|
I’ve
been around, how about you? I’ve been pushed around, screwed around,
led around the block on more than one occasion - which coincidentally, some
of you might better know as being ‘led down the proverbial garden path’.
Oh, I’ve run around, been on merry-go-rounds, was married once to
someone who ‘slept around’, heck, I’ve even read the book
around the world in ninety days! Around town; uptown, midtown and downtown
– I’ve done the rounds. Round tables, round-a-bouts, round cheeks
and round house – now you’ve got to get a kick out of that!
I’m not
messing around here – just looking for good segue to what I really want
to talk about; round tripping.
Now,
I’d like you all to consider the following recent confessions from
energy firms about "round trip" trades:
“Reliant admitted
10 percent of its trading revenues came from ``round-trip'' trades. The
announcement forced the company's president and head of wholesale trading to
both step down.
DMS Energy announced 80
percent of its trade in 2001 were ``round-trip'' trades.
That means 80 percent
of all of their trades that year were bogus trades where no commodity changed
hands, and yet the balance sheets reflect added revenue. If that isn't
fraudulent, I do not know what is.
Remember, these trades are sham deals where nothing was
exchanged.
Duke Energy disclosed
that $1.1 billion worth of trades were ``round-trip'' since 1999. Roughly
two-thirds of these were done on the InterContinental Exchange; that is, the
online, non-regulated, non-audited, non-oversight for manipulation and fraud
entity run by banks in this country. That means thousands of subscribers
would see false pricing.
A
lawyer for J.P. Morgan Chase admitted the bank engineered a series of
``round-trip'' trades with Enron.
Dynegy and Williams have also admitted to ``round-trip''
trades.
Although these trades
mostly occurred with electricity, there is evidence that suggests that ``round-trip''
trades were made in natural gas and even broad band.”
The descriptive
above was read into evidence by none other than Senator Dianne Feinstein.
I’m simply borrowing her words from the Congressional Record, Proceedings and
Debates of the 108th Congress [2003], First Session, where Ms.
Feinstein characterizes this type of trade,
“By exchanging the same amount of commodity at the same
price, I believe these companies have not engaged in meaningful transactions
but deceptive practices to fool investors and drive up energy prices for
consumers. It is, therefore, imperative that the Department of Justice, the
Federal Energy Regulatory Commission, the Securities and Exchange Commission,
the Commodities Futures Trading Commission, and every other oversight agency
within this Federal Government conduct an aggressive and vigorous
investigation into all of the energy companies that participated in these
markets.”
Ms. Feinstein delivered
this soliloquy in the aftermath / investigation of the Enron debacle. She is
essentially “outlining” how BANKERS [like J.P. Morgan
Chase] aid and abet their clients [in this case Enron] in
“engineering” desired outcomes in markets in which they operate.
In this particular case, of course, the commodity being discussed is
electricity and what we are being treated to is snippets of just how its
price was “engineered” higher – largely on the backs of
consumers in California.
What is important
to take away from the revelations above is that commodity prices can be, and
in fact are – illegally manipulated. But remember, prices are not
necessarily only manipulated UP!
Who would
possibly want to manipulate prices down?
So, what if
your ‘client’, instead of Enron, was “someone even more
special” - like the U.S. Treasury or the Federal Reserve? What if these
clients had been busy for the past few years printing money like bandits [I
actually prefer the term Pirates] and were hitting the wall so to speak
as the price of virtually everything was beginning to precipitously rise as a
result. Of course, they ran the gambit inventing ways to disguise the real
inflation [debasement of the currency] in the economy through the use of
hedonics, seasonal adjustments and other sophisticated Tom Foolery –
like creation of asset bubbles and exporting inflation through the bloated
trade deficit? But, just for fun, let’s assume now they had exhausted
their proverbial bag of tricks but were still living the lie - and had a
vested interest in keeping the price of a strategic commodity, like natural
gas, DOWN to give credence to their claims that inflation was still
somewhat under control – having already lost just that – control
– where pricing of crude oil is concerned?
Now I have to
admit, the chances of such a case – just like the one described above -
ever occurring in the real world must be pretty slim, ehh? I mean, I’d
hate to even guess at what the “odds” might be for such a
situation to really happen. But as ridiculous as it seems, I’m going to
suppose that this long odds situation really has happened and try to figure
out what else might have logically happened if such a scenario were to occur,
ok?
An Ongoing
Hypothetical Case Study
For such a
situation to occur – to control the price of natural gas – I
would want a “real player” quarterbacking the whole affair.
Someone with who had their hands in everything:
“J.P. Morgan Chase is one of the largest, if not the
largest, participant in the overall derivatives markets. According to the
U.S. Office of the Comptroller of the Currency, J.P. Morgan Chase had
$34.7trillion [more than 48 trillion reported as of June, 2006] in
derivatives on their books (measured in notional value) as of September 30,
2003. The bank acts as a dealer in many derivatives markets and uses 99.5% of
its derivatives for trading purpose with only 0.5% used for other purchases
such as hedging its banking activity;”
Quite possibly
and most likely, you’d want someone with experience in the natural
gas arena:
“Prior to its merger with J.P. Morgan & Co., Chase
Manhattan Bank set up an energy trading business in the British Channel
Islands named Mahonia, Ltd. The business, based in New Jersey, conducted
billions of dollars of natural gas trading with other energy companies. Many
of its transactions took place just before year-end. Often, the deliveries of
natural gas and oil were sold right back to those who delivered them through
complex derivative transactions. Approximately 60 percent of Mahonia’s
trades were with Enron Corp. “
Then, perhaps
you’d want this huge derivative player – to take a dominant position on some
recognized exchanges in the subject market so as to position themselves to
“put the clamps” on the price movement in the commodity.
JPMorgan awarded Energy Derivatives House of the
Year
Risk magazine, January 2006
JPMorgan was named Risk magazine’s Energy derivatives
house of the year in their January issue. According to Risk,
"JPMorgan has emerged as a key player in energy derivatives over the
past year."
Now, after the
price of natural gas is ‘wrestled to ground’, so to speak –
I might have some explaining to do since the price of crude oil is making new
all time highs. As the questions mount – with natural gas prices
falling [or were they engineered, perhaps?] in three short months to
one third of their all time highs – and crude oil is trading at an all
time high of 75 bucks a barrel – you’d, no doubt, want to cover
your tracks. You might even want to make claims that, due to a warm winter,
natural gas inventories were bursting at the seams!
“Despite record storage levels in the summer,
the futures market is sending record
strong signals to inject more as quickly as possible. There could
be many reasons
for the strength of this futures market-based signal –
fears about gas use in electric generation this summer, fears of hurricanes,
fears of international pressures on oil prices. Still, the strength of the
November through March seasonal price spread in the face of huge existing
storage inventories clearly emphasizes the fact that gas markets value
storage right now at unprecedented levels.”
Of course, you
would not want to mention the fact that warm winters are, in fact, a double edged sword! It was so warm
folks that in southern climates they actually used record amounts of
electricity [largely derived from nat. gas]
to power air conditioners – but we won't mention that, ok?
ERCOT: Electric supply OK
today
Conservation
of usage still urged
09:40
PM CDT on Tuesday, April 18, 2006
By
KIMBERLY DURNAN / The Dallas Morning News
Adequate electricity should be available as afternoon
temperatures soar in North Texas, meaning rolling blackouts are unlikely,
officials with the agency that oversees the state’s power grid said
Tuesday.
Dottie Roark, spokeswoman for the Electric Reliability Council of
Texas, or ERCOT, said the state should have enough electricity supply to meet
demand despite projected record-breaking heat. But she urged consumers to
curtail electric use when possible.
“We don’t expect a problem today … but we never
say never,” she said. “We are encouraging people to bump up their
thermostats a little and reduce their use of electricity.”
Viewed in this
light, would this not tend to cast government supplied natural gas inventory
data in the same light as, say, inflation or employment data?
“Have you ever wondered why the CPI, GDP and employment
numbers run counter to your personal and business experiences? The problem
lies in biased and often-manipulated government reporting. We offer an exposé
of the problems within the reporting system, and an assessment of underlying
economic reality, through two basic services:”
The reality is
this: There is no independent third party audit of what published natural gas
inventory data is – is there?
But we do
factually know that rolling blackouts on the electrical grid have occurred in
places like Austin, Texas:
Austin Required to Implement
Rolling Blackouts
The Electric Reliability Council of Texas (ERCOT) – which
manages the statewide electric grid – ordered rotating blackouts Monday
afternoon, April 17, 2006 across Texas. Cities across the state were
each assigned a portion of 1,000 megawatts (MW) that needed to be turned off
or “shed” to keep the statewide electric grid in balance.
The short supply situation was created by a combination of factors: Record
temperatures that caused record electric demand for April and 14,000 MW of
power plants off line undergoing annual maintenance and repair work. March
and April are two of the months when this work is typically scheduled because
electric demand is usually lowest during fall and spring months due to mild
temperatures. In addition, five generating units in the state tripped off
line shortly after 4:00 pm, creating a shortfall in generation that required
immediate load shedding statewide to prevent a total blackout of the
statewide electric grid. If the statewide electric grid shuts down, it would
take 3-5 days to get the system back up.
But of course
there are always rational explanations why we need not concern ourselves,
right? Is this not reminiscent of the type of reasoning put forward as to why
Americans should not be concerned about illegal immigration?
We need to
remember that someone might have to take some heat, otherwise, regulators themselves
might be accused of complicity or turning a blind eye to deliberate and
premeditated market manipulation.
 
In the case of
the Enron debacle, blame was laid at the heels of Arthur Andersen.
As Mr. Anthony
Fell – Chairman of Canada’s RBC Dominion Securities [the
brokerage unit of Royal Bank of Canada] was recently quoted as saying,
"Gold bullion is the one investment and
long term store of value which cannot be adversely impacted by corrupt
corporate management or incompetent politicians -- each of which is in ample
supply on a global basis," he said
Apparently, there
are some that would have us all believe that BANKS DO NO WRONG –
everyone else is guilty?
It would appear
that banks [practicing philanthropy, no doubt?] simply pay their fines
and move on to bigger and better things.
The Perils of
Price Manipulation
For folks who
would suggest that we all benefit from lower natural gas prices [even if they
are manipulated] – consider this:
·
artificially
low prices discourage conservation
·
artificially
low prices discourage much needed research on and implementation of
alternative fuel sources
·
artificially
low prices discourage exploration
·
artificially
low prices “speed up consumption” of a non renewable resource and
lead to misguided uneconomic choices being made on behalf of governments and
consumers alike
·
artificially
low prices are not sustainable
·
artificially
low prices mean our kids [future tax payers] ultimately pay for our largess
Good thing
we’re only talking hypothetically here, ehhh? It would be a real bummer
if half this stuff was true, wouldn’t it?
Rob Kirby
KirbyAnalytics.com
All
articles by Rob Kirby
Subscribers to Kirbyanalytics.com are profiting from
paid in-depth research reports, analysis and commentary on rapidly unfolding
economic developments. Subscribe here.
| 
