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JP Morgan's Commodities Trading Troubles

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Almost lost among the widespread relief that JP Morgan Chase didn't suffer a Citigroup or Bank of America like third quarter was the poor performance of the bank's commodities trading operations.
It's hard to believe, but it was just last year that Jamie Dimon was telling analysts that bulking up its commodities and asset-backed securities trading would diversify the banks trading business and smooth out volatility. In March of this year, JP Morgan's co-head of investment banking, William Winters, was telling investors that the bank expected energy trading to add somewhere between $100 million and $160 million in annual earnings in 2007. As late as June, JP Morgan was announcing plans the expand its commodity-trading staff by more than 30 percent, or 40 more people.
The plan hasn't quite worked out, and now might be a good time to ask what happened. Last year, the plan seemed to be working. The bank scored a windfall by scooping up the assets of Amaranth and then flipping them to Citadel. But shortly afterwards it lost several top commodities traders.
Parker Drew, who was recruited in 2005 to run the gas trading business after his own hedge fund folded, left the bank at the end of 2006. George Taylor, who ran the bank's energy business, left in May 2007, and shortly after words Trevor Woods, who had replaced Drew, left. Three others also followed Taylor out the door.
At the time of these high level departures, there was a lot of speculation that they were connected to the bank's role in the collapse of Amaranth. JP Morgan’s was the clearing firm for energy traders at Amaranth, and it's margin calls reportedly helped bring the hedge fund down. When the bank then bought Amaranth's positions as it struggled to meet margin calls and return money to investors, many raised an eyebrow at how the bank seemed to be profiting from the troubles of its client. There was speculation that the bank may have decided that some of its traders were on too many sides of Amaranth's collapse.
This was hardly an undisputed position, however. The bank said the departures had nothing to do with Amaranth. Others say the traders left because they were unhappy with their compensation following the massive profits the desk made for the bank in 2006.
In June, the bank hired Foster Smith from Deutsche Bank to head U.S. power and natural-gas trading. Deutsche was tied with JP Morgan as the fifth largest energy trading bank in 2006. It's clear that the energy trading operation's performance has been a huge disappointment for the bank, and that Smith seems to have stepped into a mess. We haven't found solid numbers on the energy trading performance, but JP Morgan describes it's commodities trading performance—a broader category—as "weak." That's still not much solid guidance about what went wrong but it's a starting place.