When JPMorgan Chase & Co. (JPM:US) set out to sell its powerhouse commodities unit, the group’s boss, Blythe Masters, made it clear that she wanted to go along with the business and continue as its chief.
The strategy, as described by a person directly involved, didn’t work out. After a $3.5 billion sale was announced last month, Masters, 45, one of the most senior women on Wall Street, announced her departure from JPMorgan. Masters told others that she would no longer have the same standing in the executive ranks after the sale, according to two people involved in the auction process. She also had no plans to join the unit’s purchaser, Geneva-based Mercuria Energy Group Ltd.
Her future may be cloudy for another reason. Masters is under investigation by federal prosecutors in Manhattan, according to two people with knowledge of the matter. That probe was opened following a settlement with regulators that alleged JPMorgan manipulated power markets in the Midwest and California, the people said. JPMorgan settled without admitting or denying wrongdoing in the regulatory matter, and there’s no sign the remaining probe has advanced beyond a preliminary stage.
The existence of a probe surrounding JPMorgan’s role in the energy market has been known since August, when it was reported by several news organizations, including Bloomberg News, and subsequently disclosed by the New York-based bank. What wasn’t known was prosecutors’ interest in Masters.
The series of events since last summer is a sharp reversal for Masters, who shot to the top of JPMorgan in a 27-year career at the investment bank that began with a stint as an intern. She became a managing director at age 28.
Brian Marchiony, a JPMorgan spokesman, declined to provide information on the inquiry or details of the bidding process, much of which is covered by confidentiality agreements. He didn’t make Masters available for comment, and an attorney representing her didn’t provide additional information.
Someone close to Masters said that she set her own employment aside during the unit’s auction to avoid even the perception of a conflict, adding that she advocated for a deal that would protect the most jobs in her unit.
She informed “us of her intention to leave the firm, take some well-deserved time off and consider future opportunities,” Chief Executive Officer Jamie Dimon and investment-banking head Daniel Pinto said in a memo on April 2. Dimon, who has stood behind Masters over the years, described her as a leader in the industry and a mentor and role model for colleagues at the firm.
Masters rose to prominence in the 1990s after helping develop credit-default swaps, the derivatives that enable investors to hedge risks on bonds. She ran several credit desks and became the investment bank’s chief financial officer before taking over its commodities business in 2007.
Over several years, she built the group into a dominant player in the energy-trading business, enhancing her reputation in banking circles. A person familiar with the sale process said she was paid $10 million to $12 million last year. That amount couldn’t be independently verified.
In 2008, Masters’s role with credit-default swaps came back to haunt her, as firms’ overuse of the hedging tools magnified damage wrought in the financial crisis. Over a period of months, she went from being described as a wunderkind to being called “the woman who built financial ‘weapon of mass destruction’” in a Guardian headline.
Dimon, 58, put Masters in charge of regulatory affairs for the corporate and investment bank in 2012, in addition to her duties as head of the commodities unit. In February, Masters withdrew from an advisory committee of the U.S. Commodity Futures Trading Commission a day after her appointment to the panel was disclosed. A person close to the bank told Bloomberg News at the time that Masters stepped down because the company’s sale of its commodities unit would keep her occupied.
JPMorgan, the largest U.S. bank, agreed in July to pay $410 million to settle Federal Energy Regulatory Commission allegations that the firm manipulated power markets, enriching itself at the expense of consumers from 2010 to 2012. Bidding strategies at issue were developed by a Houston-based unit then run by Francis Dunleavy, who was one of eight people who reported directly to Masters. The settlement released JPMorgan and employees including Masters from future FERC enforcement actions in the case.
JPMorgan announced in July it was exploring a sale of its physical commodities business, as regulators and lawmakers expressed concern that banks handling raw materials and energy could manipulate prices or endanger the financial system.
During a due diligence period from mid-December through mid-January, a handful of bidders emerged. The most serious were Mercuria, New York-based buyout firm Blackstone Group LP (BX:US) and Macquarie Group Ltd. (MQG), an Australian bank. A fourth contender, Grupo BTG Pactual of Brazil, dropped out in part because of the extra capital Brazilian regulators would require it to hold, a person said at the time.
Masters met with senior executives from the three final bidders in New York and elsewhere, according to people involved in the process. Her arrival at some of the meetings, with an escort of bodyguards, left an impression on her unit’s suitors, said two of the people.
The commodities chief was careful not to put her own interests ahead of the bank’s, yet she let it be known she would be available to join the future acquirer, according to the people.
Included in the binder that JPMorgan distributed to some of the bidders was an organizational chart titled, “Possible NewCo management team.”
The chart listed the executive jobs that would exist after the sale of the bank’s commodities business, such as the president and chief operating officer. All remained blank, except the box for the chief executive officer. That contained Masters’s name.
Blackstone appeared to have an inside track on Mercuria and Macquarie in the final round of bidding, according to three people involved in the process. The buyout firm had a significant banking relationship with JPMorgan through its history of acquisitions.
Its limited presence in commodities and energy trading also made it the most likely candidate to buy JPMorgan’s business in its entirety and bring Masters and her team on board to run it, the people said.
The three finalists engaged in a delicate dance about Masters’s future role, according to the people involved in the process.
Blackstone executives were open about their interest in keeping Masters in charge of the group, said one of the people. It was not clear whether they wanted her for her expertise or were trying to use the possibility of employment to gain an advantage over their rivals, the person said.
Macquarie and Mercuria didn’t need Masters to run the acquired business, according to the people involved in the process. One of the people involved said the subject of Masters’s future had to be handled carefully, so as to avoid even the appearance of a conflict.
Christine Anderson, a Blackstone spokeswoman, declined to comment, as did Stephen Yan at Macquarie and Benoit Lioud at Mercuria.
As the January deadline for bids approached, the question of Masters’s legal exposure to the federal investigation remained, according to the people involved in the process.
JPMorgan didn’t provide a level of detail about the investigation that was satisfactory to some of the bidders, according to the people familiar with the process. Masters dismissed any concerns about the inquiry, one person said.
“We didn’t receive any complaints during the process,” said Marchiony, the bank spokesman, about information on the lingering investigation.
Blackstone executives wondered whether there could be more to it than the bank was letting on, said one of the people. Given that Masters might end up as the public face of Blackstone’s commodities business, they were wary, this person said.
Macquarie also was wary about potential legal issues, said one of the people. The bank didn’t want any unforeseen developments to harm its reputation in the U.S. energy markets.
Mercuria’s executives were less concerned about the legal exposure, according to a person familiar with its bid. The firm, started in 2004 by two former Goldman Sachs Group Inc. traders, had a minimal presence in U.S. power and gas markets, and it could run JPMorgan’s business without Masters.
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