BRIEF-Bank of America declares quarterly cash dividend of $0.075/share
* Says board declares a regular quarterly cash dividend on Bank of America common stock of $0.075 per share
By Cezary Podkul and David Sheppard and Scott DiSavino
NEW YORK Dec 21 When federal regulators proposed a six-month penalty on JPMorgan Chase & Co's electricity trading arm last month, they took aim at what is now a rare sight on Wall Street: a large and growing power sales business.
After five years of rapid and lucrative growth, the world's biggest investment banks are now dramatically scaling back their U.S. power operations, a Reuters analysis of electricity sales has found.
In 2008, when they were most active in the market, the 15 biggest banks sold enough electricity in the United States to power two out of every five residential customers for a year, Reuters found. By last year, their sales would only power about one out of every five customers.
The pull-back means fewer deep-pocketed players in an already shrinking $200 billion U.S. physical power market and strongly invites the question of who will fill the banks' role of cushioning the risks of buying and selling in one of the world's most volatile commodities.
"If big banks leave the market . . . it means that somebody else has to absorb those risks. And it could be utilities or consumers - those would be the two leading candidates," said Craig Pirrong, a University of Houston professor and expert in energy trade regulation.
Others cheer the exit as a potential win for consumers.
"All the banks are doing is feasting on overly complicated market rules to find vulnerabilities, which they pounce on to make large short-term profits," said Tyson Slocum of Public Citizen, a consumer advocacy group.
Regardless, some electricity buyers are already expressing nervousness about JPMorgan's penalty. The bank had been one of just four banks, alongside Bank of America Merrill Lynch , Australia's Macquarie Group and Germany's Deutsche Bank, to sell more electricity in 2011 than in 2008, according to quarterly data sellers are required to provide to the Federal Energy Regulatory Commission (FERC), the country's top power market regulator.
Others have pulled back sharply. Total power market sales reported by Goldman Sachs in 2011 fell to one-sixth of their peak in 2005. Total sales by the banks have continued to slide in the first nine months of 2012 and are almost half the level of a year ago.
There are many reasons for the decline. Power prices have fallen to 10-year lows across most of the United States thanks to an abundance of cheap natural gas. With decades worth of cheap fuel ahead, fewer utilities have been looking to hedge their output; tough new capital requirements and regulations banning proprietary deals have cut into commodity trading; and some European banks, facing a persistent debt crisis back home, have fled dollar-intensive businesses.
But many bankers and analysts see a more alarming cause for the pull-back by banks: the risk that a more aggressive FERC may target them for anything suggestive of nefarious trading.
BANKS' SLICE SHRINKS FASTER THAN PIE
While the total value of the U.S. physical power market has shrunk in recent years, the banks' share has fallen faster.
At their height in 2008, banks sold $46.2 billion worth of electricity across all products, or about 15 percent of the U.S. physical power market. In 2011, they sold $17.5 billion, or about 9 percent. In the first quarter of this year, their share was down to just under 7 percent, FERC data show.
Reuters gauged each bank's footprint in the power sector by analyzing quarterly logs of physical power transactions they have filed with FERC since 2002. Reuters shared the data with each bank represented in the filings, and while all declined to comment publicly for this article, none disputed the figures.
"The pie is definitely shrinking and has been for a few years," said the global head of one bank's power operations. "Our hope is that we are nearing the bottom."
Some of that gap has been filled by hedge funds or merchant traders not facing the same limitations as banks; but, say traders, some of that liquidity has simply evaporated.
FERC's stepped-up enforcement has grown increasingly apparent since 2005, when Congress beefed-up its penalty powers to help prevent another Enron scandal.
In November, the agency imposed the temporary ban on JPMorgan's physical power trading - over no more than a document discovery dispute in an investigation that is not yet finished. The ban will limit JPMorgan's ability to sell power at profitable rates for six months starting in April 2013.
Asked about the ban by Reuters, JPMorgan Chase CEO Jamie Dimon brushed it off this month as "not that big a deal" for the bank, which is contesting the punishment.
Not everyone is so blasé.
Several customers of the bank -- which includes a range of local utilities from Palo Alto to Seattle -- expressed worries about the impact on their routine power purchases.
"I don't think we are going to get any bid [from JP Morgan] because it takes away their vested interest in getting into these trades," said Yakov Levin, manager of the power department for the Town of Hudson, Massachusetts, which has bought power from the bank.
The California city of Palo Alto "took steps immediately to ensure we wouldn't set up any more deals with during the ban," said Debra Katz, who handles communications for the city's utility. It wasn't ideal since "we've been very happy with our transactions with JPMorgan in the past."
JPMorgan spokeswoman Jennifer Zuccarelli said the bank has been in contact with its clients regarding the ban and sought clarification from FERC to make sure it will not impact pre-existing contracts.
The bank's trading counterparties are also taking notice. One trader who has bought power from JPMorgan said any future deals with the bank must be "reviewed by our legal and regulatory departments".
FERC spokeswoman Mary O'Driscoll said the Commission is not worried about banks scaling back their electricity trading operations.
"Power markets ebb and flow and change all the time. Banks have their own reasons for leaving the market," she said.
BOOM AND BUST
Most banks entered the power sector after the California power crisis in 2000-2001, when several energy marketers like Enron were driven from the market by manipulation scandals, bankruptcy and other credit concerns. That left a financing gap in an industry that had recently become deregulated.
Wall Street sensed opportunity.
Between 2001 and 2005, FERC granted power marketing authority to at least eight banks. Others bought their way in: UK-based RBS launched a joint venture with trading powerhouse Sempra Energy in 2008.
"Everyone was seeing how much Goldman and Morgan were making," said one executive at a large bank that wound down its electricity operations after 2008. So banks started "chasing revenue" by poaching top traders from Wall Street's dominant duo and hiring promising up-and-comers from utilities, he said.
Banks make money in the sector by buying electricity from power generators or plants they own or operate. These often long-term agreements help make costs more predictable and projects more bankable for power providers. The deals also make sense to banks, who can then turn around and sell the power to utilities, cities and industrial users at a slight mark-up.
In all, the value of banks' physical power sales surged three-fold from 2003 to 2008, FERC data show. But the 2008 financial crisis - and its regulatory aftermath - accelerated Wall Street's retreat from the market.
RBS was forced to sell its Sempra Energy venture in 2010 after it was bailed out by the UK government. Bear Stearns and Merrill Lynch, both with large power books, were sold to rivals. Lehman Brothers went bankrupt.
Others simply found the costs exceeded the benefits of staying in the market. Credit Suisse lost over $100 million on Texas power trades that went sour at the peak of the financial crisis, according to a person familiar with the bank's operations at the time.
By 2009, Credit Suisse had decided to pull out of power trading because it was too capital intensive and as they faced restrictions on trading for the bank's own book, according to a person familiar with the firm's thinking.
'JIHAD' OR JUST BUSINESS?
Now, some in the industry worry the retreat is accelerating. Amid a glut of natural gas supply, the market's economics haven't improved much. But the potential costs have.
When FERC proposed fining Barclays for alleged market manipulation in October, the record $470 million penalty more than eclipsed all the bank's physical power sales revenue for the first nine months of 2012, FERC data show. Even Barclays' penalties for manipulating Libor - the global interest rate benchmark - were smaller.
"It used to be that they didn't have significant penalty authority. So if you messed up, whatever ill-gotten gains you got, you gave back," said Barbara Bourque, the former head of FERC's quarterly electric sales reporting, who helped Reuters analyze the agency's data.
"Now, they can put people out of business," said Bourque, who runs Energy Compliance Consulting in Phoenix, Arizona.
Besides Barclays and JPMorgan, FERC has also accused Deutsche Bank of market manipulation, though the agency is only seeking to impose a $1.5 million fine on the bank.
Deutsche Bank this month made deep cuts in its U.S. power trading division; Barclays stopped trading West Coast Markets a year ago. Both banks are contesting FERC's charges.
David Perlman, former chief counsel to Lehman's commodity trading business who is now a partner at the law firm of Bracewell & Giuliani, thinks the proceedings could further dampen banks' enthusiasm toward the power business.
"People are looking at the Deutsche Bank case and they are looking at the JPMorgan case and they are wondering what the rules are," Perlman said.
Former FERC Commissioner Marc Spitzer, now a partner at the law firm of Steptoe & Johnson, says the agency is simply doing its job.
"The argument that FERC is on a Jihad or a crusade against banks is not accurate," he said. Spitzer said FERC is just following up on tips it receives from the marketplace, which could come from regional regulators or even rival traders.
For now, at least, more cases like Barclays could be on the way. FERC has increasingly gone after market manipulators under the tenure of current enforcement chief Norman Bay.
During the last three years, 56 percent of 43 investigations opened by FERC involved market manipulation, according to a Reuters review of the agency's enforcement data. That compares with 42 percent of the 93 investigations opened by FERC in the three years prior to Bay's tenure.
Asked earlier this month by Reuters whether the agency is trying to push banks out of the power markets, FERC Chairman Jon Wellinghoff brushed off the suggestion.
"We're an equal opportunity enforcer."
* Says board declares a regular quarterly cash dividend on Bank of America common stock of $0.075 per share
LONDON, April 26 Shareholders of British asset manager Henderson Global Investors backed its $6 billion merger with U.S. fund firm Janus Capital on Wednesday, after Janus shareholders approved the deal earlier this week.