JP Morgan Commodity Chief Blythe Masters leaves the sinking ship

Blythe Masters

A week ago we wrote: ‘While it has been public for a long time that i) JPM is eager to sell its physical commodities business and ii) the most likely buyer was little known Swiss-based Mercuria, there was nothing definitive released by JPM. Until moments ago, when Jamie Dimon formally announced that JPM is officially parting ways with the physical commodities business. But while contrary to previous expectations, following the sale JPM will still provide commercial gold vaulting operations around the world, it almost certainly means farewell to Blythe Masters.” Sure enough:



Farewell Blythe: we hope your replacement will be just as skilled in keeping the price of physical gold affordable for those of us who keep BTFD every single day.

* * *

And since it is nostalgia day, here is, from April 2012, “Blythe Masters On The Blogosphere, Silver Manipulation, Gold-Axed Clients And Doing The “Wrong” Thing”

In an article that is about three years overdue, “JPMorgan’s practices bring scrutiny” the FT finally takes aim at that other “vampire squid”, JP Morgan, which technically is incorrect: because if Goldman is a nimble and aggressive creature, with infinite tentacles in every governmental office, and unencumbered by massive liabilities, JPMorgan is just as connected, but unlike Goldman, it is a behemoth in every other possible capacity, and with its trillion in deposits, matched by tens of billions in bad loans, is a true Bank Holding Company. As such ‘Jabba the Hutt‘ would be a far more appropriate allegory to describe the the firm, whose reach, scope and scale lead the FT to classify it as “Three times a pallbearer, never a corpse.

As some may recall, back in October 2009, Zero Hedge did an exhaustive expose on the relationship between JPMorgan and the then version of MF Global, Lehman Brothers, whose perfectly functioning division, its North American Brokerage, ended up being scooped up by Barclays for pennies on the dollar. In the meantime, however, JPMorgan, with the backing of the Fed, proceeded to demand as much extra collateral for Lehman repo positions on hold with JP Morgan and the Tri-Party repo system, of which JPM is one of only two custodians, simply because it could, and because this is the easiest way for the bank that is even closer to the Fed than Goldman Sachs, to procure liquidity during times of broad distress. Such as when the money market is about to freeze to death. Since then, the topic of just how much JPMorgan may have ripped off the Lehman estate has escalated, and is set to be an epic showdown in the form of a lawsuit which “accuses JPMorgan of using its “life and death power as the brokerage firm’s primary clearing bank” to put a “financial gun” to its head and demand excess collateral.” And here is the kicker: “It claims JPMorgan abused its access to US government officials and then “accelerated Lehman’s free fall into bankruptcy”, hoovering up collateral to protect itself to the detriment of the firm and other eventual creditors.”

And therein lies the rub: because of all TBTF banks, JPMorgan is literally at the nexus of the entire $16 trillion shadow banking system, the very system that the Fed, much more than traditional liabilities, knows and uses constantly to hypothecate and rehypothecate assets, in essence creating money out of nothing, and which in conjunction with the other Tri-Party repo dealer, Bank of New York, as well as State Street, provides the US financial system with over $30 trillion in shadow credit money in the form of custodial assets – liquidity the bulk of which is not accounted for in any conventional monetary textbook or in any modern theory of money as it is such a novel development, yet which is still 100% fungible, and is by far the biggest secret of the American monetary system. It can be seen as summarized in the following graphic, first created by Citi’s Matt King back in the week before Lehman failed (full report can be read here, and should be by anyone who wishes to understand just what is truly going on behind the scenes in modern finance).

Custody Assets

Keep in mind, these are the same custody assets which, as explained previously in the case of MF Global, can be rehypothecated in serial fashion, creating a virtually infinite amount of “money” as long as everyone who is in on the fraud agrees to maintain the ponzi. Of course, if and when someone demands delivery of an underlying assets, the whole thing falls apart, which is what happened with AIG, with Lehman, and to a smaller degree, MF Global.

So what does all of this have to do with Blythe Masters?


At the end of the day, and as the Lehman lawsuit alleges, JPMorgan has intimate access to US government officials, and particularly the Federal Reserve, who will in turn take advantage of all JPM facilities, including its trading desk, to preserve the sanctity and foundations of the $30+ trillion in custodial assets and rehypothecation system, which further means that any potential implication that fiat money is impaired has to be wiped out. As it so happens, soaring prices of gold and silver are the primary if not only means left to express rising doubts in the future viability of the dollar, but in the viability of the fiat system in the first place. Which means that the Fed is, without a doubt, one of the biggest “clients” of the Fed in a symbiotic crosshold, where what the Fed wants, JPM has to execute and vice versa.

This brings us to the transcript of Blythe’s interview on CNBC, in which a primary topic, ironically, was whether or not Jamie Dimon’s firm manipulates the prices of precious metals, and particularly silver. What followed was the usual avalanche of platitudes that only a muppet can love:

  • “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.”


Ah yes, because JPMorgan never engages in “wrong” activites…

And while we admire JPM’s naive statement that it can triple its commodities revenues to $2.8 billion in 2011, while everyone else was losing money in the space, without taking prop bets, we just don’t buy it. Just as we didn’t buy Goldman’s explanation that its prop desk only accounted for 12% of that firm’s revenue, as Goldman told us directly (coupled with our challenge of prop trading in 2009, a pursuit taken on by Paul Volcker a few weeks later, resulting in the Volcker Rule). Needless to say, once the firm did break out its prop trading, it became quite clear just how huge of a factor prop trading truly was for Goldman. Because taken at face value, it would mean that all else equal, JPMorgan transacted at least 3 times more in flow in 2011 than in 2010. Yet, everyone knows that trading volumes in 2011 slumped relative to 2010. So no, Blythe, we appreciate your explanation, but we would appreciate the truth even more.

And yet there is one simple explanation that would make Blythe’s story 100% correct: would JPMorgan consider the Fed, whose interests in keeping the price of precious metals as low as possible, and are aligned with those of JPM for the reasons listed above, its client?

Because if so, then absolutely everything falls into place, as JPMorgan is merely the overt conduit by which the Fed, and specifically the New York Fed, conducts monetary policy in the commodities space, just as Brian Sack would conduct open market operations in the bond arena, and as the FRBNY uses, on occasion, Citadel, and its HFT expertise, to execute its discretionary stock trades (yes, we know about those too).

We would welcome Blythe’s comments on any and all of the topics listed above.

In the meantime, for those who missed it, here’s Blythe.

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