By Pam Martens: January 2, 2013
If the general public knew the history of the company that has announced it is acquiring the New York Stock Exchange, there would be a loud clamor for the anti-trust division of the Justice Department to become involved. But the larger question is, where has the Justice Department been on this issue for more than a decade?
The company planning to acquire the New York Stock Exchange in an $8.2 billion cash and stock deal is the Atlanta-headquartered Intercontinental Exchange, known on Wall Street simply as ICE.
ICE went public in 2005. There are two paragraphs in its offering statement that are simply breathtaking:
“In May 2000, our company was formed, and Continental Power Exchange, Inc. contributed to us all of its assets, which consisted principally of electronic trading technology, and its liabilities, in return for a minority equity interest in our company. In connection with our formation, seven leading wholesale commodities market participants acquired equity interests in our company, either directly or through affiliated entities. We refer to these leading commodities market participants, or their affiliates, as the case may be, as our Initial Shareholders. Our Initial Shareholders are BP Products North America Inc. (formerly known as BP Exploration and Oil, Inc.), DB Structured Products, Inc. (formerly known as Deutsche Bank Sharps Pixley Inc.), The Goldman Sachs Group, Inc., Morgan Stanley Capital Group Inc., S T Exchange Inc. (an affiliate of Royal Dutch Shell), Société Générale Financial Corporation and Total Investments USA Inc. (an affiliate of Total S.A.).
“In November 2000, six leading natural gas and power companies, which we refer to as the Gas and Power Firms, acquired equity interests in our company. The Gas and Power Firms are AEP Investments, Inc. (formerly known as AEP Energy Services, Inc.), Aquila Southwest Processing, L.P., Duke Energy Trading Exchange, LLC, El Paso Merchant Energy North America Company, Reliant Energy Trading Exchange, Inc. and Mirant Americas Energy Marketing, L.P.”
One might be forgiven for thinking that this sounds more like a cartel than an exchange. It is clear from these disclosures that ICE came into being because powerful moneyed interests on Wall Street (Goldman Sachs, Morgan Stanley, et al) wanted to team up with Big Oil and Big Gas and create their own electronic trading platform – and their own rules.
The offering statement also notes that the lead underwriters, Morgan Stanley and Goldman Sachs, were wearing multiple hats as existing shareholders: “We expect that Morgan Stanley Capital Group Inc. will sell 1,395,395 shares, or 17.8% of its interest in us, The Goldman Sachs Group, Inc. will sell 1,100,000 shares, or 14.6% of its interest in us…”
According to a September 30, 2012 report from Morningstar, units of Morgan Stanley and Goldman Sachs continue to own sizeable stakes in ICE.
ICE continued to gobble up pieces of the trading market, acquiring the International Petroleum Exchange in 2001. At the time, the International Petroleum Exchange was second only to the New York Mercantile Exchange for trading energy futures. ICE quickly replaced human traders with computers.
ICE made another brazen announcement less than two months after AIG collapsed into the arms of the U.S. government because of its insane exposure to credit default swaps. Wall Street firms had used AIG to insure their exposure on credit default swaps and the U.S. government paid Wall Street firms 100 cents on the dollar on behalf of AIG. By October 30, 2008, the date of the ICE announcement, Bear Stearns had collapsed, Lehman had collapsed, Merrill Lynch had collapsed into the arms of Bank of America, Citigroup was teetering. Wall Street had proven itself to be a pile of dysfunctional hubris and corrupt self regulation.
And yet, ICE announced it was teaming up with nine of the largest investment banks to create its own solution to trading credit default swaps:
“Under the terms of the new agreements, ICE will acquire TCC [The Clearing Corporation] and will form ICE US Trust (ICE Trust), a New York limited purpose trust company and subsidiary of ICE, with the support of Bank of America, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Merrill Lynch, Morgan Stanley and UBS. As previously announced, ICE and TCC continue to work closely with regulators, other market participants and industry groups to develop a comprehensive central counterparty clearing solution for the CDS [credit default swap] market. This customized solution is currently undergoing final testing in preparation for launch.”
There is an old, wise maxim that bad money drives out good. High Frequency Trading and flash crashes and corrupt cartel behavior have driven the public investor out of the stock market. All that is left is a duel to the death among the factions of the cartel. We see the beginnings of that now with investment banks cutting immunity deals to provide evidence against their peers in the Libor scandal.
The U.S. Department of Justice needs to step up to the plate, with the precious little time remaining, with a long overdue investigation of ICE.