December 24, 2013

In an article in the NYTimes this weekend (“Off Limits, but Blessed by the Fed” 21 December 2013) , Ms Gretchen Morgenson of the New York Times outlined once again the prevalence and self-dealing conflicts of interest inherent in the integrated commercial+investment banking model (the basis of Canada’s capital markets today). The article noted that JPMorgan was able to expand, and exploit, opportunities in markets where large banks were nominally banned with the explicit help of regulators. Some have argued that the bank/regulator relationship is governed by a desire on the part of the latter to regulate a contained universe of larger firms despite the attendant market risks and conflicts of interest.

““With the big banks, everything is negotiated,” said Edward J. Kane, a professor of finance at Boston College and an authority on regulatory failure.”

The following extract from the article is illustrative

“…[In] its June 2010 letter, the Fed let JPMorgan take an even bigger role selling electricity in California and the Midwest, saying the push would “reasonably be expected to produce benefits to the public that outweigh any potential adverse effects.”

Three months later, JPMorgan traders began a scheme to manipulate electricity prices, ultimately forcing consumers in those regions to pay more every time they flicked on a light switch or an air-conditioner, the Federal Energy Regulatory Commission subsequently contended.

…In 1999, Congress permitted Wall Street investment banks like Goldman Sachs and Morgan Stanley to keep their commodity operations. Since then, other banks have been allowed to expand into commodities, but in recent years no bank has gotten more leeway from the Fed than JPMorgan, experts in the field contend. In California and the Midwest, JPMorgan’s subsequent dealings in electricity echoed actions of Enron a decade earlier. The Federal Energy Regulatory Commission contended that JPMorgan engaged in price manipulation that generated $125 million in “unjust profits.” Last July, JPMorgan agreed to pay $410 million in penalties and restitution; it neither admitted nor denied wrongdoing.

Maneuvering in markets for electricity, metals, oil and more added billions to the bottom line at banks like JPMorgan, Goldman Sachs and Morgan Stanley in recent years. But their involvement in commodities has now come under intense scrutiny. Industrial users of aluminum and other metals contend that questionable activities by major banks have increased their costs.”