Officials in the nation’s capital and California’s hailed this week’s announcement of a $410 million settlement with JPMorgan Chase as a win for consumers and a warning to big companies that try to manipulate electricity markets not to do it again.
But JPMorgan didn’t admit any wrongdoing in the case, and no executives were charged, prompting protest from Capitol Hill that the action didn’t go far enough. Some corporate governance experts say that large financial firms have come to consider such fines simply part of the cost of doing business.
Big fines alone can’t change the culture of high-risk trading that brought down firms such as Enron and nearly all of Wall Street, said Chip Pitts, a lecturer at Stanford Law School who specializes in corporate responsibility.
“The regulators are fooling themselves if they think this will be a deterrent,” he said.
The settlement includes a $125 million refund to defrauded customers in California and the Midwest, plus a $285 million civil penalty. Even if that refund was split only among Californians, each resident would see just $3.
“Historic,” said Tony Clark, a member of the Federal Energy Regulatory Commission, the federal watchdog that brought the case against the firm.
“Vindication,” said Nancy Saracino, general counsel for the California Independent System Operator, which manages the state’s power grid.
The settlement came only eight years after California recovered $1.5 billion from Enron, a bankrupt Houston energy trader, in the mother of all power-market manipulations. Enron’s activities were blamed for a 2000-2001 electricity shortage that led to widespread blackouts, the bankruptcy of the state’s largest utility and the defeat of its governor in a recall election. The energy crisis cost the state an estimated $40 billion to $45 billion.
But unlike bankrupt Enron, profitable JPMorgan can pay its fine, and, based on last year’s net profits, still keep $20 billion.
A company spokesman declined to comment. In June, JPMorgan announced that it was exploring the sale of its energy trading business, acquired in 2008 through the takeover of troubled rival Bear Stearns.
Jon Wellinghoff, the chairman of FERC, said in a statement that the commission’s actions had been effective. “Look at the results,” he said.
Congress gave FERC, the federal energy regulator, penalty authority in the Energy Policy Act of 2005 to deter the kinds of abuses committed by Enron. Last month, it fined British bank Barclays for allegedly manipulating energy markets in western states from 2006 to 2008. The $435 million sum was the largest in the agency’s history.
One of the bill’s authors, Sen. Dianne Feinstein, D-Calif., called it “a strong example” of how giving the agency some extra enforcement muscle protected consumers.
Since 2011, JPMorgan has been fined by a variety of federal regulators for a total of $7 billion for everything from mortgage fraud to doing business with sanctioned countries such as Iran, Cuba, Sudan and Liberia.
But this week, two of Feinstein’s Senate colleagues were less impressed with the JPMorgan settlement.
“We are concerned about whether the settlement includes adequate refunds to defrauded ratepayers and also concerned that the individual executives who sought to impede the commission’s investigation will not be punished,” Sens. Elizabeth Warren and Ed Markey, both Massachusetts Democrats, wrote to Wellinghoff.
Warren, a former Harvard professor and architect of the Consumer Financial Protection Bureau, has been a strong critic of Wall Street firms and an advocate for tougher cops on the beat.
The Senate Appropriations Committee this week adopted an amendment by Feinstein that would strengthen oversight of gasoline and diesel fuel markets, which are regulated by the Federal Trade Commission and the Commodity Futures Trading Commission.
Feinstein said a gasoline price spike in California last year couldn’t be explained by market conditions alone, pointing to market manipulation as the culprit.
“This is a pervasive pattern in California, the result of what may be malicious or manipulative trading activity,” she said in a statement.
Pitts said regulators need to do more than just issue fines: They need to hold executives accountable.
Several of Enron’s executives went on trial, and some went to jail. But the Wall Street firms that participated in trading activities that nearly brought down the entire economy in 2008 didn’t face the same kind of reckoning.
“We’re basically back to business as usual,” Pitts said. “There’s been little or no accountability.”