OK, Panic

From Bloomberg:

Read the whole article here:

Blythe Masters, JPMorgan Chase & Co.’s head of commodities, sought to reassure her team on an internal conference call after “extremely difficult” dismissals, defections and a first half in which some results were as much as 20 percent below expectations.

Don’t panic,” she said in summing up the 35-minute call, a recording of which was obtained by Bloomberg News. “No one’s going to get screwed. We’re not going to do crazy things on compensation at the end of the year.”

Masters, who was named to run the business in late 2006, said the bank began dismissals on July 21, a day before the call, to trim overlap after buying parts of RBS Sempra Commodities LLP. The bank cut less than 10 percent of the combined front office, even as the oil unit lost “key people” who needed to be replaced, she said. She was discussing results with top executives after “we made a bit of a rookie error” that left the firm “vulnerable to a squeeze,” she said.

The 41-year-old banker, who helped develop credit-default swaps while at JPMorgan in the 1990s, delivered her talk from a conference room in New York, where the bank is based, less than a month after the firm closed its $1.7 billion RBS Sempra purchase.


When a senior manager or president of a company needs to tell their employees not to panic, it suggests something serious is at hand. JP Morgan has the largest notional derivatives exposures of any American bank according to the Reuters article of July 15, 2010.

What this suggests to me is the commodities team at JP has seriously underestimated both risk and uncertainty in their attempt to make greater, leveraged returns.

With a notional derivative exposure level of $76 Trillion, it begs the question, is JP the next Lehman in waiting? Will deleveraging and settling of derivatives trigger the next banking crisis?

Who knows?

With the interconnectedness of the banking sector, and extreme levels of leverage, the wrong move, a "rookie error" in, say, the precious metals market, could trigger some very ugly movements in financial stocks.

So, go ahead and panic, unless you physically own precious metals.