The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (24 page)

“It made sense,” Gensler said that November afternoon in the Commission’s New York office. “I’m not going to say that every day was great, but I’ll say that every day was interesting.” A mere two months later, he was packing boxes in his Washington office.

L
ess than a year into his tenure at Delta, Jon Ruggles was upending the airline’s broken hedging operations. His trade book had generated more than $400 million. His risky heating-oil bet had effectively funded executive bonus checks during a cash crunch. And he was modernizing the flyer’s philosophy on trading in general.

Word of his achievements was circulating around Delta’s Atlanta headquarters. At an officers and directors meeting, Ruggles and his team practically got a standing ovation for what they had contributed to the profit-sharing pool. Ben Bergum and one of his colleagues were promoted to a management-level role that, among other things, required them to speak to small groups of employees about how they did what they did. Ruggles’s little third-floor conclave in the finance building, which had started with a handful of employees and a useless hedge book, now numbered twenty.

“The people in the group were like celebrities around the campus,” Ruggles recalled. He made a number of motivational speeches about the hedge group’s accomplishments. “Speaking to
a group of two hundred flight attendants and saying we were winning the war on fuel, that’s powerful,” he remembers.

Ruggles and his wife, Ivonne, had by then settled into an expansive house in Atlanta. After nearly a decade of marriage, they were also expecting their first child late in the spring. But Ruggles found it hard to focus on his personal life. Having made Delta a far more active market participant, he was now working eighty-hour weeks and was racked with insomnia, often waking up several times a night to check energy prices in the overseas markets. It was early 2012, and Iran was threatening to close the Strait of Hormuz, a critical waterway for shipping crude from the Middle East. As a result, crude prices were on a sharp upswing, the kind of move that had the power to wipe out an airline’s quarterly earnings.

Ruggles was ready for it. That winter, he had put in place a fresh trading position betting that crude contracts would linger in a range between $105 and $125. During a period where oil was trading in the low $110s for weeks, it seemed like a pretty wide berth.

Initially, it worked. For the first quarter of the year, as Brent crude popped 9 percent, the hedge book generated gains of $45 million, helping Delta to stay in the black. Toward the end of February, though, it even looked as if the $125 ceiling might not be high enough, as crude contracts moved into the low $120 range. In addition to the turmoil in Iran, which was fighting a trade embargo by countries in Europe, strife in Nigeria, a key oil producer, loomed large, lifting crude contract prices yet higher.

U.S. airlines were understandably jittery. Fuel now topped their list of expenses, and there was little sign of relief in the offing.
Citing a respected energy-market research firm, the Federal Aviation Administration predicted that crude would remain above
$100 a barrel for the rest of the year, and ticket-price hikes appeared inevitable.

Southwest Airlines, which in an unfortunate bit of timing had removed most of its jet-fuel hedges late in 2011, reported a slight loss in April as it faced mounting crude prices with no contracts to reduce the added expense. Reviewing the company’s performance at a town hall meeting in Dallas the following week, Southwest’s chief financial officer singled out Chris Monroe, the unassuming executive who ran the carrier’s hedging operation, as the person responsible for reversing those fortunes.

“If we can keep fuel in check—Mr. Monroe,” she told hundreds of employees, pointing in his direction, “we’ll be in good shape.” Laughter erupted around the room, but the CFO appeared to be only half kidding. Employees were glancing across the cafeteria tables, which were dotted with Dr Pepper cans and other refreshments, to catch Monroe’s eye in the back corner of the room. He smiled and shook his head; there was only so much that one man could do. Even at Southwest, hedging decisions were made by committee, and sometimes the group didn’t move fast enough to mitigate the blow that erupting crude prices could deal.

Delta, which now had a quick-thinking fuel trader running its hedge book, seemed more insulated from such setbacks. But Ruggles, the company was learning, could also be a galvanizing figure. His unassuming face and conservative shirts and suits left an unthreatening first impression, and his chronic tardiness and midwestern plainspokenness were humanizing. He frequently told funny stories about himself—about his lack of friends, his trouble getting Ivonne to date him at first, his checkered educational track record—and relished sharing a juicy piece of industry gossip, often at another trader’s expense.

But his spurts of intellectual arrogance and distaste for red tape of any sort could be unnerving. “He wasn’t flashy like gold chains and white Porsches, he was more understated than that,” remembers someone who worked with him at Bank of America in Houston. (By the time he got to Atlanta, Ruggles drove a silver Mercedes coupe.) “But he knew a lot about a lot,” the person added, whether it was houses and fine art or the energy markets—giving him a cocksure approach to commodities that made some people uncomfortable. Plus, what Ruggles understood to be the standard risks of the game sometimes sounded harrowing to his colleagues—at least they had at Bank of America during the two years he’d worked there. “The fact that he was underplaying risk” in suggesting commodity deals to clients, a former coworker said, scared the pants off some of the traders.

Ruggles knew some of these perceptions were dogging him at Delta, particularly since the confrontation he’d had with Trey Griggs, the salesman at Goldman who had questioned his heating-oil position. To address any concerns about Delta’s presence in the markets, Bergum and others put together numerous PowerPoint presentations detailing their strategies. Delta management, which was closely vetting Ruggles’s trades, also sent daily reports to directors that outlined the level of risk in the hedge book. Such briefings were commonplace on Wall Street, where firms like Goldman calculated its value-at-risk, or the amount of money it could lose in a given day during adverse market conditions, on a real-time basis. And although it was in a different industry, Delta’s board, which later that year added George Mattson, a retired Goldman investment banker, was very involved with such matters.

In dealing with his bosses, Ruggles started noticing more pushback against the things he wanted to do. His efforts to establish a
more lenient hedge policy for Delta, for instance, were not progressing. He was still subject to overruling by Paul Jacobson, the treasurer, who kept a close eye on the trading desk from his office nearby, and of course also by Edward Bastian, Richard Anderson, and the board. The scrutiny was making him paranoid. He suspected Goldman’s team of criticizing his trading practices simply because it was receiving smaller commissions than in the past, now that Delta had IntercontinentalExchange accounts and unique trading relationships. Having a savvy hedger on their hands whose game plan wasn’t entirely clear, he thought, annoyed the Goldmans, Morgan Stanleys, and JPMorgans of the world, sparking questions about his motives and for no good reason.

“We were always long” on crude, or betting on higher crude prices in the contract markets, Ruggles recalls, “though we were not always long in a linear way. The banks would have a hard time figuring out what we were doing.” That, he presumed, was his biggest problem.

Through the first half of the year, Delta was moving ahead on its Trainer refinery purchase, which Anderson considered to be a key weapon for fighting runaway jet-fuel prices. By early April,
CNBC had the story. The carrier was set to spend more than $100 million on the Philadelphia-area plant, it reported. The low price tag revealed what was in many ways an unattractive asset. The seller, ConocoPhillips, had stopped running the plant due to financial losses, and a major renovation would be needed before the facility could begin refining crude into more useful products again. Delta’s rumored purchase was the first known instance of an airline making such an attempt, though others had considered it in the past.

In the energy-trading community, the reaction was brutal.
Delta executives would only delve into such a troubled business “
because they’re stupid,” Edward Hirs, a professor of energy economics, told
Forbes
. Airlines had historically avoided refineries and other physical assets for good reason, he and other critics argued: they were expensive to operate and riddled with liability. Moreover, a sudden move against the refinery’s owner in the crude or jet-fuel market could wipe out its profit margins. The whole undertaking struck many observers as either a foolish fantasy deal or a capitulation to the idea that it was a failure at fuel hedging. “They must have gotten burned on paper trades in the past,” groused one commodities trader.

Ruggles, who was busy negotiating with BP and traders in Alex Beard’s division of Glencore over crude supply contracts for Trainer, took the criticism in stride. He had been disappointed not to bring in a private-equity partner for the refinery investment, which was one of his original ideas for sharing the ambitious project’s risk. But that failure had not hurt his confidence in the deal. He had a plan for optimizing the refinery’s output that involved expanding its production of jet fuel and trading its other refined products, such as diesel fuel and kerosene, in exchange for additional jet fuel. Initially, Delta’s crude would be shipped across the Atlantic from West Africa, a fairly costly trip, but within a few years, he figured, it would instead be coming from the Bakken shale formation in North Dakota, where huge stores of underground crude were now being harvested. In the meantime, he comforted himself that he’d worked at Conoco and another driller and knew how to bargain with suppliers to keep crude relatively cheap. And once the Bakken crude was more accessible, he figured, Delta’s considerable expertise in physical logistics would help it move supplies quickly and cheaply.

On April 30, 2012, Delta announced the Trainer purchase with much fanfare: a $180 million deal to acquire the shuttered refinery with a $30 million contribution from the state of Pennsylvania, which was eager to see the plant’s hundreds of jobs preserved. BP would provide the crude for processing, and Delta would trade diesel, gasoline, and other products to BP and
Phillips 66 for additional jet fuel. Because the needed repairs that were part of the “turnaround” of the facility would cost $100 million, the refinery wouldn’t begin producing fuels for at least several months, but Delta planned to start operations around Labor Day.

Anderson flew to New York to talk to airline analysts that day. He could hardly contain his excitement.

“We hit it at the bottom of the market,” Anderson said
in a television interview with CNBC. “Big ideas like this can create a lot of value for your shareholders,” he added, pointing out that Delta’s shares had risen 10 percent since news of the deal had first leaked.

“Commodities prices are at all-time highs, whether it’s foodstuffs, metals, or energy,” Anderson said. A case in point, he continued, was that even with the benefit of the Trainer deal, Delta’s expected fuel costs that year were projected to be more than $12 billion, an all-time high.

On June 15 at Delta’s annual meeting, Anderson stepped up the rhetoric. “
It’s our intention to begin to participate in the pricing function and put a lot of downward pressure on the cost of refining a barrel of jet fuel,” he told a reporter. In light of its refinery purchase, Delta expected to soon become a seller of jet fuel, rather than a buyer, he said.

His comments did not sit well with the jet-fuel market, where
whispers of manipulation began to make the rounds. Complaints reached the market-data provider Platts, which Delta had petitioned for participation in the so-called
pricing window, an end-of-day period in which Platts collected bids and offers for various commodities, including jet fuel. Applicants were subject to review and were asked to adhere to a strict methodology.

Shortly after the annual meeting, Platts fired off a letter to Delta’s internal lawyers complaining about the CEO’s comments. The pricing window was reserved for legitimate traders only, the letter said, and Delta’s CEO had given Platts reason to think it might engage in behavior that distorted the markets. Aware of the backlash, a Delta spokesman tried to soften Anderson’s comments,
telling another reporter at Reuters that the airline would produce and sell jet fuel only to itself. In fact, Monroe Energy, the company subsidiary that now owned the Trainer plant, was legally prohibited from selling jet fuel on the open market, the spokesman pointed out—making the CEO’s remarks seem all the more absurd.

But the damage was done. The commodity business hated the refinery deal, Platts was threatening to shut Delta out of the pricing process, and the actual production of jet fuel was still months away. There was nothing to do but try to avoid more incendiary comments and wait. Anderson, who had been barraged by reporters wanting interviews and had wanted to proselytize his message of taking control of the markets, would have to let an article he’d penned for Delta’s in-flight magazine be his last remarks on the subject for some time.

On May 19, 2012, Ivonne gave birth to a son in Atlanta. Ruggles, who was exhausted from work, had looked forward to the opportunity to rest at home with his wife and new baby, who had
no grandparents in the area to help out during the sleepless nights that were no doubt coming. Ruggles had scheduled a couple of weeks off so the family could bond.

For Delta, however, the timing could hardly have been worse. Two days before Ruggles’s son was born, crude experienced a pronounced drop, sparked by robust production from the oil-producing nations of the Middle East at a time when demand in the U.S. was at a fifteen-year low. The recession and unemployment were finally affecting fuel purchases, making an excess supply overwhelming at a time of muted demand, depressing prices. By early June, crude had crossed below $100, and was now significantly cheaper than the $105 level Ruggles had pinpointed earlier that year as the commodity’s expected bottom price.