Blythe Masters, JPMorgan's Credit Derivatives Guru, Is Not Sorry

Blythe Masters is the most recognizable woman on Wall Street—and arguably its most resilient. At 44, she heads the largest commodities trading operation at the largest bank in the U.S., JPMorgan Chase (JPM). In the mid-1990s she developed and marketed credit derivatives, which rapidly became a new wonder of high finance. These contracts—in which sellers agree to compensate buyers if specified loans go into default—were supposed to disperse risk and spur additional lending. They did that, but in the hands of reckless buyers they also blew huge holes in balance sheets. In a September 2009 list of “100 to Blame” for the global economic mess, Vanity Fair ranked Masters No. 65, just behind convicted Ponzi mastermind Bernard Madoff. [...]

It’s turning out that 2013 is Masters’s rockiest year yet. In the spring the New York Times reported on a confidential memorandum in which investigators for the Federal Energy Regulatory Commission alleged that she made “false and misleading statements” under oath about electricity-trading improprieties. The FERC memo described “manipulative schemes” devised by Masters’s underlings that purportedly transferred $83 million from California and Michigan ratepayers to JPMorgan’s coffers. Masters pushed back hard, insisting within the bank and in discussions with FERC that she and her people had done nothing wrong, according to a person involved in internal bank communication. Chief Executive Officer Jamie Dimon stood behind her, and on July 30, JPMorgan settled the FERC case by agreeing to pay $410 million, without admitting or denying wrongdoing. Four days earlier, amid heightening federal scrutiny of Wall Street’s acquisition of power plants, metals warehouses, and other physical commodity operations, JPMorgan announced it would sell much of the business that Masters oversees. Masters declined to comment for this article. Through a spokeswoman, Dimon says, “Blythe is an outstanding individual and has done an impressive job at our firm over many years.” [...]

The recent FERC investigation of JPMorgan posed a more severe threat to Masters. The probe came to light in 2012, after the agency went to court seeking internal e-mails from the bank. A 70-page confidential notice FERC sent JPMorgan in March 2013 said the agency staff intended to recommend enforcement actions concerning a Houston-based power-trading unit the bank acquired when it picked up the pieces of Bear Stearns in 2008, the New York Times reported. The notice threatened to hold Masters and traders she supervised “individually liable” for eight “schemes” executed from September 2010 to June 2011. Allegedly, the JPMorgan traders misquoted energy prices, prompting state authorities in California and Michigan to make $83 million in excessive payments to the bank.2 “The accusations are reminiscent of the wrongdoing by Enron in 2000 and 2001,” says Wallace Turbeville, a former banker at Goldman Sachs who serves as a senior fellow at the research group Demos. Masters’s potential liability is related to “a systematic coverup,” the FERC investigators alleged. In response to the investigation, Masters “falsely” denied under oath any awareness of the problems, the FERC staff said.