The Legacy of JPMorgan's Blythe Masters

The Legacy of JPMorgan's Blythe Masters
Blythe Masters photographed in 2009
Photograph by Joshua Roberts/Bloomberg

Blythe Masters is a pioneering woman on Wall Street who may yet go on to discover the secret to eternal youth, but her legacy is already known: She helped invent credit derivatives, the financial instruments that caused the economy to explode in 2008.

As outlined in Gillian Tett’s book, Fool’s Gold, a group of math wizards that included Masters at JPMorgan in the mid-1990s set out to eliminate the risk of lending money by developing a new type of contract that banks could use to insure against the possibility that a loan wouldn’t be repaid. As Bloomberg Businessweek’s Paul M. Barrett put it in a review of Tett’s book, it worked like this:

“Bank A, worried about a loan it has made, strikes a derivative deal to pay a fee to Bank B in exchange for Bank B’s promise to compensate Bank A if the loan sours. Bank A sheds some of the uncertainty related to its loan and feels emboldened to make fresh loans. Bank B assumes some of the risk but immediately enjoys the fee income.”

These became known as “credit derivatives,” and they would soon be used to insure millions of low-quality mortgages, mixed into batches like cookie dough, divided into pieces, and sold to investors all around the world. When the real estate market crashed in 2007, so did all those derivatives, causing financial carnage too extensive to enumerate. Masters has spent the years since trying to distance herself from the damage her creation inadvertently caused. Is it her fault that her innovation was so badly misused and exploited by others?

Born in England, Masters joined JPMorgan in 1991 after graduating from Cambridge University with an economics degree. Her career at the bank followed a swift upward trajectory. She became the firm’s youngest managing director, at age 28, and moved to New York, taking a key role not only in developing credit derivatives but in selling them as a new concept to investors. One of her clients was Joseph Cassano, the head of AIG’s financial products unit. The strategy didn’t work out so well for AIG, which had insured billions of dollars in bad mortgage securities. In 2008 the company collapsed and was taken over by the U.S. government.

The Occupy Wall Street crowd may have been upset, but Masters had the support of JPMorgan Chase Chief Executive Officer Jamie Dimon, who had appointed her to run the bank’s global commodity trading operations in 2006. She was well-liked and admired for her intelligence, drive, and work ethic. “Jamie doesn’t have problems with strong women,” JPMorgan’s former international business head Heidi Miller told Barrett for a Bloomberg Businessweek profile. “It takes a lot of skill to get where [Masters] is as a woman.”

In 2012 it emerged that the Federal Energy Regulatory Commission was investigating JPMorgan’s trading in the natural gas markets. The New York Times reported on a confidential memo that named Masters as having made “false and misleading statements” under oath during an investigation into alleged deceptive practices in the energy markets. Both JPMorgan and Masters denied any wrongdoing. JPMorgan settled the case by agreeing to pay $410 million, without admitting or denying culpability, last summer.

A few weeks ago, JPMorgan announced that it would sell the physical commodities unit, which Masters oversees, to Mercuria Energy Group for $3.5 billion, potentially freeing itself of a long list of regulatory headaches. It means that while the bank may still engage in trading of commodities contracts for profit, it will no longer be in the business of owning actual oil, natural gas, and metals such as copper and steel as part of its trading strategy.

Masters was involved in negotiating the sale and agreed to stay with the bank for a few more months to help with the transition. Beyond that, her future plans are unknown.

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