The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (22 page)

Over the months that followed, a final vote on the limits, now past their immense public-comment period, was delayed repeatedly. Chilton continued simmering, pondering his political odds. On October 18, under pressure from Senator Carl Levin, who had threatened a hearing on the missed deadlines,
the CFTC finally held another vote. David Frenk, the Better Markets economist,
published his white paper on the Goldman Sachs Commodity Index that very same day, finding that the index’s monthly “roll” period—in which existing near-term contracts were changed out for new ones as they neared expiration—contributed to steeper contango, or an upward bias in commodity prices, distorting the markets.

As anticipated, O’Malia and Sommers opposed the new rule, with the latter describing the curbs as a setup for an “
enormous failure.” To the surprise of some, however, Dunn dispiritedly cast a favoring vote, saying position-limits were a congressionally mandated obligation, even if they were, in his view, a “
sideshow.” Since the Democrat Mark Wetjen was soon to be confirmed as his replacement, it was Dunn’s last significant move as a CFTC commissioner. Six days later, after seven years at the agency and a brief stint as its acting chairman, Dunn stepped down.

Enforcement, or the policing of contracts like futures and swaps, had never been at the top of Gary Gensler’s to-do list, which was dominated by the policymaking aspects of the job. The CFTC had a small team relative to the Securities and Exchange Commission and the Justice Department, and commodity contracts had never grabbed the public’s interest in the same way that stocks had. Regulating the swaps market, a global, $600 trillion industry, and imposing position
limits, which had captured the attention of important Democrats in Congress, seemed more important priorities.

But the more time he spent observing the industry’s behavior in the various contract markets—known overall as derivatives because they were derived from simpler products like stocks and commodities—the more objectionable Gensler felt it was. The swindle that first captured his attention was the handling of an internationally regarded interest rate known as LIBOR, the acronym for the London Interbank Offered Rate, in London, which had little to do with commodities. But his sudden enforcement zeal spurred a crackdown on misconduct and sleaze in the contract market for raw materials.

Late in 2010, Gensler hired David Meister, a trim, antsy father of two teenagers, to run the forgotten enforcement division. Meister was a partner at the prominent New York law firm Skadden, Arps, Slate, Meagher & Flom, where he represented securities firms in white-collar crime cases. His hiring process had been vintage Gensler. After a couple of more formal meetings with his potential boss at the agency’s offices, Meister had been summoned to a third sit-down in a lobby restaurant of Manhattan’s Waldorf Astoria hotel. To keep Meister occupied during some down time, Gensler brought along a twenty-five-year-old CFTC speechwriter, with whom Meister chatted for three or four minutes about where he was staying in New York and other innocuous topics. Gensler later boasted that he had subjected Meister to a job interview with an inexperienced young aide and that Meister had been shocked that Gensler considered that interchange to be part of the interview process.

Meister, however, had more substantive concerns. To do the CFTC job, he had abandoned, at least for the three or four nights
a week he slept in the crummy studio apartment he’d rented in Washington’s DuPont Circle district, a cozy life in suburban Westchester and a well-compensated perch at a law firm that paid partners millions of dollars per year. A former assistant U.S. Attorney in Manhattan, Meister was familiar with the Spartan offices and low-tech systems that characterized a government job. In the past, though, he had at least operated from one of its better-reputed offices, the Southern District of New York, where the miscreants included mobsters, terrorists, and white-collar criminals like Marc Rich who actually feared facing consequences for their actions. At the CFTC, Meister was now running a division that had lacked a permanent head for two and a half years and was known mainly for its exposure of small-fry Ponzi schemes and other retail fraud matters. Overall, it was really petty stuff.

Since enforcement matters hadn’t even been listed on Gensler’s mental Post-it Note at the outset, he told Meister that if he joined the CFTC, the entire oversight program would be his to run, without undue interference from the boss. To Meister, accustomed to the groupthink of a private law firm, that was an attractive proposition. At forty-seven he worried he was aging out of some of the higher-ranking opportunities in government, so if he wanted another significant crack at law enforcement, this would have to be it. He convinced his family that the job was important to him, and vowed to be back in Westchester as often as the job would allow so that he wouldn’t miss out on too much of their lives.

Early in January 2011, Meister took a late-Sunday shuttle from La Guardia to Ronald Reagan Washington National Airport to report for his first week of work. He attended Gensler’s weekly 9
A.M.
senior staff meeting, then scheduled an all-enforcement personnel gathering for the next day. He was concerned about making a
solid initial impression on his 175 employees, many of them career government attorneys whom he presumed might be tempted to dismiss him as a fast-talking jerk lawyer from New York.

Later that week, he addressed the group, some of whom were watching via videoconference from Kansas City, Chicago, or New York. “We’re going to make a lot of decisions on this job,” he said. “Some of the decisions will be good ones, some will not.” But in every case, Meister added, “I’m going to have your back.”

Meister explained his basic calculus when it came to litigation, which was that the staff should bring cases it “ought” to win, not only the ones it suspected it would definitely win. “At times you’re going to lose,” he said. But Dodd-Frank, by lowering the legal standards required to bring certain cases and allowing the CFTC to pursue certain cases that had been beyond its purview in the past, would be a boon. No one asked any questions.

Meister began meeting individually with some of the enforcement lawyers and reviewing the cases already in progress. He earmarked the more promising ones and opened a computer file dedicated to what he called “high-impact” litigation. There were about two dozen—a number that would fluctuate over time, but would always be the focus of the greatest manpower.

One case that immediately interested Meister involved potential manipulation in the crude-oil market. The CFTC had gathered evidence suggesting that a pair of experienced crude traders,
both of whom had worked previously at BP, dumped physical oil positions at times in order to drive down the price of oil contracts in the West Texas Intermediate market. There’s a “
shitload of money to be made shorting,” or betting on a fall, of WTI crude, one of the traders wrote in a late-2007 e-mail, if someone were able to manipulate physical stores of oil in that market in such a way that an
unexpected surplus occurred. The traders, who worked at two small firms known as Arcadia and Parnon, eventually did that, the evidence suggested, generating $
50 million in profits.

The Arcadia crude-oil case had been under investigation for more than two years, moving along at the CFTC’s usual low metabolic rate. Meister saw promise in it. Manipulation cases, which had been relatively rare at the agency, were always high-impact, in his view, and this one dealt with a particularly crucial period in the crude markets. He asked his team to fast-track the inquiry and set a deadline for bringing charges that was several months away. On May 24, the agency actually filed suit, levying another big public shock.

Gensler’s embracing of enforcement was uncannily well timed. Late in October 2011, not long after the position-limits proposal had received its narrow approval, it emerged that MF Global Holdings, the large futures broker run by the former politician and Goldman Sachs head Jon Corzine, was in dire trouble. Citing poor financial results and overexposure to the European debt crisis, on October 24 the ratings agency Moody’s downgraded the quality of MF Global’s debt to
just above junk status, meaning that the company was closer to default, or not repaying its creditors, than it had been before. That day, with rumors circulating about bad bets that Corzine had made in the bond markets,
MF Global stock fell slightly.

October 25 was much worse. Spurred to action by the downgrade,
MF opted to report quarterly earnings early, and the results were terrible. The company’s shares fell a whopping 48 percent, and word soon trickled out that Standard & Poor’s, a
competitor of Moody’s, was
considering lowering MF Global’s credit rating to actual junk, a move that would place it in the riskiest echelons of corporate borrowers, those who were most likely to walk away from their debts.

During the CFTC’s weekly division-head meeting that Wednesday, senior staff discussed MF Global’s situation as the commissioners listened from across the conference table. Ananda Radhakrishnan, the agency’s head of risk, promised that MF Global would be a top focus until matters were resolved. The staff of both the clearing and swaps divisions said they would get in touch with the company.

It was the very least they could do, considering what a major issue MF Global could be for the CFTC. In the U.S., the firm was the
eighth-largest futures broker and the biggest one not owned by a major bank. MF contributed a sizable portion of the volume on stateside exchanges like the Chicago Mercantile Exchange, but it also had a significant presence on the London Metal Exchange and other foreign markets. Moreover, many of its customers, who together accounted for more than $7 billion in funds, were small farmers and other mainstream commodity hedgers who used the futures markets to preserve businesses from catastrophic events. It was just the sort of constituency the CFTC was created to defend.

Gensler went to see the CFTC’s newly appointed head of swaps, Gary Barnett, after the meeting. “Just make sure you send staff on site” at MF Global, he said. “They’ve got one role: to make sure customer money is secure.” Barnett dispatched monitors to the brokerage’s New York and Chicago offices within twenty-four hours.

Over the next several days MF, like Bear Stearns and Lehman Brothers before it, was pounded by negative rumors, causing its
stock to drop precipitously. By the end of the week, the company had lost
two-thirds of its value, and was looking for a suitor who could salvage it from bankruptcy.

Central to the market’s concerns was the notion that Corzine, who had made his name as a bond trader at Goldman during the 1990s, had gotten in over his head with overoptimistic bets on European credit. Just as an ailing Greece was requesting a second bailout package to help pay its mounting debts, Corzine was betting on the health of larger economies like Spain and Italy, believing the European Union would never let them fail. He had a rational point, as time would prove. But that didn’t prevent him from being socked with huge margin calls, that is, demands from his Wall Street creditors for additional cash in order to keep his original trades in place as the markets moved against him. On October 28, facing $175 million in overdrafts to MF’s banks,
Corzine directed his treasurer, Edith O’Brien, to move $200 million of customer money into a firm account in an effort to pay off those debts and move toward a last-minute deal.

That Jon Corzine could preside over such a grand failure seemed shocking. He had run Goldman Sachs and the state of New Jersey. His brains and knack for persuasion had served him in scenarios with much higher stakes. In 1998, he had
collaborated with Goldman’s rivals on Wall Street to construct a bailout package for the failing hedge-fund Long-Term Capital Management that saved the stock markets from a potentially devastating disruption, and his ability to
convince his fellow partners of the need for more permanent bank funding had cemented Goldman’s plans for an initial public offering, which would be held in 1999. (That IPO, which had been accompanied by his ouster from the firm, also made Corzine $
400 million.) His accomplishments
as governor during a period of global recession and state fiscal crisis were far fewer, but even there, his reputation was for inertia, not political brinksmanship.