Fine for manipulating energy market equal to 7 days net income or two traffic tickets

JP Morgan settled charges it manipulated energy prices by paying $410 million. That is a civil penalty of $285M plus $125M of profits from the trades.

I calculate that is about a week’s work of earnings per share or roughly equal to 2 traffic tickets in California for a median income family.

No individual accountability

The WSJ article reports the four named individuals who arranged the trades that generated a near-half-billion fine were not charged in any way and they continue to work at the subsidiary company that got in trouble. Therefore, this is just the bank’s problem, not something that will generate consequences for the individuals involved beyond their name showing up deep in a WSJ article.

Story at USA Today, JPMorgan pay $410 million in energy case and Wall Street Journal, J.P. Morgan Settles Electricity-Market Case.

7 days net income

It’s just a bad quarter for the bank, what with a fine that is a week’s EPS.

NASDAQ reports EPS was $5.20 in FY 12 and $1.59 for first quarter of 2013. The USA Today article above says the $410M is $0.11 per share. Here’s my calc: 

FY 12 Q1Fy13
EPS $        5.20  $      1.59
days            366             90
per day  $   0.0142  $   0.0177
fine  $       0.11  $      0.11
days            7.7            6.2


So the fine is equal to 7.7 days of the 2012 earnings per share or 6.2 days of earnings in the first quarter of ‘13.

That’s a lot, but not a bad deal considering there’s a fairly small chance of getting in trouble and in terms of overall strategy,

(t)he bank had believed that the plan would generate between $1.5 billion and $2 billion in profits by 2018, the agreement said. 

2 traffic tickets

Let’s look at a way of comparing this to a family budget.

In 2011, California median household income was $57,287.

In San Bernardino county, a typical traffic fine is $186 with all the additional add-ons.

Since you don’t want to pay hundreds of dollars more on your insurance for each of the next three years, you are going to traffic school. That is just a part of the ticket. Like the disgorgement part of the FERC settlement.

Going to traffic school will involve an additional $57 paid to the county for permission to take the class.

A quick internet search shows lots of California traffic schools for $14.

Time has value, so the 8 hours sitting in class counts too. I’ll calculate that as one day of the $57,287 median family income.

So, a typical traffic ticket in California on a median family’s budget will cost this:

CA, ’11 median income  $         57,287
weeks                   52
median weekly income  $           1,102
traffic ticket  $             186
traffic school                   57
fee for actual school                   14
one day in class                 220
total  $             477


So that settlement for manipulating the market for all California consumers is about the same as a median family getting 2.3 California traffic tickets. That is roughly comparable to a family getting a set of ‘his and hers’ traffic tickets in a year.

I’ve shown my calculations so you can revise them as you wish.

The methodology

Previous post describes the ‘make-whole’ plan alleged by FERC.

FERC alleged 12 different plans were in use. One plan they assert is based on the normal arrangement that energy buyers won’t force plants to ramp up and ramp down just for their purchase. If a plant starts up and has no buyers the next day, the initial buyer makes good on the costs to slow down and stop the plant. Here’s how the WSJ article describes the FERC’s description:

J.P. Morgan would submit a very low bid to ensure that the system operator would schedule its plant to produce on a given day, FERC said. Then it bid $999 per megawatt-hour for the first two hours of the next day, even though market prices at that time were at about $12. The California system operator’s rules required it to pay J.P. Morgan the high prices because the plant was in “ramp-down” mode from the previous day, FERC said.

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