Wall Street banks don’t like to talk about the extent of their involvement in energy trading, but sometimes they are forced to, and it seems that is happening more often than before.
- Goldman Sachs is suspected of illegal trading practices in the California electricity market, and it misled regulators by filing a false report during an investigation of its electricity trades. As a result, the Federal Energy Regulatory Commission (FERC) is considering action to suspend Goldman Sachs’ trading privileges in California. Goldman Sachs says its error was minor and inadvertant and was corrected quickly, but its arguments may not hold much weight in administrative hearings on the matter unless it can come up with a more detailed explanation of its actions. In energy trading, supplying false information for even a short period of time can give a trader the ability to manipulate market prices.
- Separately, Deutsche Bank is accused of similar misconduct. It faces $1.6 million in fines and forfeitures for U.S. energy market manipulation in early 2010. The bank is contesting the charges.
- Energy swaps traders are seeking a delay in new registration rules from the Commodity Futures Trading Commission (CFTC). The new rules will require traders who handle more than $8 billion in swaps to prove that they have sufficient capital to meet their swaps contracts. The financial crisis of 2008 began after AIG issued swaps in quantities thousands of times greater than its capital would cover.
- Banks are having trouble retaining their energy traders. Within the last month, there were reports of gasoline traders quitting Morgan Stanley. Separately, most of Barclays’ energy trading staff has left for other jobs after changes in trading rules and bonus formulas.
Money laundering investigations seem unlikely to die down anytime soon. There are reports that the OCC is investigating gaps in anti-money laundering practices at Goldman Sachs. The money-laundering investigations picked up new urgency a month ago when Standard Chartered Bank agreed to pay $340 million to settle charges of keeping false records and filing false reports in connection with more than $250 billion of transactions in order to hide money laundering activities. The bank and state regulators have reached a final settlement agreement in that case, but the bank still faces serious charges from other regulators in connection with the same money laundering practices.
Citibank’s sale of EMI, one of the world’s largest music companies, has run into so many problems it is fair to describe it as a big mess. Universal Music Group, the largest record company in the world, has now been cleared to buy most but not all of EMI’s record labels, but regulators are requiring Universal to sell off some of its assets as a condition of that deal. Most of the music publishing assets have already been sold separately to Sony and a group of music business investors.
Greece’s economy is falling into a depression as a result of its European Union-led bailout, which became necessary to repay bondholders after the country fell victim to a Wall Street accounting fraud. It is easy to say at this point that the bailout and associated austerity program have done far more harm to Greece than the original accounting failures and excessive indebtedness ever could have.
A banking executive in Switzerland warned this week that Swiss banks could lose more than 10 percent of their deposits as a result of new tax compliance rules. Tax cheats are expected to move their money out of Switzerland now that it is no longer a safe haven for tax evasion, and the amount of money involved may be larger than most people suspected.
The worldwide protests that have erupted over various issues in the past two weeks raise questions for businesses in general, including banks. In Pakistan, KFC has temporarily closed all its restaurants because of threats of religious violence. There is similar tension between China and Japan, as demonstrators in China, in a fit of nationalistic fervor, seek to force Japan to relinquish its claim to three small islands. There are widespread boycotts of all things Japanese in China, and citizens in Japan are responding with boycotts of Chinese-made products. The biggest victim so far is Japan Airlines, which next week will sharply reduce its flights between the two countries as demand falters because of the mutual boycotts. Neither KFC nor Japan Airlines is closely associated with a bank, but it is easy to imagine this kind of business disruption affecting a bank. The financial consequences could be similar to those of a natural disaster, or could be longer-lasting in nature. It is hard to say how prepared any large bank would be for that kind of scenario.