memorandume

◼ FINANCE Bloomberg Businessweek October 1, 2018

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THE BOTTOM LINE Crypto and cannabis share many traits of 1990s dot-com stocks. But the the market buzz may be built less on optimism than on a restive, anti-Establishment mood.

heavy racial component in the war on drugs. The government has “blood on its hands,” he says.

Harrison says the current uncertain legal land- scape makes it hard for most investment institutions to get in. Cannabis is, he says, “the only time I’ve ever seen in my 30 years on Wall Street where indi- viduals can front-run institutions.” 

It was while talking with him that I realized the story with the cannabis boom is about more than a new, legal market opening up. Crypto and canna- bis share a meta-story about getting back at corrupt elites. Stick it to big businessmen with their war on hemp. Stick it to ineffective mainstream medicine.

“This whole thing is a mess and a disaster”

● Ex-JPMorgan traders made a big wager—and power customers are dealing with their losses

Zapped by a Bad Bet on Electricity

Two energy traders, veterans of JPMorgan Chase & Co., saw an opening. Starting in 2015, Andrew Kittell and John Bartholomew plunked down mil- lions of dollars in bets in an obscure corner of the energy market. Their strategy depended on certain parts of America’s largest electric grid being con- gested, driving up power prices. But the wagers fiz- zled. Their portfolio, valued by some at more than $150 million, soon cratered.

After failing this June to pay up for losing posi- tions, their firm, GreenHat Energy LLC, was declared in default. And now everyone from utili- ties to manufacturers and residential customers are left holding the bag to make up the tens of millions of dollars in losses. “The whole thing is a mess and a disaster,” says Marjorie Philips, a director of fed- eral services at Direct Energy, a retail provider of electricity. GreenHat and Kittell, through an attor- ney, declined to comment; Bartholomew couldn’t be reached for comment.

GreenHat, based in Houston, bought hedges in a market administered by PJM Interconnection LLC, an organization that oversees the wholesale electric grid that serves 65 million people from Chicago to Washington, D.C. The hedges are known as finan- cial transmission rights, or FTRs. They’re used in deregulated power markets to help energy buyers, generators, and distributors protect against local- ized price swings. Bottlenecks can sometimes form

on the grid, such as during an ice storm or when a plant goes down, creating what are known as con- gestion costs. Using an FTR, a big power buyer can get paid when congestion costs rise, offsetting its risk. But it might also end up owing money if there isn’t congestion.

Financial players can buy FTRs, too. Much of GreenHat’s portfolio was “long-dated” —meaning it was betting on transmission-line congestion pat- terns that wouldn’t start until June 2018. Based on historical patterns, most of those positions ini- tially looked like smart moves, according to PJM. That likelihood of success brought a side benefit to GreenHat: Under PJM rules at the time, it could keep building its portfolio without having to put up much money as collateral. But GreenHat would have to pay if congestion patterns turned out to dif- fer widely from those in the past.

By spring 2018, GreenHat’s bets were look- ing bad. Upgrades had taken place to transmis- sion lines across the eastern U.S. that promised to lessen congestion on the grid. On June 5, GreenHat received an invoice from PJM for $1.2 million to cover losses. The firm didn’t pay. Losses have con- tinued to mount, according to PJM. The portfolio has more hedges that will probably keep losing money for three years, though it’s impossible to say exactly how much because of changing condi- tions with transmission lines.

Since GreenHat isn’t paying for its losing bets, that leaves fellow PJM market participants picking up the tab. The organization has begun to charge its 1,000 or so members, companies that use the transmission lines to move electric- ity or for other purposes. Smaller businesses have to pay about $10,000, while big, active PJM par- ticipants, including the likes of Exelon Corp. and American Electric Power Co., will need to absorb the rest. Members are also debating whether

Stick it to central bankers degrading the value of your dollars. Stick it to bankers and their bailouts at taxpayers’ expense. Stick it to the prison-indus- trial complex.

And the cherry on top, believers will tell you, is that thanks to current regulatory black holes, there’s a beautiful opportunity to get in now and make Wall Street the last bag holder. Psychologically, at least, crypto and cannabis are the perfect trades for the postcrisis era. �Joe Weisenthal

◼ FINANCE Bloomberg Businessweek October 1, 2018

30

THE BOTTOM LINE A trading collapse shows how complex some parts of the U.S.’s energy markets have become. That’s made them vulnerable to potential gaming by Wall Street players.

● Danske, the country’s biggest lender, ignored red flags of potential money laundering

The Bank Scandal Rocking Denmark Danske Bank A/S, founded in Copenhagen in the 1870s, has rarely made waves outside Denmark. That changed when the bank revealed the scale of what may prove to be one of Europe’s biggest and most brazen cases of money laundering.

Some €200 billion ($235 billion) flowed through its tiny Estonian unit over a nine-year period, a large portion of the funds suspicious, the company said. Concerns about Danske had been brewing for more than a year, but an internal report published on Sept. 19 showed the bank allowed the poten- tially illicit activity, and profited from it, even after regulators and a whistleblower raised red flags. “The scandal is huge,” says Martin Lidegaard, Denmark’s former foreign minister and a member of the opposition Social Liberal Party. “One of the worst consequences is the loss of faith in the Danish financial industry, and in Denmark.”

Chief Executive Officer Thomas Borgen, once a darling of investors, is leaving, and board members may not be far behind, although the internal report found that neither Borgen nor any of the board members broke the law. Prosecutors in Denmark and Estonia are pursuing criminal probes of the bank. The Danish government has threatened a $630 million fine, and U.S. and U.K. authorities are

studying aspects of the case. The stock’s plunge of about 30 percent since the beginning of the year has erased almost $12 billion from Danske Bank’s market value.

Denmark consistently ranks in surveys as one of the world’s least corrupt and most transparent nations. Now, S&P Global Ratings says the scale of the scandal could put even the country’s AAA credit rating at risk. Lawmakers across the polit- ical spectrum are expressing dismay and rushing to toughen anti-money-laundering rules. With Denmark’s banks under scrutiny from foreign authorities, it’s even more important to avoid “the impression that we’re not coming down severely on this,” said Danish Business Minister Rasmus Jarlov in an interview in September.

The Danske revelations are just the latest exam- ple of how much needs to be done to stop bad actors from funneling ill-gotten gains into the European Union, cleansing the money in the pro- cess so it can be spent without raising alarms. Seven months ago it was Latvia, Estonia’s neigh- bor, caught in the media and regulatory glare after the U.S. Department of the Treasury accused the country’s third-largest lender of acting as a laun- dromat for cash. That bank denied wrongdoing

several changes adopted by PJM will be enough to prevent a similar incident. PJM said in a state- ment that it’s investigating the situation and its options for legal action.

Two years before Kittell and Bartholomew started buying the hedges, they were ensnared in a high-profile scandal while working for JPMorgan. In 2010 the bank had a financial stake in old, money-losing natural gas power plants in California. In September of that year, the plants’ fortunes suddenly reversed, and they became profitable. What changed? The Federal Energy Regulatory Commission alleged that a JPMorgan team including Kittell and Bartholomew had developed manipulative bidding strategies that allowed JPMorgan to make money from grid oper- ators “far above market prices,” according to a 2013 consent agreement with the bank. JPMorgan

settled in 2013 by paying a $285 million civil pen- alty and disgorging $125 million in profits. It didn’t admit or deny wrongdoing in agreeing to the set- tlement. The two traders’ attorney at the time said their actions had been lawful.

By summer 2018, Kittell and Bartholomew were making no mention of GreenHat on their LinkedIn profiles. But the firm’s impact is still being felt. GreenHat “can easily walk away and leave other people holding the bag,” says Susan Bruce, an attorney who represents the PJM Industrial Customer Coalition. “Large steel mills, large manu- facturers, your mom and pop dry cleaners—they’re going to pay a portion of this default. Everyone else is holding the bag.” �Tim Loh

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● Danske Bank share price in krone

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