How Blythe Masters pioneered the credit default swap

Blythe Masters © Getty images
Has Blythe Masters been made a scapegoat?

Three decades ago, when Blythe Masters was a horse-mad teenager from Kent, she worked as an intern in the JPMorgan Chase derivatives unit, says the FT.

“She became hooked” and, over the next 27 years at the bank, earned both “acclaim and notoriety” as a pioneer of credit derivative products. Masters never had a hand in developing the mortgage credit derivatives that proved so deadly in the credit bubble.

She left this field of finance well before it “spawned multiple abuses”. But that didn’t stop her being branded as “the female face of the crisis” by some – a debate rekindled this week after the announcement of her resignation.

In September 2008, The Guardian described Masters as “one of the destroyers of the world”. That was just the start of it, says BusinessWeek. A year later, in a list of “100 to Blame” for the global economic mess, Vanity Fair ranked her “just behind the convicted Ponzi mastermind, Bernard Madoff”.

A bizarre book on her even went so far as to claim that “never since the famous Eve in the mythical Garden of Eden has any woman had so much influence on the destiny of men”.

A good deal of the vilification Masters received was undoubtedly down to sexism, says the FT. As one of the few prominent women on Wall Street, shebecame a scapegoat “primarily because she was a visible (and attractive) female face”. But not everyone is convinced by her protestations that she has been traduced.

Educated at King’s School Canterbury, Masters, 45, read economics at Trinity College Cambridge, returning to JPMorgan as an intern every summer. She joined the bank full-time in 1991, spending her early years in commodities.

She came to prominence in the mid-1990s developing “synthetic securitisation” tools that allowed banks to reduce the notional size of their balance sheets and carry more capital and is widely credited with creating the modern credit default swap (CDS).

Thereafter, her career at JP Morgan followed a swift upward trajectory. At 28, Masters became the youngest female managing director in the firm’s history, and moved to New York where she played a key role in selling CDS as a new concept to investors.

Described by one former colleague as “one of the most capable bankers that I have worked with”, Masters served as CFO of the investment bank between 2004-2007, before returning to her early roots in commodities, says the FT.

The business she built up “brought in billions of dollars of revenues, but also investigations by regulators” – including an allegation of manipulation in the California power market that led to a $410m penalty.

The decision to sell the division to the Swiss firm, Mercuria, for $3.5bn may have precipitated her departure. But she is reportedly keen on taking a less pressurised role. After so many years under fire, who can blame her?

Creative thinker or disingenuous risk-taker?

The best account of Blythe Masters’ contribution to the field of finance is contained in Gillian Tett’s Fool’s Gold, in which she describes how a small group of bankers at JP Morgan “built a monster that got out of control and helped destroy much of their industry”, says Paul M Barrett in The New York Times.

“The wizards at Morgan decided they could defeat the banker’s oldest foe – the danger that borrowers will not repay their loans” by “combining esoteric financial instruments so cleverly that repayment risk would simply disappear, or at least become so diluted as no longer to matter.”

Masters was enthralled. “I think these products appealed to me because I had a quantitative background,” she told Tett. “But they are also so creative.”

The JP Morgan group broke new ground by combining credit derivatives with securitisation, which traditionally involved lenders selling their loans to investment banks. Thereafter the process swiftly became “industrialised” – and the rest, sadly, is history.

Masters has insisted that she developed “a tool” – it was not down to her how people used it. She later admitted to The Economist that “tools that transfer risk can increase systemic risk”, but only if “major counterparties fail to manage their exposures properly”.

Masters cited AIG – omitting to mention, notes Sheelah Kolhatkar in Businessweek, that she was the one who convinced AIG of the possibilities of CDS in the first place. Her attitude is disingenuous, says Jeff Connaughton, author of The Payoff: Why Wall Street Always Wins. “You can’t market incredibly risky securities and then pretend you’re shocked when things get out of control.”

What next for Masters? How about joining Glencore? asks Christopher Hughes on Breakingviews. She’s certainly got the trading expertise to join the commodities giant, and having a woman on the board would end “the all-male roll” that “makes it such an anachronism in the FTSE 100 index”.

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