Whereas 20 years ago, it was Enron that made billions from the California electricity crisis (which it caused), a scandal which culminated with Enron’s scandalous and convoluted bankruptcy, this time it is pristine banks such as Goldman and Bank of America that made hundreds of millions of dollars in revenue as tens of millions of Texans were stuck in the dark.
According to the Financial Times, in the days when the Texas electric grid failed during last month’s polar vortex blast and which sent electricity prices to staggering levels, Bank of America made hundreds of millions of dollars in trading revenue “highlighting the upside for Wall Street from mayhem that knocked out power and heat across the state, industry executives and traders said.”
The bank’s Houston-based energy trading group – which is part of BofA’s FICC division that made revenues of $1.7bn in the fourth quarter – had electricity contracts that soared in value when wholesale Texas power prices rose 10,000 per cent to a cap of $9,000 a megawatt-hour the third week of February, the FT reports.
The story is familiar to our readers: while the record prices were ordered by the Texas utility regulator in an attempt to bring more generation into service, this plan imploded when almost half the state’s capacity fell offline as wind farms froze over starting a catastrophic chain reaction which lead to widespread blackouts amid blocked supplies of natural gas and frozen coal piles. The Blackouts lasted days, leaving millions in the dark.
Like numerous other power merchants, BofA takes part in the Texas energy market by trading power and gas and selling products that enable generators and other asset owners to hedge against fluctuating prices. That activity left BofA with an inventory of power contracts that surged in value during the blackouts. “The volatility of the energy market has heightened the value of risk management,” the bank’s website says, perhaps in anticipation of the outrage that will follow the realization that a handful of banks made huge windfalls as the population froze, in some cases to death.
To ease its conscience – and preempting the angry populist chants in front of its Texas office – the bank pledged $1.1 million – or a tiny fraction of its power revenues – to charities to provide shelter, water, food and other essentials after the weather catastrophe.
“From the Rio Grande Valley to the panhandle, this winter storm affected the entire state, including our 19,000 employees in Texas, and for many, the recovery is just beginning,” Nikki Graham, the bank’s Austin market president, said in a statement last month.
While BofA declined to comment on the Ft on how much its energy trading generated during the Texas blackouts, but it said: “Revenue related to this activity will be offset by losses and reduced revenues related to investments in wind and other alternate power suppliers in Texas and other affected markets.”
And in what appears to be a distressed asset grab to further entrench itself in the space, BofA was the lead bank on a $480MM line of credit to Brazos Electric Power Co-operative, the generation and transmission company which as we reported on Monday filed for bankruptcy protection this week because it was unable to pay for power purchases racked up during the storm.
While most banks have been understandably tight-lipped about their trading activities during the longest spell of cold weather ever to test the Texas grid (and certainly their profits), one exception is Australia’s Macquarie which also has a Houston-based energy business, and which reported an A$300m (US$234m) gain related to natural gas trading, lifting annual group profit by 5-10%.
“So far we’re only hearing from the losers, and furthermore, we’re only hearing what the losers have chosen to tell us,” said Ross Baldick, an emeritus professor of engineering at the University of Texas at Austin.
To be sure, most other banks likely generated significant revenues during Texas’s historic woes since BofA has a smaller energy trading business than most of its peers. Citigroup was the fourth-largest seller of US wholesale power in the third quarter of 2020, while Morgan Stanley was 15th, according to government data compiled by S&P Global Platts. Bank of America was not in the top 20.
One other bank which we do know made substantial profits from the Texas turmoil is – who else – Goldman Sachs.
The bank, which recently was found criminally guilty for its involvement in the biggest sovereign corruption scandal in history when it bilked billions from Malaysia’s Sovereign Wealth fund, could stand to gain more than $200 million from the physical sale of power and natural gas and from financial hedges after spot prices surged across much of the U.S., according to Bloomberg.
“The polar vortex drove volatility in energy markets, and, as a market-maker and liquidity provider, we were positioned to help our clients manage their risks in that challenging environment,” Maeve DuVally, a Goldman Sachs spokeswoman, said in a statement.
Some of Goldman’s gains resulted from hedges, a routine part of risk management on Wall Street and across corporate America. Hedges are typically supposed to blunt losses in the event that prices swing unexpectedly. The protection can become highly profitable when rare events occur.
But, as in the case of BofA, those gains whether from hedges or prop trades may prove elusive given the increasingly political fallout from the Texas crisis which has tipped energy companies into bankruptcy, triggering legal challenges and prompting government intervention. Indeed, as the FT adds, profits may well be diminished as Texas officials ponder retroactively reducing prices for some of the $50bn in electricity sales executed during the blackouts.
Morgan Stanley also stands to reap a revenue bonanza from the Texas freeze, its gains coming in just below those of Goldman at under $200 million. Pipeline operators Energy Transfer LP and Oneok Inc. also said they gained.
The big question now is how much of these revenues will actually result in cash getting wired. That’s because said cash will depend on what happens to the gas suppliers, power generators, utility customers and traders who were stung by the soaring energy prices. Some are facing default. Others are going bankrupt, according to Bloomberg. And state lawmakers are looking into forgiving some payments for consumers altogether.
Several traders described the potential for a daisy chain, in which payments aren’t made to sellers in one market, affecting payments elsewhere. It was a surprise to some that Macquarie updated its forecast so soon.
“People are waiting for checks that aren’t coming,” said Evan Caron, chief strategy officer of energy-technology firm ClearTrace.
The final outcome, according to Bloomberg, depends in part on developments in places such as Texas. That market’s manager, ERCOT or the Electric Reliability Council of Texas, is grappling with a $2.5 billion shortfall as more than a dozen companies face default. In a further complication, an independent monitor told state regulators that Ercot incorrectly priced electricity during the emergency, resulting in $16 billion in overcharges. If that were reversed, the adjustment would cut profits expected by some of the market’s biggest winners. Meanwhile, in the statehouse, discussion of a potential bailout or other intervention continues.