The architect of credit default swaps will no longer be advising the CFTC

February 7
Masters is the head of JPMorgan's commodities division.  (Photo by Spencer Platt/Getty Images)
Masters is the head of JPMorgan's commodities division.  (Photo by Spencer Platt/Getty Images)

And so it's over -- Blythe Masters, widely credited as an architect of the notorious credit default swaps that helped fuel the financial crisis, has withdrawn from a Commodity Futures Trading Commission advisory board, according to the agency.

The decision comes a day after CFTC spokesman Steve Adamske said the head of JPMorgan Chase's commodities division was asked to counsel regulators on issues that "affect the integrity and competitiveness of U.S. markets and U.S. firms engaged in global business."

Adamske and JPMorgan declined to discuss the reason for the resignation. But a person close to Masters said she reconsidered after realizing it would be tough to participate while JPMorgan was in the final stages of selling its physical commodities business.

Masters's appointment was a bit of a head-scratcher. Her name is, after all, synonymous with products that Warren Buffett once called "financial weapons of mass destruction."

But considering that the CFTC has been enacting rules to curb risk in the global swaps market, the selection of Masters made some sense. Who better to provide input on the market than the person who was instrumental in the development of one of its most destructive creations.

A little history: Twenty years ago, Masters led a team at JPMorgan in creating a type of insurance policy against credit risk.

Companies selling these contracts would agree to pay investors if certain loans (say mortgages) went into default. The contracts became a hit on Wall Street, and earned JPMorgan hundreds of millions of dollars.

Banks, pension funds, hedge funds and investment houses used the swaps to hedge their bets or produce elaborate trading strategies - some of which would ultimately prove fatal to the economy.

Remember AIG? The goliath insurer got in on the action, selling billions of dollars of CDS that forced it to pay out billion of dollars after the subprime mortgage market blew up in 2007. Jobs were lost. Companies teetered on the brink of collapse.

And taxpayers had to hand over $182 billion to keep AIG afloat.

It's not like Masters orchestrated any of this, but she arguably laid the groundwork. And here again is why she could have been a useful addition to the CFTC committee, in the same way that former hackers are valuable to the FBI - they understand the weaknesses in the system.

Being invited to join the panel was a bright spot in what has otherwise been a dreary few months for Masters. In July, the division she oversees was at the center of a $410 million settlement with the Federal Energy Regulatory Commission, which accused JPMorgan of manipulating the energy markets.

The agency did not pursue charges against Masters, but evidence in the case cast her in a poor light. As Steve Mufson reported, FERC produced e-mails that showed Masters may have been aware of bidding strategies the firm used to charge electricity grids in California and the Midwest as much as 80 times the prevailing power prices.

Days before the settlement became public, JPMorgan said it would exit the physical commodities business as regulators have become wary of Wall Street's role in the trading of goods such as oil, sugar, corn and metals. Now the Wall Street Journal is reporting that the bank is in talks to sell the unit to Mercuria Energy Group, with Masters' future left uncertain.

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