Even in this TARP and Fed supported, “heads I win, tails you lose” of the banking industry, the “you live by the sword, you die by the sword” element has not been entirely removed.
Witness the schadenfreude-gratifying distress at JP Morgan’s commodities unit, headed by Blythe Masters (a supersaleswoman who has already gotten a fair bit of profile as one of the moving forces behind the credit default swaps business). Less than stellar results of an internal unit seldom make for Bloomberg coverage, but evidently layoffs (which appear in part the result of an ill timed and perhaps also badly-executed acquisition, the acquisition of $1.7 billion purchase of RBS Sempra) and revenue shortfalls have led to juicy, unflattering rumors.
The business also appears to contradict the usual notion that low interest rates help raise all boats. Low interest rates reduce the cost of speculation, and aside from wrong-footing some market bets, a second cause of distress for the JPM unit appears to be spread compression, the result of too many dealers (and dealer capital) ready to act on behalf of (evidently) a less than commensurate level of end customer business. Indeed, the article indicates specifically that JPM’s coal trading unit, which suffered a big loss, was a disproportionately large player relative to the size of the market.
Of course, this begs the question of why government-backstopped firms are permitted to trade commodities at all….
From Bloomberg (hat tip reader Scott):
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….
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….
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…
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.”
The article indicates JPM lost some key members of the RBS Sempra oil team. It also makes for intriguing reading, the quotes are so exact and lengthy (with a lot of rah rah corporate speak) because a JPM employee recorded and leaked the entire call to Bloomberg, which is particularly amusing given that Masters also chides employees for talking to the media.