Chase May Get Nailed with $500 Million Settlement for Dodgy Energy Trading
Some records were made to be broken. Whether it's the most home runs in a season, building the world's tallest skyscraper or serving the world's best cup of coffee -- these are all records people are aiming to bust right through.
However, it's unlikely the Houston energy traders working for JP Morgan Chase had anything like a yen to break the record for Federal Energy Regulatory Commission fines.
Chase, the largest bank in the nation, took on electricity assets when Bear Stearns died back in 2008, and now the bank is in settlement talks that may result in a record fine from the F for how those electricity assets were handled.
Chase picked up Bear Stearns for about $2 a share back in March 2008, which was basically like finding an investment bank and securities trading and brokerage firm in the bargain bin because it had subprime mortgages smeared all over it. As part of the deal, Chase got the right to sell electricity to power plants. The thing is, the power plants were old, with outdated technology, and weren't turning a profit as expected.
From September 2010 to June 2011, electricity traders in Houston, responding to pressure to bring in better profits, allegedly dressed things up so the prices for electricity looked like better deals than they actually were.
Power plants in California and Michigan ended up paying more than $80 million over what they should have been paying for the electricity. Eventually, the folks over at FERC figured it out and started investigating, according to The New York Times.
The federal regulatory agency got some additional powers in the wake of the California electricity crisis in 2000 and 2001, according to The Wall Street Journal , and seems to be flexing its muscles and cracking down of late. Electricity trading is a relatively newer market, with murkier rules about how things ought to be done, but it seems the FERC has decided to start shedding a little light on how it's supposed to work.
Last week, the FERC issued a record $470 million fine to Barclays -- a London-based investment bank that has also been dabbling in commodities -- for working a similar deal for electricity in California and other western states. Barclays reps have told all who will listen that they won't be paying any stinkin' fine, but Chase, despite its reputation for being something of a bully with regulators recently, seems to be heading in a more peaceable direction.
Maybe they're just trying to reform the company's image -- Chase has lately been in the public eye in a manner decidedly not on the warm and cuddly side of things -- or have just decided that the path of least resistance might be better.
Maybe they also realized that the allegations -- basically that the traders came up with ways to move things around so the prices offered looked falsely attractive -- are the kind that really don't do company reputations any favors in the world, and are best dealt with quickly. Maybe.
A couple days after the Barclays fine, the Times reported that Chase was in settlement talks over their electricity dealings, talks that may result in a $500 million fine for the company. If $500 million ends up being the final price tag, Chase will hold the dubious honor of paying the largest fine ever issued by the FERC. It's all a bit fuzzy, though, until the final agreement is made and announced. Chase could be out even more dough, according to The Wall Street Journal, which reports the final deal could be made as soon as this week and could result in $410 million in fines and $200 million in unpaid electricity claims to California buyers.
However, the company just reported a record-breaking quarterly profit of $6.5 billion, so even FERC doing its worst is pretty much chump change for Chase.
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