The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (21 page)

Throughout the midnight summit at Claridge’s, Mick Davis and Trevor Reid were holed up in their respective apartments in Zug. Brett Olsher and Bill Vereker, who had flown in for the shareholder meetings, were staying in hotels nearby, preparing documents for the anticipated vote. Frequent calls from Klein kept them closely apprised of what was happening in London.

By early morning, it was clear that something had broken the impasse, although the final details were yet to be determined. At 7
A.M.
, Olsher and Vereker arrived at their client’s office for a scheduled meeting with Davis and his team. Shortly thereafter, Glasenberg arrived, and he and Davis disappeared together.

“I’ve reached an agreement with the Qataris,” Glasenberg told Davis once they were alone. “We’ve raised our ratio to 3.05.”

“Hallelujah,” said Davis. “Now we can get this deal done.”

“But there’s a small wrinkle,” said Glasenberg. In exchange for the added premium, his partners at Glencore, he said, “want me to run the company.”

Davis frowned. “Fine,” he said. “If that’s the way you guys want it, put it in writing, and I’ll take it to my board.”

In a matter of hours, the Glencore-Xstrata merger had gone from a combination of equals to a takeover.

The shareholder meetings planned for that day didn’t come off very well. Faced with a last-minute change of some significance, both boards postponed their deal votes so investors would have more time to consider the new terms. (“
Bloody hell,” one shareholder grumbled as Xstrata chairman Sir John Bond read out the new details.) On November 19 the deal was approved—minus the Xstrata retention packages. Qatar, in an effort to maintain some neutrality, abstained.

To Xstrata management, Glasenberg’s eleventh-hour deal with the Qataris had come as an initial surprise. But on reflection, as Davis himself had predicted, it had an air of inevitability. Xstrata brass hadn’t been so naïve as to think the Glencore boss would be comfortable in the number two spot forever. But they believed that for two years he would.

For a number of months after the deal’s approval, Davis continued running Xstrata. Regulatory approvals were still pending, and until the pairing had passed muster with antitrust officials, integration could not occur.

It was an awkward time. One day in January 2013, Davis and Trevor Reid, Xstrata’s chief financial officer, were dining at the
upscale Royal Automobile Club in London when Youakim spotted them from across the room. Eager to say hello, the banker approached their table and congratulated Davis on the completion of the deal.

Davis exploded at him, saying he’d blown the deal. He attacked Qatar Holding, the share-ratio negotiations, and the work Lazard had done.

“You gave the wrong advice to your client,” he fumed. “Because of you, a lot of people are going to leave Xstrata.”

F
ar removed from Glencore and Xstrata and unlikely to ever have sway over them, either separate or together, CFTC chairman Gary Gensler was busy reforming a beleaguered agency.

In early 2011, just as Glasenberg began courting IPO investors, Gensler had named a new top lawyer, a new chief cop, a new corps of advisors, and a new head of public relations from the staff of Barney Frank, the Democratic congressman after whom the Dodd-Frank Act was named. The act, passed only six months earlier, had been a life-altering event for workers at the CFTC, who were now beavering over dozens of new rules to govern the trading of basic commodity contracts and more complex private market agreements known as swaps.

Tight legislative deadlines and a new organizational structure that divided the agency’s policy makers into small teams were making the CFTC more productive. But the idea that its small and underfunded staff could fend off the overwhelming influence of the Wall Street lobbying apparatus was still optimistic.

So Gensler adopted a blunt, catch-all approach to regulation. He insisted that swaps, the $
600 trillion market that was
responsible for much of the damage caused to banks and insurers during the financial crisis but was still barely regulated, be traded more publicly and better tracked. On three separate occasions he proposed strict limits on the size of commodity trades, having his legal staff write and rewrite voluminous filings for the
Federal Register
. He gave countless interviews, speeches, and congressional testimonies, stocking the CFTC Web site with links to documents providing exhaustive accounts of his positions.

Though Gensler was polished and diplomatic in public, thanking his hosts and staff graciously before railing against the latest regulatory blind spots or Wall Street chicanery he had uncovered, he could be curt in private. Asked his opinion by a bank executive on the Volcker Rule, a critical tenet of Dodd-Frank which intended to outlaw self-interested trading by financial firms, at one point he said, “I know what you guys want to do. You want to keep doing all your sneaky stuff.” Knowing that, the CFTC and its fellow regulators planned to give the industry strict limits, he explained, and “cut you down.”

Banking industry denizens made a show of being appalled by that sort of rhetoric—and some actually may have been, given the scarcity of such threats in Washington’s regulatory circles. Financial lobbyists were used to overseers like Securities and Exchange chairman Christopher Cox, a former corporate lawyer who had been out of reach at a birthday party the night JPMorgan’s emergency purchase of Bear Stearns was being finalized in March 2008 and was attacked roundly for missing the warning signs at that poorly managed, overly indebted bank that prompted the financial crisis. Or like Walter Lukken, the CFTC chairman who had issued a press release defending commodity speculation mere weeks after convening a task force intended to make a
thorough study of the issue. After relinquishing their government posts, both officials had taken private-sector jobs representing the firms they had once regulated.

Gensler met frequently with industry representatives, fielding their suggestions, but paid little heed, ultimately, to what they wanted him to do. When his patience thinned, he sometimes resorted to mockery. Athanassios Diplas, Deutsche Bank’s head of global systemic risk and an active member of the International Swaps and Derivatives Association, met with the chairman some eighty times in a two-year period after the passing of Dodd-Frank, prompting an amused Gensler to call Diplas his stalker. “You’ll find him behind a bush at my house,” Gensler would say of the boisterous Greek risk supervisor when other people were in the room. In a meeting with dozens of banking-industry officials gathered to discuss one of the swaps rules, Gensler did it again. “You know Diplas,” he said, gesturing to the risk manager after a lively debate about one of the CFTC’s proposals. “He’s my stalker.” Gensler even told the joke in a private meeting with regulators from the German securities supervisor BaFin, Deutsche’s primary watchdog. One of them called Diplas afterward, sounding alarmed that there might be a seed of truth to the joshing. “Do you know what Gensler’s saying about you?” he asked.

By early 2011, Gensler had relocated from Baltimore to Chevy Chase, Maryland, to be closer to the office. His two elder daughters had gone off to college, leaving only his youngest still living at home. Every morning, he got up early, let out the family’s two yellow Labs, Chloe and Alice, and tried repeatedly to awaken his sleepy teenager, who was slow to get out of bed. Once she was up
and dressed, he made breakfast and drove her to her private high school in northwest Washington before he drove to work at the CFTC’s offices near the K Street lobbying corridor. After school, Gensler’s daughter would get herself home, followed by her father by eight o’clock on most nights.

Since he wasn’t much of a cook, Gensler often ordered Thai delivery for dinner or threw together something easy like pasta. Then he’d sit in the living room while his daughter did her homework and return some late-night calls. Long talks with his speechwriter or head of enforcement were common. Some of Gensler’s daughter’s classes were by now over his head, but he pitched in occasionally, impressing himself at one point by naming all the U.S. presidents before an important American history test.

Hobbies like running were hard to keep up. Gensler’s favorite six-mile loop from Chevy Chase to Rock Creek Park, the hilly, wooded enclave that abutted some of the tonier residential neighborhoods of Maryland and the District, was only possible on the weekends. If he had to travel for work, a scenario he strove to minimize, his daughter often stayed with neighbors who could drop her off at school in the morning.

In business, Gensler’s family life was omnipresent. He’d cut off conversations late in the day, muttering that he had to get home to his daughter even if he couldn’t resist taking one more meeting with an aide right afterward. He spoke, eyes glistening, of his late wife Francesca and how she was still with him every day. In what sounded like an outtake from a old-fashioned political stump speech, he likened the need for “common sense” regulation in the contract markets to the need for traffic lights and policemen to protect his daughters while driving on public roads. It was as if Gensler, who spent so much time enervating the opponents of
reform, was in fact driven by a core sense of mission on the job, so deeply rooted that Washington’s self-interested culture simply didn’t bother him.

CFTC commissioner Bart Chilton’s quixotic attacks on commodity speculators continued. In January 2011, at one of the CFTC’s regular public meetings, four out of the five commissioners agreed to move forward with a proposal on position limits. (In the interim, surveillance staff would use position points—the idea that had put Chilton into a huff at the December meeting—to monitor trading and potentially to request less risk-taking.) But commissioners Dunn, Sommers, and O’Malia still had their doubts.

Without clear evidence that speculators actually harmed commodity markets, Dunn said in his written remarks at the meeting, “position limits are a cure for a disease that does not exist or at worst, a placebo for one that does.” Sommers, who cast the dissenting vote, largely agreed.

Intellectually speaking, they had a reasonable point; it was certainly the approach that Wall Street was using to pooh-pooh the measure. But waging professorial debates about the necessity of a new rule mandated by Congress was not their job.

The Dodd-Frank Act’s language on position limits, which they were now required to impose, was unambiguous. The essential passage of Title VII, a portion called Section 737, stated that the CFTC was to place limits on the size of commodity contract positions held by any one person at a given time.

The trouble for advocates like Chilton and Berkovitz, the lawyer who had led the five congressional inquiries into the impact of speculation on commodity prices, was that the academic research on their topic was both limited and anecdotal. It was hard to prove a mathematically demonstrable link between futures trading and the
resultant prices, however obvious the correlation might seem. Berkovitz and his colleagues on Levin’s subcommittee believed it, Chilton believed it, large corporations befuddled by big swings in commodity prices that affected their core costs believed it, and even Andurand and Patel, who had seen how their sale of billions of dollars of crude-oil contracts at BlueGold seemed to exacerbate a market downturn, believed it. In short, everyone to some extent believed it. But in a market like commodities where higher risk-taking fashioned higher returns, and where cowed regulators had created massively profitable banks and hedge funds, the fact that there was no proven, causal relationship between speculation and prices was a wedge that imparted considerable leverage to Wall Street.

Ironically, an Atlanta-based hedge-fund trader named Mike Masters was one of position limits’ most outspoken advocates. During the middle of 2008, when oil and other commodities were reaching their record prices, he had testified to Congress about the relationship he discerned between a rise in speculative activity in commodity trading and major price moves in commodities. As a trader focused mostly on stocks, including a handful of airlines,
like Delta, that were hurt by rising oil prices, Masters had no inside knowledge of commodity trading. But he could spot patterns between stocks and other economic gauges, and he felt the harmful effect of commodity index positions on their underlying markets, which he had tracked using his own market data, was indisputable.

In 2010, concerned about the misconceptions surrounding commodity speculation, Masters seeded a think tank in Washington called Better Markets. There a staff economist named David Frenk was studying the impact of the Goldman Sachs Commodity Index’s monthly “roll” period. But Masters’s whole line of
thinking, at least as it pertained to the massive price spikes that preceded the 2008 financial crisis, was relatively new.

Shortly after the commodity position limits proposal’s late-January debut in the
Federal Register
, the CFTC faced an onslaught of complaints. Critics from Morgan Stanley and Goldman Sachs to Cargill and the International Swaps and Derivatives Association blasted the intended curbs, complaining they were ineffective, undermining, and unnecessary. The
Futures Industry Association echoed Dunn’s language, calling the limits “a ‘solution’ to a nonexistent problem.” Large commodity index fund managers were equally annoyed.
The proposal would “hamper” the ability to “prudently” manage investments, argued U.S. Commodity Funds. Over time, more than fifteen thousand comment letters were dispatched.

For the rulemakers, the attacks were wearying, and Chilton, whose mere appearance could often cause chatter, had become a polarizing character. He and his wife spent most of their time in Hot Springs Village, Arkansas, where their daughter and grandson lived, making him hard to pin down. When he was in Washington, which was only about one week per month, he was often rushing in from, or out to, some sort of media appearance, to the irritation of colleagues hard at work on interpreting the finer points of swap-trade finalization or what size caps to put on a bundle of natural-gas contracts.

“It’s not where you are, it’s what you do” is Chilton’s self-described motto. His long-winded speeches and homespun lingo—small investors who bought commodity contracts through indexes were “massive passives”; traders who used sophisticated algorithms to game the public markets with light-speed transactions were “cheetahs”—worked well on television, but less so in
high-level policy meetings with commodity-market academics and lawyers. Now, some of the internal disputes were becoming more personal.

In early March, MSNBC commentator Ed Schultz, host of
The Ed Show
, who had become a strong advocate for commodity position limits, lambasted Dunn’s opposition to the proposal. Chilton, who was booked that night on Schultz’s show as a guest, tried to downplay the breach between himself and his colleague, using sterile, respectful responses.

It was an embarrassing juxtaposition for both commissioners, who despite their more academic ruffles were in fact friends and golfing buddies whose relationship went back thirty years. Dunn, who had been lobbying for days to get involved in the
Ed Show
discussion, was irritated. He had already left a blistering voice mail for one of the show’s producers saying that if Schultz were going to attack him, he could at least have “the decency” to interview him. Now Chilton was being portrayed as an angel of reform, fighting the dark magic of Wall Street and disciples like Dunn. “Nice hatchet job Bart did on me last night,” Dunn griped to an agency staffer the day after the interview. Privately, he suspected Gensler and Chilton of having shut down Lukken’s 2008 study on speculators—which had never been finished—and boxing out the economist who asserted they had no impact on commodity prices. But, this being Washington, a bastion of passive aggression, unlikely alliances, and conflict-ridden friendships, Dunn never confronted Chilton about it, other than to say mildly that the study should never have been killed. At sixty-six he had his own private life to return to in Harpers Ferry, West Virginia, and was eagerly awaiting the appointment of a new Democratic commissioner so that he could resign.