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Manipulating Electricity: When Will Madness End?

Posted by Larry Doyle on July 22, 2013 7:25 AM |

Do readers recall how the morally depraved crowd at Enron manipulated the electricity markets so aggressively in California in 2000 as to force the state to implement rolling blackouts?

I am assuming there are some in our audience who not only remember the rolling blackouts, but actually lived through them.

Market manipulation of a basic good or service is a destructive force like none other. Many in America and around the world will dismiss the manipulation that goes on in a structured products market, such as mortgage-backed securities or auction-rate securities. They will similarly dismiss the clandestine dealings within the credit derivatives space or the arcane world of high-frequency trading. 

Not that people should be so dismissive of the racketeering-type activities within these markets because they ultimately impact all of us but our general population does not make that connection. If our nation is going to move forward, these connections need to be made and understood.

Might the people in the western part of our nation — and perhaps elsewhere — be so dismissive the next time they pay their electric bill knowing that some of our major money center banks are being fined hundreds of millions of dollars for having manipulated their electricity markets? As people write that monthly check, picture some of that money going from your account into the trading book at JP Morgan, Barclays, and who knows which other banks.

Starting to get pissed off? You should.

Not that this story is receiving the requisite coverage but when will the madness of market manipulation end?

While our economy continues to struggle with significant structural headwinds and Washington is more inclined to distract our attention than address these and other meaningful issues of the day, the major Wall Street banks are making money hand over fist. How so? They are accruing the benefits — primarily limited competition — that come with an oligopoly.

The massive revenue streams from little competition and manipulative activities are also derived from a political and regulatory system that is in bed with Wall Street. I do not expect anybody from those realms to readily admit the reality of this incestuous dynamic, but the evidence is overwhelming.

Fortunately, we do have one sane individual in the crowd who is willing to draw attention to this madness. The FT highlights in writing, Wall Street Faces Questions Over Its Physical Commodity Interests:

“The quiet transformation of US [banks] into global merchants of physical commodities effectively nullifies the foundational principle of separation of banking from commerce,” Saule Omarova, a University of North Carolina law professor scheduled to testify at the hearing, writes in a forthcoming paper.

In my opinion, the madness of market manipulation within an array of commodity markets will only end when banks are broken up so as to allow meaningful competition within these sectors.

The mere breaking up of the banks certainly does not guarantee that manipulative activities will not persist, but it strikes me as a necessary first step. Ponder this as you write your check for your electric bill this month wondering how much of that check is ultimately flowing into the trading books on Wall Street.

What do people think?

Navigate accordingly.

Larry Doyle

For those reading this via a syndicated outlet or receiving it via e-mail or another delivery, please visit my blog and comment on this piece of ‘sense on cents.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell
  • Steve

    Don’t know if you saw it, but there was an amazing quote in a recent NY Times article about Goldman’s warehousing of aluminum and JP Morgan, Goldman and BlackRock’s proposal to buy up to 80% of available copper on the market.

    “At the same time, JPMorgan, which also controls metal warehouses, began seeking approval of a plan that would ultimately allow it, Goldman Sachs and BlackRock, a large money management firm, to buy 80 percent of the copper available on the market on behalf of investors and hold it in warehouses. The firms have told regulators that these stockpiles, which would be used to back new copper exchange-traded funds, would not affect copper prices. But manufacturers and copper wholesalers warned that the arrangement would squeeze the market and send prices soaring. They asked the S.E.C. to reject the proposal.

    After an intensive lobbying campaign by the banks, Mary L. Schapiro, the S.E.C.’s chairwoman, approved the new copper funds last December, during her final days in office. S.E.C. officials said they believed the funds would track the price of copper, not propel it, and concurred with the firms’ contention — disputed by some economists — that reducing the amount of copper on the market would not drive up prices.”

    Huh? Here is the link:

    http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html

    By the way, attached is the first research report I remember seeing (way back in 2006) promoting institutional asset allocation to commodities. PIMCO commissioned it from Ibbotson – a winning combination if there ever was one. Commodities are described as, “real return, real assets that are part of the consumable/transformable super asset class and the store-of-value super asset class” I’m just a Polish goaltender and have no idea what they mean by that. But this I understand:

    “We believe that commodities offer an inherent or natural return that is not conditional on skill.”

    Love it.

  • Carlton

    The best example are demands for billions of dollars to upgrade the national “grid” so that wind power juice can move from the Dakotas to Chicago and elsewhere. But then North Dakota burns coal for 90% of its electricity! Just use wind power to power the Dakotas!






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