Izabella Kaminska, Alphaville, Commodities and banks, a recap, here. Blythe Masters became head of Global Commodities at JP in 2006 and served as the head of Global Credit Portfolio and Credit Policy and Strategy until 2007. Probably a decent idea to watch what Blythe Masters does next in any game with asymmetric information distribution.
When 2008 hit, and most commodity curves went into super-contango, this allowed those banks with commodity businesses to very profitably enter the warehousing business — which was now a securitised path towards yield enhancement.
In this case contango yield positions ended up working very much like repo-to-maturity positions in the bond world. The idea was to buy the underlying commodity, warehouse it, forward sell it at a premium and then sit back and collect yield until it had to be delivered (at which point the trade could either be rolled on or liquidated). Providing your warehousing and financing costs didn’t eat into your forward carry profits — or that margin calls on your physical and futures legs didn’t become unsustainable — the trade was a lucrative one for as long as forward yields remained in contango, or moved into backwardation.
Jessica Silver-Greenberg, NYT, JPMorgan Executive May Escape Penalty, here.
Known for her “highly detail-oriented” style, Ms. Masters “kept close tabs on the California and Michigan power plants,” asking that she be directly briefed by her employees about “many of the bidding schemes under investigation,” agency investigators found in the March document. From September 2010 to June 2011, those traders devised eight separate “schemes” to sell energy at prices “calculated to falsely appear attractive” to state energy authorities.
As the bidding was under way, the investigators found, Ms. Masters received regular PowerPoint presentations and e-mails that referred to the strategies. In one January 2011 PowerPoint reviewed by Ms. Masters, the strategy, which promised to transform the plants losing money into profitable operations, appeared 51 times, according to the March regulatory document.
David Kocieniewski, NYT, A Shuffle of Aluminum, but to Banks, Pure Gold, here.
The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.
This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.