24 July (LPAC) JPMorgan Chase is estimated to have cost California electricity rate-payers about $160 million dollars in fraudulent costs in 2012, and Michigan rate-payers another $83 million, through its electricity market “merchant bank investments” which were prohibited when the Glass-Steagall Act was in force. The megabank is reportedly about to agree to a fine of $500 million for the electricity price-rigging — a fine not by a banking regulator — what, us? do banking? — but by the Federal Electricity Reliability Council (FERC). FERC has also just levied a $470 million fine for the same activity on Barclays Bank, which is refusing to pay, insisting it did nothing not merely British in character.
At the Senate Banking subcommittee hearing on this subject, Glass-Steagall sponsor Sen. Elizabeth Warren charged, “Banks may have adopted the model for trading both physical commodities and derivatives used by Enron Corp., adding more and more risk to the financial system.”
Morgan Chase has repeated Enron’s 1999-2002 crimes more or less exactly, no doubt figuring some bank should take responsibility for the vigorish on that huge deregulated electricity turf. It inherited its post-Glass-Steagall ownership of electricity, however, not from Enron, but from the Bear Stearns investment bank, which the Federal Reserve bought for Morgan as a present in March 2008. Morgan holds interests, many of them controlling, in 35 electricity-generation plants nationwide, totaling 8,000 megawatts-electric, with 13 of the plants in California. (This is not to mention its ownership of 100 full-sized oil tankers.)
Many of these plants are operated by the electric utility holder AES Corp., but Morgan sells them their fuel supplies, controls their prices, and decides when they go on or off line. It used this control for the following dirty game, among others: Morgan (AES) would submit a very low-priced “next-day operation” bid to the infamous California Independent System Operator (ISO); this being accepted, when it came time actually to operate the plant next day, Morgan would submmit a very high “same-day operation” bid, causing ISO to reverse itself and not buy from that plant. Morgan would then keep the plant idle and collect a substantial “minimum fee” for the day from ISO because it had submitted a bid to operate on the previous day. If ISO somehow accepted the high “same-day” bid, Morgan traders would buy the power from somewhere else and sell it to ISO at a profit. (Ken Lay’s ghost was gloating proudly at this sincerest form of flattery.) FERC got fed up in May 2012, ordered Morgan to keep three particular plants operating (one nuclear, two fossil fuel), and when it refused to do so, began the enforcement process leading to the reported large fine.
These “merchant banking investments” were prohibited to commercial banks or holding companies by the 1933 Glass-Steagall Act. The Gramm-Leach-Bliley Act which repealed Glass-Steagall redefined such commodities speculation as “so closely incident as to be inherent to banking”, and Alan Greespan started doling out the permissions, starting already in 1998 when Citibank bought the British oil trading firm Phibro. Ben Bernanke followed suit, but last week the Fed suddenly announced it was “reconsidering” whether any of this was appropriate. Market rumors have been planted that Morgan and Goldman-Sachs are “considering” selling their commodities holdings. A connection to the threat of Glass-Steagall restoration is more than suspected.