Banks Caught Manipulating Electricity Trading Now Face Billions in Fines

32 | By Shah Gilani

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.

32 Responses to Banks Caught Manipulating Electricity Trading Now Face Billions in Fines

  1. AMattos says:

    Interesting article, Shah. Free markets are dead, except in the classrooms of Economics, as Galbraith has shown ad nauseam in 1967 (The New Industrial State). I liked your phrase “trying to keep the free market free to manipulate.”

  2. Ian says:

    I have been in the trading game for over 40 years. A saying good through all that time is “You can’t rig an active market”. That did not stop people trying, though they lost overall.

    BUT, and it is a big but, if a market condition permits any form of subsidy or compensation payment, then that market will be rigged to obtain it. Which seems to be what was happening here.

    Memo to market rule makers – keep it simple.

    • Roy Fultun says:

      Why fine the shareholders? Because this graft is being committed in their names, under a fiduciary commitment to their profits. And if they are being ripped off too (as is likely), then they should invest in equities that are not subject to loss by (potentially total) fines.

      Note that confiscation of equity under the law does NOT violate stockholder immunity from liability from damages incurred by corporate officers. It’s “just a cost of doing business.” So if the stockholders lose everything by buying equity in these corporations, well, that’s the risk of making those purchases.

      • Chris says:

        The MAJOR shareholders are not as often in the dark about the activities of executive managment as you may think. They are often just as guilty, just a shame the minor shareholders have to come along for the ride. All shareholders have a responsibility to either not invest in a corrupt corporation, or to invest enough in one to give them the power change it for the better. Those who don’t do that must cough up, but as for the majority shareholders – they are almost never in the dark about these things.

  3. P Jorgenson says:

    Love the way you write. You made me laugh at something that is usually so dry my eyes glaze over and I have trouble plowing through the article. I finished yours with a smile. The only question I have is, “Is there no end to greed and avarice?”

  4. anders wannborg says:

    what is your opinion concerning the chances to see the same bunch of banks in court for manipulating the gold, silver, platinum and palladium markets?

    • gloria rider says:

      As a small silver investor, I am furious that they manipulate the commodities market, and something should be done about it.
      It just is not fair. I am down 16K because of it….sheeh!!!!

      • Chris says:

        They won’t be able to manipulate for ever – especially with growing Chinese demand. Hold on to your gold and silver. The less confidence people have in fiat currencies (world-wide) the more precious metals will increase in value – and fiat currencies ARE loosing peoples confidence slowly, but surely. Lets hope for some hyper-inflation to REALLY get the ball rolling.

  5. Sadie says:

    Whenever I hear about all these enormous fines that are leveled against banks for illegal activity, I have to wonder – who gets the money? Shouldn’t it be us, since we’re the ones they are screwing? They laugh at fines like this, it’s pocket change compared to what they really have. Fines are a joke. Where is the JAIL TIME?

    • Wayne says:

      Sadie, I have been asking that for the past two or three years. As long as the big banks can “bribe” Congresspeople who make the laws that they circumvent (sometimes) or that permit them to manipulate markets, taxes, stocks, or whatever, they will be forever pushing the boundaries. With no “jail time” they make far more money than the “fines” they are made to pay. And the executives get their bonuses while the taxpayer and consumers suffer.

    • Ron says:

      Jail time would be nice, but I think the Chinese have it right. Shoot a few of the bastards and things will improve swimmingly.

  6. Eric says:

    JP Morgan has been manipulating the silver market for years and that’s a well known fact. When Bear Sterns collapsed JP Morgan jumped right in and took over Bear Sterns and Silver dropped immediately, that’s market manipulation by anyones book. Why is Paladium, a metal 15 times more rare then Platinum priced so low when it has so many industrial uses? Because the investment bankers keep it that way by market manipulation.

  7. Sofia says:

    Good (again) article. It never ceases to amaze re: these Corporations’ abilities to dream up these perpetual schemes. Because of the proliferous rigging, I lost the desire to understand the processes involved, but would like to know how the “make-whole” process works, and where the compensation money comes from. Could anyone explain? Thanks.

  8. James says:

    New York attorney general Bhahara provided some pertinent insights regarding correcting Wall Street shenanigans in an interview on Bloomberg business channel yesterday:

    l. It is rare to charge a company for wrongdoing.

    2. Institutions with multiple violations should be held accountable.

    3. Many compliance agencies are “lip” services.

    4. Statute of limitations will not save bad behavior.

    This interview was interesting. Is the ax starting to drop on the big boys on Wall Street?

    With our economy on the mend, now is the right time to clean house on Wall Street and restore order.

    Shah, our hats are off to you, Bhahara, Elizabeth Warren, etc. for your courage in crusading relentlessly to correct the wrongdoings occurring in the financial sector.

    And it takes a special kind of people like you who have the right smarts to take on Wall Street and fight for the little guys on main street.

    Thank you very much! Keep up your good work! Some day we will see the light of day.

  9. Mike says:

    I’m surprised that Eric Holder hasn’t stepped into this situation, and given a “free pass” to ALL banks caught manipulating FERC! Oh, Wait! none of the banks admit any wrong-doing, no bank exec’s/traders get jail time, nobody knows what the final fine/penalty amount actually is, AND, “if” any fine/penalty is paid, where does the money go?!? Holders assistants seem to have this under control…

  10. robert w. says:

    Good question, Sofia.
    My guess is that the utility customers end up paying it as they do for everything else the power companies mess up.
    Certainly not the utility shareholders; and hopefully not the taxpayers.

  11. cory bell says:

    tks for the new input shah. didn’t know it existed. tks folks for your comments. lurning new things is blessing. much thanks again.

  12. O. O. HARDAWAY says:

    If some down and out guy or gal stole food and drink at a local grocery or restaurant they would be encarcirated, and if they stole cash at a Chase bank they’d be really encarcirated for a long time! If Jamie’s bank has extorted billions over the years the bank should be charged triple damages in amount of extortion! All officers from Jamie on down should go to jail for a really really long time!

  13. H. Craig Bradley says:


    The Financial Sector’s biggest players, be they banks or bank holding companies, are in-charge of all our financial markets. Like the mafia Casino in Las Vegas, Nevada, the House is THEIR house, so they set things up with their government-politican lackey friends so THEY always win. Sometimes they lose big bets, but hey, gambling is so much fun when you do it with “other people’s money”. Its a dream come true for born risk takers (betters). Way better odds than at the racetrack.

    Regarding Utilities: “Deregulation” was another sweet deal that allow these financial wizards and their insider buddies to pry open the assets of some of the public’s largest utilities. Montana Power and Light is one prominent example of the era of deregulation. Employees lost all their retirement funds and many of them lost their jobs, as well. Montana Power and Light incurred lots of debt in the process and rate payers in the State of Montana were left holding the bill. The trader’s and insiders made off like a bandit in a Charlie Russell Painting ( of a stagecoach robbery by Big Nose George).

    Today, look at Texas. Ten years ago the State of Texas passed a law that allowed residential rate payers to pick the power company they get their electricity from. So, just recently the state’s largest utility company went into Chapter 11 Bankruptcy. Sweet. It seems they had too much debt and consumers chose other utilility companies to buy their electricity from. Has power infrastructure suffered from a lack of capital and investment in Texas? My guess is outgoing (lame duck) Texas Gov. Rick Perry hasn’t the slightest idea.

  14. Harry M. says:

    I truly hate to rain on Shah’s parade, or for that matter anyone’s parade, but whether it’s $500 million or $1 billion in fines, for JP Morgan that’s just a licensing fee. This ruling and these fines will change nothing. You want to send a message? Make it 50 billion and throw some of these high level scumbags in jail for 25 years; that might get people’s attention and serve as a deterrent.

    • H. Craig Bradley says:


      The deterrent for these U.S. BANKER “scumbags” is the same as the “deterrent” for royality was in the 1780’s France: Madame Guillotine.

      When our financial and monetary system finally collapses due to all the dead weight of bad debts then the resulting chaos and hardships the people will face would usher-in drastic changes. We are, as it is, absolutely unable as a country to keep current on all our debt payments (public and private).

      So, at the end of the road is a crisis and the response won’t be that different from other empires when faced with similar circumstances. The wealthy and the U.S. Bankers will be faced with two unsavory options for their families and themselves: flee an angry mob or else, if they can.

  15. Roger says:

    What we need are agencies that prosecute rather than settle! These companies just treat these fines as a cost of doing business.

  16. david says:

    arn’t all these people the SAME ones that meet once a year with ALL the other rich people,and presidents and influential people like financial wizards– andstarts with a B ,,,IS IT FIXED – YOU BET IT IS

  17. Steve says:

    This Ferc news is bigger than most people think. The utility companies should get fined for aiding and abetting the banks. This is just starting!

  18. Pappy says:

    I still say treat these executives and all those who cover up for them such as their congressional buddies like many drug dealers are treated. Seize their assets…all of them. This would go a long way toward lowering the national debt.

  19. Skippy Weil says:

    I have been treated very badly by Suntrust Bank. Any information you have about their shortcomings would be appreciated. Thanks,
    Skippy Weil

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