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JPMorgan under investigation for manipulating California energy markets

JPMorgan, the largest bank in the United States, in under investigation by the federal government for manipulating energy markets in California and the Midwest.
JPMorgan, the largest bank in the United States, in under investigation by the federal government for manipulating energy markets in California and the Midwest.
Mark Lennihan/AP

JPMorgan Chase was the darling of the U.S. financial system after everything fell apart in 2008. The bank, now the country's largest, picked up a lot of respect for avoiding the high-risk game that took down Bear Stearns and Lehman Brothers and threatened many of the country's biggest banks, including Bank of America and Citigroup (in fact, it stepped up to buy Bear Stearns in an early effort by the government to stem the crisis).

Californians have gotten used to seeing the "Chase" logo because atfer JPMorgan took over bankrupty Washington Mutual in 2008, it changed hundreds of West Coast WaMu branches to Chase branches.

But things haven't been so rosy for JPMorgan of late. It's been dealing with a trading scandal that could wind up costing it $9 billion, in a worst case scenario. It's CEO, Jamie Dimon, has had to testify before Congress. And just last week, we learned that JPMorgan is being investigated by the Federal Energy Regulatory Commission (FERC), for "[manipulating] power markets in California and the Midwest, according to the New York Times.

For Californians, this should all bring up uncomfortable memories of the state's energy crisis in 2000-01, in which Enron engaged in manipulative practices that ultimately a $1.52-billion settlement (much of which was never fully paid due to Enron going bankrupt). As Bloomberg reports, however, there are significant differences between Enron's wrongdoing and what JPMorgan is being investigated for. For its part, JPMorgan says that it complied with all federal laws.

Power falls under JPMorgan's commodities business — where contracts on things like oil, gas, precious metals, and electricity are traded — and that means FERC is actually looking into the activities of one of the bank's superstars, Blythe Masters.

Masters was present at the birth of credit default swaps (CDS), one of the exotic "derivatives" that caused so much trouble back in 2008. The almost legendary JPMorgan group that she was part of was profiled in a "Frontline" documentary about the financial crisis. The bank is credited with have the foresight to dial back on CDS before the crisis, sparing itself that pain that befell its less risk-averse peers. 

Masters remained with JPMorgan, achieving progressively more senior positions. But now FERC is examining her email correspondence with another executive in the bank's commodities business, according to Forbes.

JPMorgan may have used a complex bidding process to raise electricity costs by $73 million, in California and the Midwest. The California Independent System Operation (CAISO) submitted its complaint to FERC in March, and FERC is now engaged in legal wrangles with JPMorgan to obtain communications that the banks says are protected by attorney-client privilege but that FERC says aren't.

Californians will want to keep an eye on this investigation as it moves along. And JPMorgan will be forced to grapple with another top executive who has questions to answer.

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