Dan Morain

The Conversation: Feds need to slap down 'Bankzilla'

Dan Morain
Dan Morain

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Business went on as usual last week for JPMorgan Chase, the nation's largest financial holding company.

A New York Times exposé and a U.S. Senate hearing homed in on how big banks including JPMorgan manipulate vital commodities such as aluminum and electricity, at our expense.

A Bay Area law firm sued on behalf of Sacramento County, Houston and other municipalities, accusing JPMorgan and other banks of cheating the jurisdictions by gaming Libor, the London Interbank Offered Rate.

The Federal Energy Regulatory Commission was preparing to levy a record fine for what California authorities believe was JPMorgan Ventures Energy Corp.'s attempt to rig electricity prices between 2009 and 2011.

And as is its nature, JPMorgan Chase, with its far-flung subsidiaries and worldwide interests, earned millions of dollars every hour of every day.

At the hearing in Washington, D.C., Sen. Elizabeth Warren, D-Mass., said the notion that superbanks "are adopting a business model that was pioneered by Enron suggests this movie does not end well."

JPMorgan is not Enron. Its activity in the California electricity market didn't come close to causing the chaos of the energy crisis of 2000 and 2001. But its actions do conjure dark memories of the havoc wreaked by the energy buccaneers, who squeezed billions of dollars out of Californians and pushed PG&E into bankruptcy.

"Enron did not seem to care if its actions cost California billions or brought down the electric system," Rebecca Smith and John R. Emschwiller wrote in their 2003 bestseller, "24 Days."

The authors, who noted that JPMorgan was one of Enron's two main banks, concluded: "The Enron scandal was the new century's first entry in a very thick ledger. It almost certainly won't be last."

As disruptive as the energy crisis was, JPMorgan's involvement in the buying and selling of electrons raises broader issues about the power of megabanks.

Sen. Sherrod Brown, D-Ohio, who chaired the Senate Financial Institutions and Consumer Protection subcommittee hearing last week, questioned the wisdom of permitting banks to own and trade in oil, copper, coal, electricity and other commodities.

"Do the benefits of combining these activities outweigh the harm to consumers and to manufacturers?" the senator asked. "Can regulators or the public fully understand these large and complex financial institutions and the risks to which these firms are exposing themselves and, importantly, the rest of society?"

JPMorgan's involvement in electricity is fairly recent, and it hasn't worked out well. The Federal Energy Regulatory Commission granted the bank the privilege to sell electricity in 2005, a year after Enron's bankruptcy concluded.

In 2008, at the height of the financial crisis, then Treasury Secretary Henry Paulson orchestrated JPMorgan's purchase of the investment bank Bear Stearns. With that acquisition, JPMorgan gained control of electricity produced at three California power plants.

JPMorgan didn't become the largest financial holding company in the United States by being charitable, or by selling products at the lowest possible price, as the California Independent System Operator discovered.

In 2011, the Folsom-based organization that operates California's electricity grid detected anomalies in JPMorgan's trading practices, and concluded that the manipulation began in 2009 and cost electricity users $73 million.

Cal-ISO turned over its findings to the Federal Energy Regulatory Commission, which commenced an investigation. JPMorgan isn't talking about the matter.

As FERC investigated, the bank defied demands that it turn over emails, claiming they were protected by attorney-client privilege. When the company finally did produce the emails, they showed top bank executives were trading emails, but lawyers weren't involved.

The emails were hardly smoking guns. Blythe Masters, head of JPMorgan's Global Commodities Group, said in one email that she could not attend a meeting because of a daughter's graduation. But the refusal to turn emails over suggests contempt for regulators.

The tactic wasn't particularly wise. Concluding the bank disingenuously claimed attorney-client privilege, FERC suspended JPMorgan from trading electricity here for six months.

In another example of the bank's dim view of regulators, JPMorgan refused to honor Cal-ISO's request that it provide power from its Huntington Beach plants to cover a shortfall caused when Southern California Edison shut the San Onofre nuclear plant. FERC stepped in and compelled JPMorgan to provide the electricity.

"While the bank's motives were not stated, it is reasonable to consider that the firm sought to profit from the higher peak energy prices that would have resulted from its actions to prevent new capacity from coming on line," Joshua Rosner, a Wall Street analyst, told the Senate subcommittee last week.

Eric Hildebrandt, the chief economist at Cal-ISO who helped bring JPMorgan's activitity to light, said the discovery proved that the system is working far better than it did during the energy crisis.

"We have much better rules, much better monitoring," Hildebrandt said, adding that if penalties imposed on JPMorgan turn out to be tough, miscreant traders will be deterred from gaming the system.

JPMorgan recently sold its rights to power generated by the three power plants to Southern California Edison. But the bank remains deep in the energy business.

In its latest annual report filed with the Securities and Exchange Commission, JPMorgan summed up some of its non-banking business, writing that it is involved in the "storage, transportation, marketing or trading of several commodities, including metals, agricultural products, crude oil, oil products, natural gas, electric power, emission credits, coal, freight, and related products and indices."

Breaking that down, JP Morgan trades in coal and oil, fossil fuels that lead to climate change. It also trades emission credits, which are bought and sold in California's cap and trade program, which is intended to reduce greenhouse gas emissions. In bankers' views, one commodity apparently is not much different from another, so long as money can be made.

Whatever fine the Federal Energy Regulatory Commission imposes, the bank will absorb it. It will be a cost of doing business.

Two weeks ago, JPMorgan reported that its second quarter net income was $6.5 billion. That worked out to $71.2 million a day. It was an hourly rate of $2.9 million, which was an increase from the hourly rate in 2012 of $2.4 million. The nation's largest financial holding company, in other words, makes more in an hour than most Americans earn in a lifetime.

Whether or not it's too big to fail, JPMorgan and others of its ilk are too big. FERC and other regulatory agencies that gave superbanks the authority to deal in commodities need to reverse course. If they don't, this movie will not end well.

Follow Dan Morain on Twitter @danielmorain. Back columns, www.sacbee.com/morain.