As more people start to share scientists' long-expressed concerns over climate change, revelations of big bank energy market manipulations highlight Wall Street's entrenched stake in the fossil fuel economy that is heating up the planet.
In what critics are calling Enron 2.0, JPMorgan Chase is facing a reported fine in the range of US$500 million from the Federal Energy Regulatory Commission (FERC) for manipulating energy markets in California and Michigan.
Chase acquired a slew of ageing power plants from Bear Stearns when the firm tanked in the 2008 market meltdown.
Under pressure to reap significant returns, the bank then took advantage of a loophole in the energy markets, scamming taxpayers and inflating energy costs.
Here's how it worked: First, the bank's traders would offer low-balled electricity bids to state grid operators a day before delivery. On the day of delivery, traders jacked up the price so that operators took their business elsewhere.
Then, taking advantage of a so-called make-whole regulation meant to protect consumers against market volatility, states covered the cost of operating the plants, even though Chase sold them zero electricity.
Between September 2010 and June 2011, FERC charges the bank pocketed $83 million in extraneous payments that translated into higher utility bills for millions of customers.
“It's another example of how closely tied up the financial sector is with the energy sector,” said Amanda Starbuck, of the Rainforest Action Network. “Banks are involved in this business quite simply because there's money to be made.”
To squeeze money out of the outdated plants they had acquired, Chase orchestrated what FERC describes as a “systemic cover-up”, altering their balance sheets to hide profits the racket generated.
Blythe Masters, head of the bank's Global Commodities division and inventor of credit default swaps ― the complicated financial instruments that helped lead to the 2008 Wall Street crash ― personally took part.
Despite denials under oath to regulators, FERC says Masters had full knowledge of the scheme and sought to hinder their inquiry by providing “scores of false and misleading statements and material omissions” to investigators.
FERC, in negotiations with Chase, is seeking a civil penalty of $500 million from the bank. The agency levelled a fine of similar magnitude against Barclays for conducting the same racket in the California energy market from 2006 to 2008.
Barclays, however, is refusing to pay up and has taken regulators to court. Though FERC initially sought to hold Masters and other Chase executives personally liable, as the agency has entered settlement talks with the bank it has dropped those claims.
Now within regulators' radars, Chase appears to be selling off its stake in the power plants. But it continues to hold on to a few, including seven coal and six natural gas-fired plants.
Wall Street involvement in the energy sector is nothing new. Starbuck says Bank of America, Citigroup and Chase lent about $8 billion to the US coal industry last year alone.
But, in what appears as a sea change to many, banks have gone from simply financing the energy sector to becoming producers and distributors in those markets.
Legal safeguards have long existed ― going all the way back to the National Bank Act of 1863 ― barring commercial banks from acquiring non-financial assets. Such laws are aimed at restricting banks from gaining more power than they already have.
As Saule Omarova, professor of law at the University of North Carolina Chapel Hill, wrote: “When the same banking organizations that control access to money and credit also control access to such universal production inputs as raw materials and energy, they are in a position to exercise disproportionate control over the entire economic ― and, by extension, political ― system.”
In a new report, Omarova details what amounts to a gradual coup, dating back to the Reagan era in the 1980s, in which lawmakers have gradually unwound regulations keeping banks and commerce separate.
Banks have either skirted regulations keeping them out of physical commodities markets, or have become outright operators in those markets with no legal recourse taken against them.
By “maneuvering in markets for oil, wheat, cotton, coffee and more”, reported the New York Times recently, too-big-to-fail banks like JPMorgan, Goldman Sachs and Morgan Stanley have reaped billions in profits “while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cell phone”.
Through “controlling warehouses, pipelines and ports, banks gain valuable market intelligence,” said the NYT, which “can give them an edge when trading commodities”.
Last week, Senator Sherrod Brown of Ohio began heading up a congressional inquiry into the Wall Street manipulation of commodities markets. Underlying the political theatre on Capitol Hill, however, is the broader question of the financial sector's involvement in fossil-fuelled energy and the corresponding infrastructure.
Adding irony to insult, JPMorgan is also involved in California's carbon offsetting markets. Such trading mechanisms have done little to actually curb emissions and, if anything, Enron 2.0 shows just how embedded banks have become with extractive industries. Not simply financing operations from loans, they are running them themselves.
Conversely, credit default swap deals that hundreds of municipalities nationwide entered into with Wall Street have led to fare hikes and service cuts to public transport that allow for low-emission commutes.
In New York, about 16% of every metro card swipe goes to Wall Street, according to an analysis from United NY, a community and union coalition. New Yorkers have seen fare hikes of more than 30% since 2008 to cover the cost.
In a major policy speech in June, President Barack Obama pledged to do more to tackle climate change.
Excuses for inaction, according to the president, indicate a “fundamental lack of faith in American business and American ingenuity”.
The speech comes amid a growing climate movement that has pressured the president to take dramatic action. It follows a recent report from the National Oceanic and Atmospheric Administration that concentrations of carbon dioxide in the atmosphere have surpassed 400 parts per million, climbing higher towards what climate scientists warn may be a cataclysmic threshold plunging the Earth into a period of extreme weather events and volatility.
CO2 concentrations have not been at such levels in more than 3 million years.
Concentrations of wealth at the top in the US have never been higher, either. The richest 1% controls nearly half the country's financial wealth ― a gap that has widened increasingly since Wall Street ushered in the Great Recession more than five years ago.
Climate campaigners would do well to mind the consistent gap between Obama's soaring rhetoric and his actions. He also pledged to go after those responsible for the financial crash when he was first elected. But, despite a spool of Wall Street scandals, not one executive from a single too-big-to-fail bank has been placed behind bars.
“Wall Street has a lot to do to rebuild its reputation in the eyes of the public,” says Starbuck. “A lot of these companies think they are above the law.
“One way they could restore trust is by making a commitment to use their money and financial power for projects and companies and sectors that clean up the environment and help to rebuild communities after the financial crisis.”
As it stands now, however, there is simply too much money at stake for Wall Street to get out of the fossil fuel game. Any movement from below for action on climate change will have to confront an economic system dominated by banks with a vested interest in fossil fuels. Only big grassroots numbers can rival the influence of Wall Street's oil-soaked dollars.
[Abridged from Occupy.org.]
