Wall Street Seen Gaming Tax Credits for Ethanol ; Analysts Say Big Banks Are Stockpiling Vouchers and Exploiting Markets

By Gretchen Morgenson; Robert Gebeloff | International Herald Tribune, September 17, 2013 | Go to article overview

Wall Street Seen Gaming Tax Credits for Ethanol ; Analysts Say Big Banks Are Stockpiling Vouchers and Exploiting Markets


Gretchen Morgenson; Robert Gebeloff, International Herald Tribune


The price of ethanol credits has skyrocketed 20-fold in just six months, leaving many to believe that Wall Street has exploited the market.

It was supposed to help clean the air, reduce America's dependence on foreign oil and bolster agriculture. But a little- known market in ethanol credits has also become a hot new game on Wall Street.

The U.S. government created the market in special credits tied to ethanol eight years ago when it required refiners to mix ethanol into gasoline or buy credits from companies that do so. The idea was to push refiners to use the cleaner, renewable fuel or force them to buy the credits.

A few worried that Wall Street would set out to exploit the young market, fears the government dismissed. But many people believe that that is what happened this year when the price of the ethanol credits skyrocketed twentyfold in just six months, according to an analysis of regulatory documents and interviews with more than 40 people involved in the market, including industry executives, brokers, traders and analysts.

Traders for big banks and other financial institutions, these people say, amassed millions of the credits just as refiners were looking to buy more of them to meet an expanding federal requirement. Industry executives familiar with JPMorgan Chase's activities, for example, said the bank had offered to sell them hundreds of millions of the credits earlier this summer. When they asked how the bank had amassed such a stake, the executives said they had been told by the bank that it had stockpiled the credits.

A spokesman for JPMorgan disputed the account, saying the bank does not trade ethanol credits for a profit in the way it trades other securities, but is registered to deal in credits through its energy business. The spokesman, Brian J. Marchiony, said in a statement that from time to time the bank also purchased credits "on behalf of clients who need to fulfill their EPA-mandated obligations," though it had not done so in the past year. "EPA" refers to the U.S. Environmental Protection Agency.

But other market participants, including Thomas D. O'Malley, chairman of PBF Energy in Parsippany, New Jersey, identified JPMorgan Chase and other financial institutions as being active sellers of the credits this year. He said the institutions had helped transform an environmental program into a profit machine, contributing to the market frenzy this year. "These things were designed to monitor the inclusion of ethanol in the gasoline pool," Mr. O'Malley said. "They weren't designed to become a speculative item. For the life of me, I can't see the justification for it."

While banks are by no means the largest players in ethanol credits, Wall Street's activity in the market reflects a larger effort by financial institutions to exert their influence over loosely regulated markets for basic commodities, like aluminum and oil. The opacity of the ethanol credit market makes it difficult to determine the extent to which large financial actors have profited.

The banks say they have far less influence in the market than others are suggesting and are doing nothing wrong. But the activities, while legal, could have consequences for consumers. In the end, energy analysts say, the outcome will be felt at the gas pump -- as the higher cost of the ethanol credits gets tacked onto the price of a gallon of gasoline. (The credits, which cost 7 cents each in January, peaked at $1.43 in July, and now are trading for 60 cents.)

Valero Energy, a refiner that owns thousands of gasoline stations, said the squeeze in ethanol credits might cost it $800 million. PBF Energy, also a refiner, puts its bill at $200 million. A review of a federal registry of nearly 1,500 businesses and individuals in the renewable fuel market found big Wall Street banks as well as a handful of people with troubled legal histories.

Scott Mixon, the acting chief economist of the Commodity Futures Trading Commission, said in an interview Friday that the issue of banks' involvement in the market was something the agency was tracking and might look into more deeply because of the ethanol component.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Wall Street Seen Gaming Tax Credits for Ethanol ; Analysts Say Big Banks Are Stockpiling Vouchers and Exploiting Markets
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.