"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."
+------------------------------------------------------------------------------+
JPMorgan's Masters Says 'Don't Panic' as Commodities Unit Slips
2010-08-03 04:00:00.2 GMT
By Dawn Kopecki
Aug. 3 (Bloomberg) -- 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.
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 credit markets, a squeeze in interest rates and
lackluster commodities results.
"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.
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 recognizing 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, decisions 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, CEO 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.
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.
'Looking Like Gods'
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. The London team has 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 Robin Bhar, a metals and energy analyst at Credit
Agricole CIB in London.
Banks are moving into physical commodities as regulators
around the world impose new rules on derivative markets, making
them less attractive, Bahr 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.
'Gutsiest and Ballsiest'
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.
"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."
*T
For Related News and Information:
Top finance: FTOP <GO>
Top commodities: TOP CMD <GO
Top energy: ETOP <GO>
Government bailouts: WDCI BAILOUTS <GO>
JPMorgan's top management: JPM US <Equity> MGMT <GO>
*T
--Editors: Alec McCabe, David Scheer.
To contact the reporter on this story:
Dawn Kopecki in New York at +1-212-617-9115 or
dkopecki@bloomberg.com
To contact the editors responsible for this story:
Alec McCabe at +1-212-617-4175 or
amccabe@bloomberg.net.
