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FERC lets JPMorgan walk

JPMorgan manipulated California's energy market to great profit, then lied about it. Its penalty? Chump change (one day's revenue).

July 30, 2013|Michael Hiltzik
  • Sen. Elizabeth Warren is aiming her fire at the regulators who gave JPMorgan a pass.
Sen. Elizabeth Warren is aiming her fire at the regulators who gave JPMorgan… (Chip Somodevilla / Getty…)

If you take our federal and state energy authorities at their word, you just might be convinced that the $410-million penalty dropped Tuesday on JPMorgan Chase for manipulating energy markets in California and the Midwest is a big deal.

"A historic fine," declared Commissioner Tony Clark of the Federal Energy Regulatory Commission, which reached the settlement with Morgan. He said it "sends a strong signal."

Over at the California Independent System Operator, the quasi-state agency that was directly victimized by JPMorgan's behavior, the penalty was hailed as "a success story for market monitoring and market oversight," as ISO general counsel Nancy Saracino stated on a conference call with the news media. "It's a huge deterrent for the rest of the market," she said.

Here are some better ways to think about this "historic" penalty, which was imposed for JPMorgan's $125-million rip-off of California and Midwestern consumers: It's chicken feed. A pittance.

It will have no more deterrent effect on white-collar wrongdoing at JPMorgan or anywhere else than telling its traders they've got to take the Ferrari to work instead of the Lamborghini, though they can still take the Lambo to the beach house. Our top regulators actually think they've gotten the better of a huge illegal enterprise, which is a good sign that they're delusional. They didn't even get Morgan to admit that it had done anything wrong.

Look at the numbers. Of the $410 million, $125 million represents the disgorgement of illicit profits from Morgan's scheme — money the bank wouldn't have collected at all if it operated within the law. (The sum is supposed to be returned to ratepayers.) So that doesn't count. The real punishment is the balance of $285 million. How badly will that hurt JPMorgan Chase? Well, the big bank collected $97 billion in net revenue last year, so it represents a little more than a single day of intake.

Ask yourself: If you could steal $125 million, with the only downside being that if you got caught you might have to give the money back and lose a single day's income, would you give it a go? Me too.

What's worse is that even though FERC identified four JPMorgan employees as the perpetrators of the manipulation — Andrew Kittell and John Bartholomew of the bank's Houston-based Principal Investments unit, their supervisor Francis Dunleavy, and his supervisor Blythe Masters, Morgan's commodities mastermind — there's no indication that these individuals will suffer any consequences for this rip-off.

They're not the ones paying the penalties; Morgan's shareholders are. The four individuals haven't been referred for criminal prosecution or barred from the commodities business. It's true that they're specifically named in FERC's settlement documents as having fomented a $125-million scam, but for all we know, they'll be happy to put that on their resumes.

This leaves the question of what the proper penalty should be, and for that we need to revisit the offense. When I first wrote about JPMorgan's misdeeds a year ago, I got an indignant email from a bank spokeswoman calling my column "disappointingly skewed" for comparing Morgan to Enron. She had a point. The comparison was unfair. As the FERC documents make clear, Morgan was worse than Enron — because despite the lessons of Enron, it engaged in this manipulative behavior anyway.

The chicanery started in January 2011, when Morgan acquired contract rights to the electrical output of 12 Southern California power plants. The rights landed in its possession as a result of its 2008 purchase of the failed investment bank Bear Stearns, which had the contracts in its portfolio — but for the most part the rights had been subleased temporarily to Southern California Edison through 2010. The plants themselves belong to AES Energy, not Morgan — it's just their output that's traded.

The problem for Morgan was that the plants were money-losing old relics, some of them dating to the 1950s. That's where Masters and her team came in. Starting in September 2010 they developed a host of bidding schemes designed to turn a profit from the plants' output. They called this their "asset optimization strategy," and it proved to be spectacularly successful.

The key was that the California ISO market operated under an auction system in which bids were judged and accepted automatically, by software, with minimal human intervention.

Morgan's traders pitilessly exploited loopholes in the automatic system. They would alternate high bids and low bids in a way they knew would result in their getting paid at the highest-bid rate. Sometimes they received $999 per megawatt-hour when the market price was $12.

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