investigation remained, according to the people involved in the process.
JPMorgan didn’t provide a level of detail about the investigation that was satisfactory to some of the bidders, according to the people familiar with the process. Masters dismissed any concerns about the inquiry, one person said.
“We didn’t receive any complaints during the process,” said Marchiony, the bank spokesman, about information on the lingering investigation.
Blackstone executives wondered whether there could be more to it than the bank was letting on, said one of the people. Given that Masters might end up as the public face of Blackstone’s commodities business, they were wary, this person said.
Macquarie also was wary about potential legal issues, said one of the people. The bank didn’t want any unforeseen developments to harm its reputation in the U.S. energy markets.
Mercuria’s executives were less concerned about the legal exposure, according to a person familiar with its bid. The firm, started in 2004 by two former Goldman Sachs Group Inc. traders, had a minimal presence in U.S. power and gas markets, and it could run JPMorgan’s business without Masters.
Could it perhaps be because Swiss regulators are even more clueless and coopted than their US peers? Considering the amount of Libor manipulators that ended up in Swiss asset managers the answer is a resounding yes. That said, even Mercuria appears to have nixed the idea of Blythe coming on board as part of the commodities group package.
This is not surprising. What is however, is just how concerned Blythe was about her own security.
During a due diligence period from mid-December through mid-January, a handful of bidders emerged. The most serious were Mercuria, New York-based buyout firm Blackstone Group LP (BX) and Macquarie Group Ltd. (MQG), an Australian bank. A fourth contender, Grupo BTG Pactual of Brazil, dropped out in part because of the extra capital Brazilian regulators would require it to hold, a person said at the time.
Masters met with senior executives from the three final bidders in New York and elsewhere, according to people involved in the process. Her arrival at some of the meetings, with an escort of bodyguards, left an impression on her unit’s suitors, said two of the people.
Now why would one go to a diligence meeting with bodyguards – it is almost as if she was convinced someone meant her harm regardless of the circumstances. Whyever could that be? Certainly not due to the way her group conducted itself full of “integrity” and abidance by the rules. Just recall from her CNBC interview in April 2012, in which she made the following on the record disclosures:
- JPM’s commodities business is not about betting on commodity prices but about assisting clients”… “it’s about assisting clients in executing, managing, their risks and ensuring access to capital so they can make the kind of large long-term investments that are needed in the long run to expand the supply of commodities”…
- “There’s been a tremendous amount of speculation particularly in the blogosphere on this topic. I think the challenge is it represents a misunderstanding as the nature of our business. As i mentioned earlier, our business is a client-driven business where we execute on behalf of clients to achieve their financial and risk management objectives. The challenge is that commentators don’t see that. So to give you a specific example, we store significant amount of commodities, for example, silver, on behalf of customers we operate vaults in New York City, Singapore and in London. And often when customers have that metal stored in our facilities, they hedge it on a forward basis through JPMorgan who in turn hedges itself in the commodity markets. If you see only the hedges and our activity in the futures market, but you aren’t aware of the underlying client position that we’re hedging, that would suggest inaccurately that we’re running a large directional position. In fact that’s not the case at all.
- “We have offsetting positions. We have no stake in whether prices rise or decline. Rather we’re running a flat or relatively flat matched book.
- “What is commonly out there is that JPMorgan is manipulating the metals market. It’s not part of our business model. it would be wrong and we don’t do it.”
Of course, if some or all of the above bullet points were flat our lies, one can understand why Blythe could be concerned about her personal security. Which in the aftermath of the London Whale fiasco in which we learned that JPM mostly exceled in lying about everything, appears to have been precisely the case.
In retrospect we can understand why the inventor of the Credit Default Swap would only dare go out in public with a couple of armed gorillas covering her back.