Are you FERC-ing kidding me?
That's "FERC," as in Federal Energy Regulatory Commission. And they FERC-ing rock!
The ostensibly obscure regulator of electricity transmission lines, natural-gas pipelines, and electricity and power trading just shocked some dirty banks into coming clean about their manipulation of the nation's electricity markets.
Electricity markets? Who knew?
You may remember that back in the 1990s, the U.S. began deregulating electricity markets. States like California, New York, and Texas reorganized their "markets" to facilitate wholesale buying and selling, in other words, trading of electricity.
Hey, it's a free market, right?
Well, apparently not.
Enron (remember them?) became an infamous player in the trading power business. They, of course, were cooking their books, as some traders do, to make bigger bonuses, or make their stock prices soar – same thing. Anyway, they traded with a bunch of upstart power trading desks.
After all, what's a free market without some buddies to manipulate it with you?
It turns out that after Enron was taken out in a stretcher, the games continued. It's a little complicated, and frankly I never traded electricity (I think that's about the only thing I haven't traded), so I'm not entirely sure how it works. But the Wall Street Journal sent me a heads-up last night, so I'll just quote from them on how the manipulation worked:
Market monitors in California and the Midwest focused on the alleged manipulation of "make-whole" payments that electricity providers are supposed to receive in the event that their revenue on a given day doesn't cover the fixed costs for starting up a power plant.
Filings describe the strategy this way: Traders would submit a relatively low bid to deliver electricity in the "day-ahead" market, ensuring that system operators would schedule their power plant to turn on the following day."
Then the traders would make an offer the next day to deliver electricity from that same plant at a relatively high price, which prevented them from being chosen to provide electricity that day."
While the traders might lose money because they weren't dispatched to generate power, they would also be eligible for a "make-whole" payment because their power plant unit had been scheduled the day ahead to deliver a substantial amount of electricity. The "make-whole" payment could cover any losses and generate a profit for the firm overall.
FERC put the hammer down on Deutsche Bank, which settled without admitting or denying squat. It fined Barclay's $435 million, according to the Journal, or $470 million according to the Financial Times, or $453 million according to Reuters, but whatever, it looks to be about $400-something million dollars. Barclay's says they'll fight the allegations and fine.
Next up is JPMorgan Chase the Magic Dragon. Their FERC-ing fine could be $1 billion dollars.
They're negotiating that down as you read this. Chances are they will be in the "many hundreds of millions of dollars" fine club. And no doubt they'll be full on in the fight club to not have to admit or deny or avow their own existence should they get caught.
Trading… now you know why free markets are so important. So long as they are free to be manipulated, it's all good for the big trading banks.
Humm… I wonder?
Remember, in Q2/2013, Goldman's quarterly profits doubled, with debt underwriting up 40% to a record, and fixed income currency and commodities (trading) up 12%. Bank of America's Q2 profit rose 63% based on "global markets" fixed income, currency, commodities, and equity trading up a reported 93%. Citicorp's Q2 profits were up 42%, with profits up 63% from trading stuff. And JPMorgan's profits in the quarter rose 31%, with a 38% rise in investment banking fees, a 19% rise to $2.8 billion from investment and corporate banking, a 50% rise in debt underwriting and an 83% increase in equity business line.
So you know, nobody really knows how things like investment banking "fees" are calculated, or debt underwriting, or whether or not they include "market-making," otherwise known as "trading," that happens on the other side of underwriting and investment banking deals. But trust me, they are FERC-ing trading their butts off.
It doesn't matter, we don't need to know. It's just comforting to know that these big banks know how to make money trading.
Don't bother yourself if they manipulate capital markets. Just be thankful they're big and profitable enough to pay all those fines for doing nothing wrong except trying to keep the free market free to manipulate.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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