Newspaper article International Herald Tribune

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

Newspaper article International Herald Tribune

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

Article excerpt

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. …

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