The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (25 page)

It was a rich irony: crude was now relatively cheap, but Delta’s hedges were costing it money. To subsidize its trading, which relied on the extension of credit, the airline had to sell some of its more valuable contracts, which were options, or the rights to sell crude, at $105. But it wasn’t enough. As oil got cheaper and cheaper, Delta’s brokers started making additional margin calls, asking for more cash to fund the trades Delta had made. Over time, the company exhausted its credit lines with Goldman and others, and had to post hundreds of millions to them in cash.

At home with Ivonne and the baby, Ruggles received constant e-mails from his staff on the trading desk. Delta’s senior executives were not happy, they reported. “It was the type of market where people were in a panic,” Ruggles remembers. After more than two weeks of distractions, he cut his paternity leave short.

Instead of rushing back to manage the book, however, Ruggles was dispatched to Japan to meet some oil executives in Tokyo. It was as if Delta didn’t want him around. Meanwhile, Jacobson and
Bastian took over the trading. Ruggles suggested leaving the original hedge book intact, arguing that even below the $105 level for crude, the level at which the commodity contracts were no longer effective at hedging crude prices, Delta wouldn’t lose much money because the price of actual jet fuel would be more affordable. But senior management ignored his counsel, buying swaps, or private contracts, betting that the market would stabilize at about $100. “They doubled down when we should have gone the other way,” Ruggles recalls. Eventually, with crude falling to $88, he says the resultant paper losses mushroomed to $700 million.

On the third-floor trading desk, the environment was toxic. The team was now caught in a war between Ruggles and his superiors. Some of Delta’s board members, reviewing the details of the losses, appeared to be outraged. Ruggles says that at least one board member called and screamed at him, and there were threats that the entire book would be liquidated, or would have its trading positions sold and turned into cash. Bergum, who had started the year on such a high note, worried openly about his job security. “I didn’t know if we were going to show up and get fired,” Ruggles says he confided at a particularly bleak moment.

Still, the crisis was somewhat contained. Thanks to improvement in passenger revenue, Delta managed to make a profit for the second quarter, despite rising jet-fuel costs and
a margin requirement of $350 million.

Around that time, Jacobson summoned Ruggles into his office for an impromptu conversation with Anderson via speakerphone. The CEO, knowing that Ruggles had been overruled by the decision to bet with $100 crude swaps, tried to reassure the head trader that ultimately the right decision had been made. “I know you gave up your profits from the hedge books, but don’t worry
about it,” Anderson boomed over the speakerphone. “The airline’s better off.”

“Okay,” said Ruggles. He was unconvinced.

By that fall, Ruggles was struggling. He was sleeping poorly, eating junk food, and not seeing nearly enough of Ivonne and the baby. Delta management’s handling of the hedge book that summer had infuriated him, and his job now, as he saw it, was to undo their mistakes as crude prices bounced upward, off their June lows. Anderson, Bastian, and Jacobson did not understand the options market, Ruggles fumed, and their approach was sophomoric. No wonder Delta had incurred hundreds of millions in paper losses on the book.

By September the Trainer refinery turnaround was largely complete, and test runs of the plant’s refining systems were under way. Much of the refinery’s laid-off staff had been rehired, and crude was on its way for processing. The public spats over pricing had also cooled, and Delta had even resolved its issues with Platts, the market-data provider, making the airline eligible to participate in the pricing window once its refinery went online.

Ruggles, however, was being frozen out. Delta management decided to operate Trainer at arm’s length from its core business, with the subsidiary that owned the refiner reporting directly to Anderson. Supply arrangements were being handled by others, as were strategic plans. Just about the only thing Ruggles was permitted to do with the refinery that fall was discuss it at an industry speech in Las Vegas that October—and even there, he stuck largely to company talking points. Observers were impressed with his performance, but to Ruggles, it was little comfort.

There were other bad signs as well. Delta management was now balking at hires Ruggles wanted to make, and hinting that his bonus for the year would be less than he’d hoped for. Meanwhile, superiors continued making trading decisions he considered to be inane.

In late October, the East Coast was hit with torrential rain, heavy winds, flooding, and widespread power outages as a result of the severe weather event known as Superstorm Sandy. Numerous refineries around New York harbor were shut down, and many large tank “terminals” storing refined products like jet and auto fuel were flooded and taken offline. In New York City and many parts of New Jersey, which had been devastated by the storm, long gas lines formed. New York’s governor ordered emergency fuel supplies, and New Jersey’s imposed gas rations on motorists.

Delta’s newly reopened Trainer facility, about one hundred miles away, was miraculously unharmed. But damage to the coastal pipelines had made fuel difficult to transport. Ruggles tried to negotiate deals to sell the Trainer product to competing airlines, but was undercut by colleagues. Meanwhile, an aviation-publication poll revealed that many jet-fuel market participants doubted whether Delta would achieve the desired annual cost savings or set a precedent that other airlines might follow.

Despite the troubles at work, side projects kept Ruggles busy. Ivonne was negotiating to buy a cosmetics manufacturer in northern New Jersey, so the two were searching for a home in Montclair, not far from the business she planned to help run. They had flown up to New York to catch a day of the U.S. Open annual tennis tournament, using seats provided by one of Delta’s brokers, and made a family trip of the Las Vegas speech. And Ruggles was making money in his personal account, where he traded contracts on
crude, heating oil, and several other high-volume energy commodities in an account registered under Ivonne’s name.

Personal trading was common in commodities markets but not among corporate employees. Some companies, perhaps not thinking ahead about the nature of the work their hedgers performed, didn’t explicitly forbid it. Guidelines for commodity traders, who weren’t even required to have specific financial licenses, were loose compared to those that governed stocks and other products. As the debate in Washington over speculators demonstrated, many market participants considered arenas like crude, gold, and copper too liquid to be manipulated. At Bank of America, where employees were typically asked to hold investments for at least thirty days, company policy would have precluded Ruggles from trading in his personal account. But his superiors were unaware of the activity, say people with knowledge of his tenure there, and perhaps because his role was one that didn’t directly involve investing client money, Ruggles largely escaped scrutiny.

Late in 2012, Delta received a subpoena from the CFTC, asking for trading records pertaining to either personal or corporate trading in which Ruggles had engaged. The company itself was apparently not a target. But its head of fuel was.

The implications of the subpoena were grave. As the architect of Delta’s hedging strategy, Ruggles had been in regular possession of nonpublic information on what one of the world’s biggest energy buyers planned to do in the markets. As Patel and Andurand had learned at BlueGold, a large enough sale in the crude market could knock prices down by as much as $2 or $3 per contract; anyone who had advance notice of such a sale could theoretically make huge profits trading ahead of it. And since Ruggles was trading some of the same products at home that he traded at
work, the potential for using his corporate knowledge to make personal trades was omnipresent.

One of Delta’s higher-ups called Ruggles, who was not in Atlanta when the request arrived. The CFTC had subpoenaed Delta’s trading records, the executive explained, with an emphasis on obtaining information on what Ruggles had been doing. Management wanted to know what the inquiry was all about.

Ruggles replied that it was not a big deal. The CFTC had been looking at him for a while, he told Delta—at that point, it had probably been more than a year. He had a personal lawyer in Washington, and regarded it as his problem alone and nothing for the carrier to worry about.

Delta’s lawyers reviewed the situation. It seemed strange that Ruggles wouldn’t discuss the probe in greater detail, especially if he had known about it for a while. Surely he realized his job was on the line, they thought. Delta asked again that Ruggles return to Atlanta to brief the company’s lawyers. When he did not respond, the company gave him an ultimatum: show up for a meeting by a certain date in December, or be terminated.

He never returned.

In Ruggles’s mind, the CFTC probe had little bearing on his departure.

I had first spoken to him after the Trainer refinery deal’s announcement in the spring of 2012, when I’d called to introduce myself. Mutual contacts had described him as the mastermind behind that deal, and having covered it for CNBC, I was curious to meet him. For a senior manager in a guarded corporate culture like Delta’s, Ruggles was surprisingly receptive, and seemed
to enjoy schooling me on the history and nuances of the crude contract markets with which he dealt. He had an offhand knowledge of a litany of fun facts, including the attempts to squeeze the Brent-crude market in the early 2000s and what Mexico’s strategy was for hedging its exposure to crude oil prices in the coming year. He also told hilarious stories about his first stint as a contract trader in Trafi’s London office.

That summer, Ruggles and I chatted frequently and met for lunch or coffee on a couple of occasions. I even met Ivonne a couple of times, once for tea with Ruggles and once for dinner with my husband. Ruggles had lots of views on how the Trainer facility should be managed, though I couldn’t quite tell what his level of involvement was (and it turns out that it was nil at that point). Like Pierre Andurand, Ruggles evinced a remarkable combination of arrogance and anxiety, at times bloviating about his trading accomplishments and at others speaking in self-deprecating terms about his limitations. Throughout those six months while he was still employed at Delta, he seemed knowledgeable about what was happening on the airline’s fuel desk.

Given all of that, I was surprised to hear of Ruggles’s sudden departure from Delta in December of 2012. We connected a few days later, at which point he told me he’d had a “tantrum” on the trading desk and essentially walked out. In uncharacteristic fashion, however, he declined to explain why. I thought it strange that Ruggles would have abandoned a well-compensated perch at the airline that he had seemed during our short acquaintanceship to relish. But some of our mutual acquaintances told me Ruggles had a dispute with the airline over its hedge book, and I had no reason to doubt them.

By late January 2013, Ruggles was ensconced in a large
Montclair, New Jersey, colonial, for which he had paid $956,000 in cash. Ivonne was working at the cosmetics factory she now owned, and their son was zipping around in a walker with wheels, trailed by a young Thai au pair, on the snowy morning I drove out to their house to visit.

Relaxed in jeans and a button-down shirt, Ruggles spoke of his relief at having exited Delta and of excitement over his job search in New York. He said he was talking to at least one brokerage firm, as well as some private-equity shops that wanted to do more in commodities.

I brought up my book project. In light of Ruggles’s abrupt job change, I was concerned that he’d want to back out of the interviews he’d agreed to while he worked out the terms of his departure with Delta. But he was undaunted by the job change and assured me that with limited exceptions, he’d happily speak to me on the record about his work.

“The way I think about markets is just completely different from everybody else,” he said. “And I have a view on most days, the market’s going to tell you what it’s going to do. Today, two news stories are out there, the first is Iranian—the Fordow news—is it confirmed or not confirmed?” he went on, referring to disputed reports that an
Iranian uranium-producing bunker had weathered explosions. “My hunch is, it’s probably already happened, but nobody seems to care. The Americans came in and saw the headline and kind of bid it up, so all before nine in the morning, it went up really quickly, and since then it’s been going down. And that’s the opinion of the day, it’s going to be a bearish day.”