Are Regulators the Straw That Broke JPMorgan’s Back?
JPMorgan Chase (NYSE:JPM) faced a little bit of selling pressure on Tuesday, after news broke that a subsidiary of the bank — JPMorgan Ventures Energy Corporation (JPMVEC) — has agreed to pay $410 million in penalties to the Federal Energy Regulator Commission to settle allegations of market manipulation. The JPMVEC is accused of gaming electricity markets in California and the Midwest, reaping as much as $125 million in unjust profits and distorting prices because of abusive bidding activity.
“FERC investigators determined that JPMVEC engaged in 12 manipulative bidding strategies designed to make profits from power plants that were usually out of the money in the marketplace,” reads a statement issued by the FERC. “Under the agreement, JPMVEC will pay a civil penalty of $285 million to the U.S. Treasury, and disgorge $125 million in unjust profits.”
The settlement is a blessing and a curse for the bank and its CEO Jamie Dimon, who resolved to address a myriad of dangling legal and regulatory issues that have dogged the company recently.
One reason the development between the FERC and JPMVEC is significant is that JPMorgan generates more revenue from commodities than any other financial institution in the business. Banks and trading firms started buying and selling power in the United States deregulated energy markets after the California energy crisis of 2001, which led to the federal government granting the FERC more powers to examine and deal with any manipulations, or suspected manipulations, of the energy market.
In addition to the FERC ordeal, JPMorgan announced that “it has concluded an internal review and is pursuing strategic alternatives for its physical commodities business, including its remaining holdings of commodities assets and its physical trading operations.”
It looks like JPMorgan’s experience with the FERC could have been the straw that broke the camel’s back. Banks like JPMorgan, and more recently, Goldman Sachs (NYSE:GS) — which was recently attacked by the media for its alleged involvement in artificially inflating the price of aluminum — have always faced pressure from the government over their commodities operations, and their participation in markets that are not traditionally related to financial institutions.
However, now it looks like regulatory and financial headwinds have compelled the banks to take action. Commodities holdings at major banks so far in 2013 are bellow recent peaks — 2012 for JPMorgan and 2010 for Goldman Sachs — and a revitalized debate at the Fed to further regulate bank involvement in commodities could increase pressure on those banks to exit controversial businesses like electricity.