Previously, in our first two editions of FleeceBook, we focused on “public servants” working for either the Bank of International Settlements, or the Bank of England (doing all they can to generate returns for private shareholders, especially those of financial firms). Today, for a change, we shift to the private sector, and specifically a bank situated at the nexus of public and private finance: JP Morgan, which courtesy of its monopolist position at the apex of the Shadow Banking’s critical Tri-Party Repo system (consisting of The New York Fed, The Bank of New York, and JP Morgan, of course) has an unparalleled reach (and domination – much to Lehman Brother’s humiliation) into not only traditional bank funding conduits, but “shadow” as well. And of all this bank’s employees, by far the most interesting, unassuming and “underappreciated” is neither its CEO Jamie Dimon, nor the head of JPM’s global commodities group (and individual responsible for conceiving of the Credit Default Swap product) Blythe Masters, but one Matt Zames.
It is our humble opinion that Matt is one of the most interesting people not only at JPMorgan but in all of modern finance, courtesy of his dominant role at the Treasury Borrowing Advisory Committee (of which he is Chairman, profiled here: The Supercommittee That Really Runs America“), a group of Wall Street individuals best known for telling the current (and future) Treasury Secretary what to do, and thus effectively represent the handful of people, all of which are employed by various financial firms, that decides the fate of US public spending (and deficit creation, which incidentally must always go on – i.e., no spending cuts… ever, because if there were no deficits to be monetized the Fed would no longer create excess reserves, which are now the lifeblood of bank profitability in the New Normal as explained previously).
But perhaps just as important, Matt Zames is now the head of JPM’s infamous Chief Investment Office. As also explained previously, courtesy of the London Whale massive prop trading faux pas in early 2012, we have the CIO to thank for providing us the insight into just how banks funds their massive, Volcker-rule skirting prop trading operations (which incidentally are far more pervasive than the recent Bloomberg’s expose on a certain group at Goldman, which has openly been involved in prop trading since its inception), namely via excess deposits over loans. We are certain that it is not only JPM, but every other commercial US bank (see Wells Fargo’s record delta reported earlier today), that takes advantage of what is now a cumulative $2 trillion imbalance of excess deposits, driven by the Fed’s excess reserves, to do just what JPM did and reinvest deposits, no longer firewalled from trading activities, in risky assets, such as buying stocks and selling CDS. But mostly buying stocks. As a “hedge” of course.
In other words, it is Mr. Zames whose dual role of continuing to be on the TBAC on one hand, and indirectly determining how many excess reserves will be created by the Fed as a result of excess Treasury monetization – an issue he has direct input on in his capacity as quasi public servant, to then flip, and on the other hand, use said reserves, transformed via repo or (ab)used directly, as prop trading dry powder in his private sector capacity as CIO head, and proceed to invest as he sees fit. All of this, of course, will be done with absolute stealth: after all has JPM released anything more than broad strokes details of what precisely went so wrong at the JPM CIO aside from a $200 billion notional CDS position going horribly wrong? Because, naturally, the regulators are complicit on this scheme too.
It is precisely his role at the proverbial core of the US ponzi scheme, where he takes public funds, indirectly, with one hand, and proceeds to invest it for private benefit, with the other, that is what makes Mr. Zames quite so fascinating.
Among the other things that make Mr. Zames quite fascinating, is that he used to be a trader for none other than the first hedge fund to feel the unwrath of the Federal Reserve, and receive a bailout: Long-Term Capital Management (the same LTCM, its management team, and of course its legal team, that ushered in the parasitic and destructive era of Too Big To Fail… but that is a story for another day). It is somewhat ironic that Mr. Zames had to go from the original hedge fund blow up, to head another (one located deep in the bowels of JP Morgan) that blew up just before his arrival.
But fear not: Mr. Zames is quite qualified for all of the above – after all he graduated from MIT. Sadly, Matt is not on the “MIT engineers” list of central bankers (profiled previously) who meet secretly at the BIS every now and then and decide the fate of public funding in the “free world.” At least not yet. Or at least, not that we know of.
Yet, that Zames does all of the above with virtually no public exposure is most fascinating.
Which is why we are happy to make him the third honorary inductee into the Zero Hedge FleeceBook half of fame.
More on Mr. Zames courtesy of Bloomberg’s Max Abelson:
Zames Rises From JPMorgan Battlefield to Dimon’s War Council
Twice in the past 100 days, JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon has turned to a 41-year-old former hedge-fund trader to tackle challenges facing the largest U.S. bank.
Matt Zames, named chief investment officer in May to contain trading losses that have cost at least $5.8 billion, became the firm’s co-chief operating officer last week. Zames, who began the year as co-head of the bank’s fixed-income business, now oversees senior executives including Chief Financial Officer Douglas Braunstein, 51, and regulatory affairs head Barry Zubrow, 59.
“He had the guts and the brains,” Dimon said in an interview after announcing the management shakeup on July 27. “Matt is straight, direct, does his work. He’s got that kind of confidence without arrogance.”
Zames shoots sporting clays, described by its national association as “golf with a shotgun.” He studies military history, reading books about World War II and more recent conflicts. A husband and father of three, he leaves his bed in New Jersey at 4:45 a.m., he said in an interview.
“I wake up every morning — every morning — excited to actually make this place a better place,” he said. “I am truly humbled and honored to have been given the opportunity.”
Zames will continue to lead the chief investment office while adding oversight of finance, strategy and regulatory affairs, according to a memo sent to employees last week. The additional duties place him among senior executives who might one day succeed Dimon. Zames will serve as co-COO alongside Frank Bisignano, 52, whose responsibilities include technology and security.
Two JPMorgan executives who weren’t authorized to speak on the matter said Zames is particularly interested in trying to help shape regulatory policies so they’ll be better for the New York-based bank and the broader economy.
He and Dimon, 56, were both involved in an earlier multibillion-dollar trading crisis. After graduating from the Massachusetts Institute of Technology’s Sloan School of Management in 1993 and spending some months at Goldman Sachs Group Inc. (GS), Zames became a trader for Long-Term Capital Management LP.
The hedge fund was bailed out in 1998 after Russia’s debt default led to $4 billion of losses in what was then one of the largest collapses in U.S. investment history. The Federal Reserve Bank of New York organized support from banks including the firm Dimon was leading, Salomon Smith Barney. Zames said he “definitely” remembers meeting Dimon then, though his boss doesn’t. “No,” Dimon said when asked about the encounter.
Even so, Long-Term Capital veterans recall Zames as one of the firm’s most-trusted young traders.
Zames was trusted and mentored by senior colleagues, according to Rickards and Long-Term partner Eric Rosenfeld.
“He’s a mathematician and he’s a poet: He understands the math, but he understands qualitatively what’s going on,” said Rosenfeld, who now teaches fixed-income at Sloan. Zames is one of the people on Wall Street who “live and breathe the trades they’re doing,” he said.
The trading that Zames has overseen at JPMorgan has made the firm billions of dollars. Fixed-income trading revenue last year was $14.8 billion excluding accounting adjustments, more than any other global bank. JPMorgan posted the only increase in debt trading among the largest firms that year, while Bank of America Corp. (BAC) and Goldman Sachs slid more than 30 percent.
In last week’s interview, Dimon praised Zames’ handling of the crisis and recounted their meeting in May to discuss the situation. Dimon had called Zames into work on a Saturday, and the two were standing in a hallway when the CEO asked him to take over the money-losing unit. Zames’ promotion came fewer than three months later.
“When you have a talent like that, you got to give him a challenge,” Dimon said.
While Dimon said in last week’s interview that he hopes to keep leading JPMorgan for “many, many more years,” Zames’ promotion fueled speculation that the former trader is now a potential successor…
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Read more here