Barclay's Bank faces fines for manipulating energy markets

Barclays Bank, the only bank to date to settle in the Libor scandal, could face more regulatory probes down the line on a number of other issues, including an energy trading scandal in the US.

As the bank admitted it had slumped to a third-quarter loss as a result of the payment protection insurance scandal, it revealed that US regulators were now looking at the crucial fundraising in 2008 from Middle Eastern investors that is also being investigated by the Financial Services Authority.

Antony Jenkins, promoted to chief executive after Bob Diamond left in the wake of the Libor-rigging scandal, insisted the bank would “vigorously defend” itself against the potential fine from the United States Federal Energy Regulatory Commission (FERC) office of enforcement which could be announced later on Wednesday.

The matter relates to Barclays’ power trading in the western US from late 2006 to 2008 and is thought to relate to the way electricity was traded.

JPMorgan Chase also faces investigation for their role in manipulating energy markets, rigging the bidding process to raise rates by $73 million or more. In all, FERC has “announced more than 10 probes of alleged manipulation in electricity and natural-gas markets,” which has led to, among other things, a $245 million settlement with Constellation Energy Group. In other words, big finance and big energy have conspired to rip you off for the electricity you purchase for years now.

Scarecrow explained this scam in this space back in July.

The ISOs (Independent System Operators) keep your lights on by accepting offers/bids from power plant operators and power consumers (like your local distribution utility or your retail “supplier”) for power to be injected or withdrawn the next hour and the next day. So there are multiple markets: one for each hour of the day; and one for each hour of tomorrow. The latter set is called the “day-ahead” market. The on-the-day hourly markets are called “real time” markets. The ISO schedules the “dispatch” of plants for each hour based on these offers and bids, with the goal of selecting (sorta) the least-costly mix of power plants to exactly match the actual demand on the system at every moment [...]

So what is JP Morgan’s power marketing affiliate suspected of doing? The FT article mentions “bid manipulation” to achieve “excessive prices,” but that could mean lots of things. With multiple markets, and multiple products like financial transmission rights (which might be called “derivatives”), there are many potential ways to use bids in one market to influence outcomes in another market where the trader may hold a position. And the affected position may be some financial hedging scheme completely separate from the ISO’s functions. (Which is why it’s likely a bad idea to have the Wall Street boys engaged in the electricity markets.) So a trader working for Barclays might be manipulating bids in the day-ahead market in order to influence the values of hedges in some other derivative market.

We’ll get a fuller understanding of this scam soon, I suspect.

US regulators are also investigating Barclays over fundraising from Middle Eastern investors that may have violated the Foreign Corrupt Practices Act.

It goes to show you that America doesn’t have the only banksters in the world, and that the British contingent continues to innovate and catch up. The BBC has more.

Photo by Dominic’s Pics under Creative Commons License