Barclays Fined Record Amount For Channelling Enron, Manipulating California's Electricity Market
It just is not Barclays' year. After being exposed (so far the only one) as a ringleader in a massive LIBOR-rigging scandal which cost Bob Diamond his job, yesterday the British bank added insult to injury, after the Federal Energy Regulatory Commission (FERC) fined it $470 million - the largest penalty ever levied by the energy regulator, and even larger than the bank's LIBOR fine - for getting caught doing what Enron got caught doing about a decade ago: manipulating California's electricity markets. Although while the former ended up being the biggest corporate bankruptcy at the time, led to the end of one of the nation's largest auditors and sparked a scandal so great it was all corporate America spoke for about for the next year, this time the news has come and gone, and nobody cares. Perhaps this is to be expected: in a time when none other than the central bank intervenes each and every day in every single market to preserve the "wealth effect", habituation to epic corporate manipulation of every imaginable kind is perfectly normal.
The bank has 30 days to show why it should not be penalized for an alleged scheme of manipulating physical electricity prices at a loss in order to make profits in related positions in the swaps market, a strategy known as a "loss-leader".
British bank Barclays said it would fight the agency, likely setting up a landmark legal battle that could set a precedent over whether the once-common trading ploy in commodity markets is illegal or simply ill-advised.
It will have huge implications across the market, as the FERC -- which won expanded powers to tackle manipulation in 2005 after the California power trading scandal and related Enron meltdown -- pursues similar investigations against companies including BP and Deutsche Bank.
The FERC also said four of the company's power traders -- Daniel Brin, Scott Connelly, Karen Levine, and Ryan Smith -- have 30 days to show why they should not be assessed a total of $18 million in civil penalties.
It said their activity accounted for nearly a quarter of all trading in the next-day power market during the period, accruing gains of an estimated $34.9 million. Bank documents showed how the traders bragged about how they would "crap on" certain markets to profit in other ones, the order shows.
Barclays seems to think that to "crap on" is a good thing:
Barclays "strongly disagreed" with the order, which it said was "by nature a one-sided document, and does not reflect a balanced and full description of the facts."
"We believe that our trading was legitimate and in compliance with applicable law," Barclays spokesman Mark Lane said in an email. "We have cooperated fully with the FERC investigation, which relates to trading activity that occurred several years ago. We intend to vigorously defend this matter."
The four traders left Barclays over the past five years for reasons unrelated to the investigation, according to a source familiar with the matter. The bank closed its Portland office in 2011 and effectively quit the Western power market this year.
As we noted above, Barclays was the one that got caught doing this. The reality is that there are countless other banks who also engaged in comparable behavior, but were luckier (perhaps they did not donate to the political campaign of a given congressman and/or senator), and have been spared for now.
Mike Masters, co-founder of Better Markets and a frequent advocate for stronger rules, said it could be the "tip of the iceberg" as regulators probe more deeply into commodities.
"It's a very significant fine and not just because of the dollar amount. It also highlights how banks and swap dealers were combining financial and physical positions in a predatory way to manipulate commodity markets," he said.
"If it's happened in power markets you can be sure it was also going on in crude oil and other markets like refined oil products," Masters said.
Of course it is. The problem is what happens when one uncovers that the entity doing the commodity market manipulation is none other than America's central bank?