Public Enemy #1

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The woman who built financial 'weapon of mass destruction'

* David Teather
* The Guardian, Saturday 20 September 2008

This article was amended on Monday September 29 2008

In the article below we said that Blythe Masters of JP Morgan developed the credit derivatives which were at the heart of the current financial crisis. We apologise for unfairly failing to give her an adequate opportunity to respond and for making inaccurate personal references about her. The guide to which we referred was a general guide to credit derivatives and not just about those she created; she was 34, rather than 35, when she became chief financial officer of JP Morgan; and she was not working in hospital before having her baby, but viewing financial data to pass the time.

If Warren Buffett is to be believed in his verdict that derivatives are "financial weapons of mass destruction" then Blythe Masters is one of the destroyers of worlds.

British-born Masters is one of the most powerful women on Wall Street and is widely recognised as one of an elite group dubbed the "JP Morgan mafia" that fostered the creation of the complex credit derivatives at the heart of the current crisis ripping through Wall Street. Many of the highly qualified mathematicians and academics who worked on the credit derivatives market in the early days have gone on to run hedge funds and into high-powered jobs at other investment banks, but most of them started out at JP Morgan.

Masters sees things slightly differently. In a brief email exchange with the Guardian, she said: "I do believe CDSs [credit default swaps] have been miscast, much as poor workmen tend to blame their tools."

In 1997, she and a team developed many of the credit derivatives that were intended to remove risk from companies' balance sheets. The idea was to separate the default risk on loans from the loans themselves.

The risk would be moved into an off-balance sheet vehicle. The product was called Bistro, otherwise known as broad index secured trust offering.

In a guide to understanding the instruments she had created, Masters sung their praises: "In bypassing barriers between different classes, maturities, rating categories, debt seniority levels and so on, credit derivatives are creating enormous opportunities to exploit and profit from associated discontinuities in the pricing of credit risk."

Masters was raised in south-east England, where she attended the exclusive King's public school in Canterbury on a scholarship. She got a economics degree from Cambridge, and from the beginning had been attracted to the esoteric world of derivatives. In her spare time, she is a keen horsewoman.

She joined the JP Morgan commodities desk and worked her way up the organisation. At the age of 35 she was appointed chief financial officer of the investment bank, but for the past two years has been head of currencies and commodities. Her focus on the job reached almost comic levels when she famously took her wireless device into the hospital to get quotes on commodity derivatives as she was having a baby.

The banks argued that by trading credit derivatives of the kind pioneered by Masters, they had spread their risk elsewhere and therefore needed lower reserves to protect against loan defaults. Regulators rolled over and the banks loaned ever more. It was a huge success and the market for credit derivatives grew rapidly.

But the instruments might not have much longer. One of the fall-outs from the current crisis is the call that banks should carry their own risk.


James Clarke
Vampyres OST
1974

01. Main Titles
02. Questions and Answers
03. The Great Coupling
04. The Legend of the House
05. The Big Woodland
06. Stalking
07. Unexpected Arrival
08. In the Shadows
09. Blood and Guts
10. Waiting for Death
11. The Vampires’ Lair

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