The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (13 page)

The political unrest was soon affecting the oil markets. By February 2011, rebels challenging the Libyan dictator Muammar
el-Qaddafi were moving in on its capital city. Soon the country,
which produced about 1.6 million barrels of crude per day, was operating at only a fraction of its capacity. Some hedge-fund traders, convinced that the threats to supply would be long lasting, were predicting $200 oil in the contract markets.

By the time Ruggles arrived at Delta in April 2011, Brent crude, the European oil contract he and an increasing number of U.S. traders followed most closely, was trading at more than $120. But the contracts Delta had bought to hedge jet-fuel costs during the period had bet prices of $110, and had cost about $8 apiece. Ruggles thought that was an exorbitant price to pay for a simple crude contract, one that practically wiped out the $10 Delta stood to make by having locked in lower crude prices. Recognizing the mistake, Paul Jacobson, Delta’s treasurer and the usual point man on hedging decisions, worked with Ruggles to sell the existing contracts.

Delta’s commodity contract purchasing had until then been basically ad hoc. Decisions were made by a small group of executives—usually including Jacobson, Anderson, and Bastian—who would set the company’s plan. Once they decided how to bet in the markets, they, like Andurand at BlueGold, would then turn to underlings to actually buy the proper contracts and watch their performance day to day. Ben Bergum, a graduate of Montana State University’s accounting program who now handled many of the details, had just been hired. He worked with other employees in Delta’s supply-chain management area who tallied the amount of fuel the airline needed and what its price exposure might be as a result. The group sat in the flight-operations center of the Delta campus, isolated from Jacobson and other finance employees, and Bergum himself worked in a cubicle that was crushed against
a thick column, next to a printer, envelopes, and other office supplies.

Once on the job, Ruggles stopped the self-editing he had labored over in the interview with Anderson and Bastian. Spotting textbooks on topics like advanced corporate finance and hedge ratios in Bergum’s area, he lambasted the airline’s simple-minded approach to commodity contract trading.

“I don’t care about anything you’ve done before,” he said, tossing the books into the trash. “We’re going to do this my way.” His view was straightforward: since Delta always needed jet fuel, it was by definition short the commodity, and should have a sophisticated hedging book, or investment portfolio, dedicated to preserving the most attractive possible prices. The book would use all available techniques to do so, just as that of a hedge fund or a bank like Goldman Sachs would.

But Delta’s conservative hedging policy, which forbade the use of complex commodity contracts, restricted the possibilities. In general, Ruggles was limited at the time to using options, the right to buy or sell crude at predetermined future prices, and other commonly traded products. But he could put together more sophisticated positions if he did it in a piecemeal fashion, buying single components of the overall bet to build the broader wagers over time.

Using the more incremental approach, then, Ruggles revamped Delta’s market bets with a series of options trades tied to a spectrum of different crude prices. The resultant position was similar to the nerve-racking “cap-swap double-down extendable” that Emirates had used in the mid-2000s. With Brent crude contracts trading at $110 in the middle of May, Ruggles effectively forecast that prices would stay somewhere between $95 and $122 in the months to come. Depending on where, exactly, crude
contracts went, Delta would either come out slightly ahead or make a lot of money; barring an unpredictable calamity, it wasn’t expected to lose money.

The strategy worked well. Crude stayed in the desired place for the next several months, and Delta’s cost of hedging fell substantially.

Satisfied, Ruggles turned his attention to the physical and technical operations of Delta’s fuel-hedging business. He hired a few more traders and moved the entire group over to the finance floor, where they could be closer to their overlord, Jacobson. He also put up Bloomberg market-data terminals, which were ubiquitous on Wall Street trading floors, and set up exchange accounts for Delta on both the Chicago Mercantile Exchange and the IntercontinentalExchange. He arranged for Delta to trade directly with places like Cargill and Koch Industries, rather than contacting them through middlemen. When two-foot-deep desks designed for flight reservation takers arrived in his team’s new workspace, Ruggles sent them back, insisting that the group work off a traditional trading desk, which would allow them to work together better.

It was a Wall Street trading floor that had lured him into trading in the first place. In the mid-1990s, Ruggles was fresh out of a back-office posting in the army when he was offered a chance to help Citibank transition its trading systems from Unix, the software he had used as an information-technology specialist in the military, to Microsoft Windows. Eager for the shot, he traded in his 1986 Toyota Celica, which had nearly 200,000 miles on it, for a little bit of cash and a ride to New York.

Like Pierre Andurand, Ruggles had grown up with a liberal-minded father who was suspicious of financiers. The indoctrination was worse for Ruggles, though: his father was a professor of finance in Ohio and had actually researched the system as part of his living.

In 1987, his father took him to see the movie
Wall Street
, the portrait of corporate greed starring Charlie Sheen as an ambitious young stock trader and Michael Douglas as Gordon Gekko, his sleazy, amoral business mentor. “We left the movie and we had very, very different views,” Ruggles remembers. “I had a hard time understanding that Gekko was the bad guy. I’m thinking, ‘This is what I want to do when I grow up.’”

After graduating from what he joked was “the 200th best high school in Ohio” in the depressed steel town of Youngstown, Ruggles attended the University of Michigan, where he remembers maintaining a 4.0 for a while. He was sharp, but lacked focus, skipping classes until the last week before the exam. Prior to that, he’d bum around campus attending other things he found interesting—business school lectures, for example. Then he’d show up to the class in which he was actually enrolled and, hoping to bone up on the topic quickly, ask fifteen questions during a lecture. Classmates found him infuriating. “I didn’t have a lot of friends,” he says. He eventually transferred to the University of Texas, where the tuition was less than half of what it was in Michigan, and got a part-time job. Over the next year and a half, he lived on the cheap, worked as an assistant manager at an ice rink, and did other retail jobs to make ends meet. He never quite managed to make it work, though, so with one unpaid tuition bill standing in the way of getting his degree, he joined the army, where he finally earned enough to pay UT.

Arriving on Citi’s bond and commodities trading floor in 1997, Ruggles was immediately smitten. He loved the high-octane ambiance and the camaraderie. Plus, he witnessed some major market meltdowns right up close. He was there for the Russian currency crisis of August 1998 and the Long-Term Capital Management hedge-fund bailout a month later, periods when the traders sprang into action and hundreds of millions, even billions, were lost in a single day. It seemed to Ruggles that the market was a living organism in itself, with moments of complacency, fear, and sadness, just like people had. When crisis was stirring, “you could almost sniff it out,” he says of those wild days on the floor at Citi. “It starts out as a normal morning and all of a sudden people are yelling and screaming.”

Ruggles was paid to tweak technology systems, but he began paying attention to the mathematical trading models instead. He also got to know some of the traders whose computers he fixed. One of his mentors was
David Becker, a rising commodities trader. Sitting next to Becker for several weeks, he learned about the nature of the job and how to interpret what was happening in the market. At that point, Ruggles had “job envy,” he says. “I liked what I was doing, but I would much rather be doing what he was doing.”

Ruggles applied to business school at the University of Texas and won a spot in a program funded by Enron for aspiring energy traders. The summer before school started, he went to Venezuela to study Spanish and visit some of the country’s oil rigs. A second language would help his career, he reasoned, and Arabic seemed too difficult to learn.

During his summer in business school, Ruggles got an internship at a major oil company in Houston. It was 2000, and he was young and single. One night, a couple of friends took him to an
after-hours Latin club housed in an abandoned apartment complex. Inside, with the music booming, he was introduced to a pretty young accountant named Ivonne Gonzalez and they started talking. Ruggles was impressed with Gonzalez’s drive and business savvy. She worked a junior position at Ernst & Young, but had plans to go much farther in the corporate world.

Ruggles wanted to go out with Gonzalez, but one of his friends asked her first. Gonzalez went on a couple of dates with Ruggles’s friend, and Ruggles saw her again during a group outing about a week later. During the walk home, he pulled her aside. “We should go out,” he said. “Sure,” she replied.

The next night they went to a movie and a Tex-Mex restaurant. Over dinner, Ruggles pitched Gonzalez on why she should date him and not his friend.

“That guy you’re going out with, he’s not a good guy,” Ruggles began.

“I know that,” she said. She was barely out of school and not looking for anything serious. “Why does it matter?” she asked.

“You should be dating me,” Ruggles pressed. “I’m an honest guy, a good guy, and I know what I’m going to be doing in my life.” He laid out a prospectus that included working at an oil major, making lots of money, and traveling the world together.

She was convinced. After a few years of dating, they married in 2003 at a Baptist church in Houston. Fittingly, the reception was held at the Petroleum Club.

The next year, Ruggles was hired by Trafigura, the secretive Dutch trading firm founded by, among others, a pair of Glencore alumni. “Trafi,” as the firm was known, was one of a handful of European
commodity trading firms that did the same type of work as Glencore but on a smaller scale: moving physical quantities of oil and metals from one place to another, operating or processing the commodities it shipped, and hedging its exposure to changing prices through commodity contracts.

At Trafi, Ruggles worked in London, trading crude and other products on a speculative basis. His boss, a more experienced trader named David Mooney, had introduced Jennifer Fan to her future husband, Morgan Downey, when Downey worked for him at Bank of America. From Mooney, Ruggles learned the importance of betting smartly on energy prices not only when markets were volatile, but also when they were serene; that way, there was always a strategy for making money. He also realized he was better at finding trading inefficiencies between one commodity contract market and another—such as when heating oil was trading at an inexplicably cheaper level than natural gas—than he was at betting purely on the future direction of a single market, such as crude. In the first realm, Ruggles had real talent.

Outside of work, he began trading crude in a personal account, registered under his wife’s name. Since Ivonne, who had changed her surname to Ruggles, handled all their finances anyway, it seemed a natural step.

Trafi also exposed Ruggles to the energy-trading business’s seamier side. In 2005, he was in Houston helping to set up a new company office when government investigators arrived out of the blue, seizing computers and documents. “They came in, had a subpoena and just took everything,” he recalls. “I think it was related to either oil-for-food,” he says, referring to the U.N. program that Glencore and other traders were accused of abusing, “or the
Ivory Coast government collapsing . . . or some other thing,” Trafi faced.
He thinks the authorities came from Interpol, but still isn’t sure. “In a trading house,” he says, “what you don’t know, you should not ask about.”