The Federal Energy Regulatory Commission (FERC), the agency responsible for interstate transmission of electricity, recently levied $487.9 million (£320.6 million) in penalties to British bank Barclays and four of its former traders following an investigation into trades the bank made in California and other Western energy markets between 2006 and 2008. For Barclays, one of the world's largest banks, this is a drop in the bucket and will do nothing to deter them from manipulating markets in the future. There's only one punishment that fraudulent bankers and financial executives deserve, and it's not fines — it's jail time.
U.S. regulators contend that that Barclays and four of its traders manipulated electricity prices in the U.S. by fraudulently influencing the index price to the benefit of their own trading positions. The FERC contends that Barclays’ activities affected wholesale electricity prices in the western U.S., ultimately adjusting retail prices paid by tens of millions of Americans. The agency estimates this manipulation alone cost $139 million “in harm to the market.”
Barclays, which plans "to vigorously defend this matter,” is recovering from a string of scandals including a $450 million (£296 million) fine from American and British regulators for rigging LIBOR (London Interbank Offered Rate) rates.
Barclays, however, isn’t the only bank to face penalties for manipulation of American energy markets. In January, the FERC fined a Deutsche Bank subsidiary $1.7 million (€1.2 million) over a 2010 energy-trading scheme which similarly manipulated American markets.
Since 2011, the FERC has publicized at least 13 different investigations into energy-market manipulation, including a probe into the actions of American multinational bank JPMorgan Chase, and reached a settlement with a subsidiary of the Entegra Power Group last November for trading violations.
This is the largest penalty dealt by the FERC since 2005, when Congress granted the FERC additional powers to enforce anti-manipulation and anti-fraud rules by passing the Energy Policy Act of 2005. Congress passed the act following large-scale market manipulation by Enron Corporation traders that led to rolling blackouts throughout California.
Market manipulation isn’t a uniquely American problem. Bloomberg News reports, “European antitrust regulators are investigating allegations of price manipulation and collusion by traders in crude, refined-product and biofuels markets. Britain’s Financial Conduct Authority is considering opening a probe into potential manipulation of the WM/Reuters currency rates, which are used to set the value of trillions of dollars of investments.”
The logical question facing advocates and opponents of capitalism and any erudite global citizen is: How can we prevent so many in the financial sector from practicing this illegal behavior in the future?
This is a serious issue that warrants an intelligent response because not only is market manipulation deleterious to millions of people worldwide, it is corrosive to the inherent nature of capitalism and our way of life.
Many attribute this illegal conduct to the lack of serious repercussions for individuals who employ these immoral, illegal, and illicit tactics.
Save the occasional inside trader and Ponzi schemer, few bankers, brokers, and traders have faced jail time and other criminal penalties despite the numerous types of illegitimate activity they've conducted. While some are forced to reach settlements or pay recompense, incarceration is not a common way we’ve dealt with these crimes.
While Barclays will contest charges of market manipulation in court, their penalties, like those received by many previous criminals in the financial sector, will only include financial retribution and monetary penalties — a slap on the wrist to those who defraud the public and a small sum of money compared to the net wealth of many in the financial sector.
Conservative George Osborne, the British chancellor of the exchequer who is responsible for all financial and economic matters, has made headlines in the UK for his new offensive against "reckless bankers.” Osborne has vowed to implement recommendations found in the new 500-page report from the Parliamentary Commission on Banking Standards (PCBS), a commission established in the wake of the Barclays LIBOR scandal.
The PCBS recommended creating a new criminal offense in the UK, which would include new provisions with prison sentences for “reckless misconduct in the management of a bank.” "The government is determined to raise standards across the banking industry to create a stronger and safer banking system,” Osborne said in a statement last week.
While we need to be cautious and avoid the criminalization of failure — it’s not a crime to be an unsuccessful bank manager — the endorsement and subsequent application of a new U.S. policy that would strengthen anti-manipulation and anti-fraud legislation would administer justice and could deter further crime. This new policy would send fraudsters, market-manipulators, and criminals in the financial sector to prison when they commit serious crimes against the American people. The threat alone of a private-sector purge of criminals could scare potential felons away from this financially acidic behavior.
This would be a new policy with the old mantra espoused by Theodore Roosevelt: “Speak softly and carry a big stick.” It was the former president himself who introduced consumer protection and punishments for defrauding the public in his Square Deal.
While banking and Wall Street reform is not a priority of this administration or Congress and is seldom discussed in the American media, avoiding the practice of “moral hazard,” as venture capitalist and fellow at the Competitive Enterprise Institute Bill Frezza, wrote, “an insurance industry term meaning the ‘lack of incentive to guard against risk when one is protected from its consequences,’” is of utmost importance to prevent the demise and decay of our markets and democracy.