Manuel Balce Ceneta/Associated PressBlythe Masters of JPMorgan Chase in 2009. Regulators singled her out for criticism in a review of the bank’s energy trading tactics.It started with a summer internship in London in 1987, when Blythe Masters first encountered derivatives. In the years since, she rose through the ranks at JPMorgan Chase to become one of the most powerful executives on Wall Street.
But today, Ms. Masters, 44, faces a possible regulatory crackdown. The enforcement staff of the Federal Energy Regulatory Commission, which oversees the nation’s energy markets, has found that Ms. Masters gave “false and misleading statements” under oath about her awareness of problematic activities by a group of energy traders in Houston, The New York Times reported on Friday.
If the regulator proceeds with an action based on the findings, it could fine JPMorgan and Ms. Masters, the article said. A spokesman for the bank, Kristin Lemkau, said: “We strongly dispute that Blythe Masters or any employee lied or acted inappropriately in this matter.”
Ms. Masters, the head of JPMorgan’s commodities business, is known as a pioneer in the use of credit derivatives, financial products that played a starring role in the 2008 financial crisis. Her success at JPMorgan stemmed from her vision in the 1990s that these products could transform the banking industry.
Growing up in Kent, England, Ms. Masters was fond of horseback riding and “displayed a stubborn, driven streak,” according to “Fool’s Gold,” a 2009 book by Gillian Tett of The Financial Times. She went on to study economics at Cambridge University.
Rather than take vacation, Ms. Masters spent her summers working in JPMorgan’s London office, according to the book. She joined the commodities desk after graduating in 1991, and eventually moved to New York.
Some colleagues expected Ms. Masters to leave the bank when she became pregnant at 23, the book says. But that wasn’t her personality. When she went to the hospital to have her baby, Ms. Masters brought along a device to track market prices.
She became a managing director at 28, then the youngest woman in the bank’s history to reach that rank.
Derivatives seemed “creative” and also appealed to Ms. Masters because of her quantitative background, she once said. By separating certain risks from an underlying asset, derivatives seemed to offer a way for a bank to make more loans than it otherwise would be able to.
These products were being developed at rival firms. At JPMorgan, Ms. Masters was determined to apply them on a large scale.
She made a breakthrough when Exxon, a longtime client, asked for a credit line, according to “Fool’s Gold.” To offload the risk without actually selling the loan, Ms. Masters arranged a deal with the European Bank for Reconstruction and Development in London, in which the bank would get fees in exchange for assuming the risk of default.
The deal was known as a credit default swap.
Soon, the team at JPMorgan began talking to regulators about the new product. In 1996, the Federal Reserve essentially gave its blessing with a statement suggesting that banks could use credit derivatives to reduce their capital reserves.
But the grand promise of derivatives came undone in the financial crisis. The contracts ended up making embattled institutions even more vulnerable to mounting losses.
Warren E. Buffett called derivatives “financial weapons of mass destruction.” And that made Ms. Masters a “destroyer of worlds,” a September 2008 article in The Guardian declared.
“Unfortunately, tools that transfer risk can also increase systemic risk if major counterparties fail to manage their own risk exposures properly,” Ms. Masters said in a speech that year before the Securities Industry and Financial Markets Association.
But she added, “It is important to distinguish between tools and their users. It is also important to distinguish between disfunctionality in a product per se and disfunctionality in the underlying to which it is applied.”
Since the crisis, Ms. Masters worked on reviving JPMorgan’s commodities business, a division she was credited with building. “I will not give up on you and your vision,” James E. Staley, a longtime JPMorgan executive, wrote to Ms. Masters in 2010, according to an article in The Wall Street Journal. (Mr. Staley left the bank this year.)
Ms. Masters has had various senior roles at JPMorgan, serving as the chief financial officer of the investment bank from 2004 to 2007. She became head of commodities after that, and last year was given additional regulatory responsibilities.
In an interview with PBS in 2009, Ms. Masters looked back on her pioneering work.
“It was amazing feeling to be able to be involved in invention — but not just invention, the creating of a marketplace that had real value to add,” she said. “The irony is that credit became too loose.”