The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (28 page)

Xstrata CEO Mick Davis (center) walking out of the November 2012 shareholder meeting in Zug, Switzerland, at which his company’s $70 billion takeover by Glencore was finally approved. Brett Olsher, the Goldman banker who tried to bring order to a raucous merger process, is on the left, and Bill Vereker, the Nomura banking chief who advised Xstrata’s independent shareholders, is on the right.

Bloomberg/Getty Images

Jeff Currie, Goldman’s chief commodities analyst, realized at a fall 2012 meeting of London hedge-fund managers that the popularity of his asset class had finally fizzled.

Goldman Sachs

W
hat you have just read is the result of a three-year undertaking that was made possible by an array of sources, associates, and friends who are too many in number to name here. The shortlist follows.

My job at CNBC introduced me to the commodities world with stories on key players in natural gas, agriculture, and crude-oil trading. Once I latched on to the topic, Mark Hoffman and Nik Deogun generously encouraged my efforts, allowing me time for travel and writing. Many thanks to them, as well as to Nick Dunn, Lacy O’Toole, and especially my indefatigable producer, Dawn Giel, for their ongoing support. Thanks as well to Mary Duffy, Brian Steel, Jim Cramer, Robert Frank, Phil LeBeau, David Faber, Mary Thompson, Gennine Uliasz, and Max Meyers for their encouragement, and also to Mary Ann Lateano-Fox and Patty DelVecchio for their help with my author photo.

Bob Barnett, my lawyer and longtime friend, offered great counsel as always.

Adrian Zackheim, my past and current publisher, was stalwart. Through numerous calls, lunches, and the occasional emergency huddle on Hudson Street, we made a game plan. Emily Angell
offered encouragement when it was most sorely needed. The tireless Allison McLean had a marketing plan from day one. Will Weisser was a consistent advocate, Joe Perez and Chris Sergio designed a smashing cover, and Jesse Maeshiro helped push the book across the finish line. In a world of diminishing opportunities for serious investigative writing, I am honored to work with such an A-team.

Within the world of commodity trading, my rabbis are many. Some of my best sources, of course, can’t be named. But here is a partial list of people whose knowledge and assistance were deeply appreciated: Dwight Anderson, Bill Bagley, Jeff Christian, Jeff Currie, Billy Dunavant, Buck Dunavant, David Frenk, Andy Kelleher, Herman Kohlmeyer, Doug Leslie, David Lilley, Mike Masters, Jason Mraz, Neel Patel, Craig Pirrong, Beau Taylor, Eli Tullis, Chris Wibbelman, and Trevor Woods. In addition, Stuart Burns, Chris Grams, Miriam Heywood, Brookly McLaughlin, and Michael Southwood went above and beyond in sharing research and other insights.

I must of course thank Pierre Andurand, Bart Chilton, Gary Cohn, Jennifer Fan, Gary Gensler, and Jon and Ivonne Ruggles, who spent considerable time telling me their personal stories; in some cases, they also made colleagues and family members available to talk to me. And to those traders, bankers, hedge-fund managers, investors, farmers, analysts, and academics who haven’t been named: You know who you are, and I thank you.

In the course of researching this book I had the good fortune to stumble upon an exceptionally smart, diligent, and, perhaps most important, cheerful researcher: Krista Dugan. The book’s tight time frame and technical bent made her job that much more difficult, and she handled it all with aplomb. Many thanks, Krista.

I’m grateful to my friends in faraway places, who made the field reporting much easier. Thanks especially to Cassell Bryan-Low, Niels Bryan-Low, Jonny Horsman, and Bruce Orwall, who made London feel like a second home. (Honorable mention also goes to Triyoga, the Arsenal Football Club, and Blakes Hotel.)

I was shameless in asking for practical advice, and my friends and former colleagues magnanimously indulged me. Thanks to Dana Cimilluca, who provided invaluable insight on the Glencore-Xstrata deal; Sheelah Kolhatkar, who gamely read the manuscript and commiserated with me over our mutual juggles in court, at Starbucks, and in many other settings; and Chris Stewart and Andrew Goldman, who read semifinalized chapters and provided suggestions for improvement. Sarah Ellison, Leigh Gallagher, and Mike Siconolfi talked me out of numerous reporting (and personal) crises. Thanks also to my comrades Greg Ip, Charles Duhigg, and Bethany McLean.

Before all those people came the unsinkable Peter W. Kaplan, who died the weekend I finished writing this book. Peter gave me my first crack at reporting while I was still in college, and was the only newspaper editor willing to hire me once I graduated. His curiosity, tenacity, and love of good prose have inspired me ever since. I will miss him dearly, but I’ve tried to keep in mind the advice he shared from one of his own mentors, Clay Felker: Never hold your best stuff.

Finally, but most important, thanks to the friends and family who believed in me throughout the project, among them Gretchen Drobnyk, Erin Greenwell, Lauren Grodstein, Glenn Kenny, Merissa Marr, Jodie Morse, Julian Pritchard, and Claire Rush. Thanks to Joy Villas Barimbao and Agnes Dziedzic, who helped keep things together on the home front, and to my parents, Pat and Joe Kelly, for
inspiring me to do journalism and write books (and, many years later, for babysitting my kids so I could finish them). Thanks finally to my stepdaughter, Laney, and my son, Zack, for indulging my hobby; to my favorite boy, Bogart, for always being there for a hug; and to my husband, Kyle, for absolutely everything: cooking, caring for the children, brainstorming, editing, and providing emotional support. And most of all for my baby, Josie, for parting with me during such a tender time and still somehow turning out a mama’s girl. This book is especially for you.

1.
THE BUBBLE

hovering in the low $120s
:
Prices for ICE’s Brent crude futures and CME’s Light Sweet Crude, or WTI, futures are used throughout the book. Crude-oil pricing data was provided by each respective exchange.

maintains a minor presence
:
“The Composition of the Cent,”
United States Mint
, https://www.usmint.gov/about_the_mint/fun_facts/?action=fun_facts2.

cigarette lighters
:
“Cerium,”
Royal Society of Chemistry
,
http://www.rsc.org/periodic-table/element/58/cerium.

movie-projection bulbs
:
“Cerium,”
Making Science Make Sense
(Bayer US), http://www.bayerus.com/msms/msms_science_fun/PeriodicTable/cerium/index.aspx.

More than three thousand years ago
:
Irving Finkel, curator, British Museum, London, e-mail correspondence, July 16, 2013.

trading of commodities
:
Edward J. Swan,
Building the Global Market: A 4000 Year History of Derivatives
(Amsterdam: Wolters Kluwer, 2000).

Dutch traders who exchanged tulips
:
Mike Dash,
Tulipomania: The Story of the World’s Most Coveted Flower & the Extraordinary Passions It Aroused
(New York: Crown, 2000).

Commodity trading came to the U.S.
:
Swan,
Building the Global Market.

500 million
:
Extrapolated from data in Galen Burghardt, “FIA Annual Volume: Data,”
Futures Industry
, March 2004, http://www.futuresindustry.org/fi-magazine-home.asp?a=910.

2 billion
:
Extrapolated from data in Galen Burghardt and Will Acworth, “Volume Trends: Decline in the West, Surge in the East,”
Futures Industry
, March 2010, http://www.futuresindustry.org/files/css/magazineArticles/article-1448.pdf.

about $800 billion
:
Claudio Borio et al., eds., “International Banking and Financial Market Developments,” Bank for International Settlements,
BIS Quarterly Review
(December 2004), p. A99, http://www.bis.org/publ/qtrpdf/r_qt0412.pdf.

More than $13 trillion
:
Claudio Borio et al., eds., Bank for International Settlements,
BIS Quarterly Review
(December 2009), p. A103, http://www.bis.org/publ/qtrpdf/r_qt0912.pdf.

“supercycle”
:
Bilge Ertan and Jose Antonio Ocampo, “Super-cycles of Commodity Prices Since the Mid-19th Century” (working paper, United Nations Department of Economic and Social Affairs, New York, 2012), http://www.un.org/esa/desa/papers/2012/wp110_2012.pdf.

“Peak Oil”
:
The term refers to a theory, first put forth in 1956 by scientist M. King Hubbert, which argued that oil production in the U.S. would reach its highest point in the latter half of the twentieth century and would decline thereafter. In the 2000s, the concept of Peak Oil took on new meaning, defining a generalized fear of running out of oil, and the global consequences that would bring. See M. King Hubbert,
Nuclear Energy and the Fossil Fuels
(Shell Development Company Exploration and Production Research Division, 1956), http://www.hubbertpeak.com/hubbert/1956/1956.pdf. For a succinct discussion of how “Peak Oil” played in the public’s mind in the 2000s, see Daniel Yergin, “There Will Be Oil,”
Wall Street Journal
, September 17, 2011, http://online.wsj.com/news/articles/SB10001424053111904060604576572552998674340.1.

John Arnold
 . . . philanthropist:
Leah McGrath Goodman, “When a Billionaire Trader Loses His Edge,”
Fortune
, May 4, 2012, http://finance.fortune.cnn.com/tag/john-arnold/.

the resultant $4 per gallon price of gasoline
:
Jad Mouawad, “Congress Looks for a Culprit for Rising Oil Prices,”
New York Times
, June 25, 2008, http://www.nytimes.com/2008/06/25/business/25oil.html?_r=0.

where members of Congress held forty hearings
:
Ibid.

their own records showed
:
U.S. Commodity Futures Trading Commission,
Staff Report on Commodity Swap Dealers and Index Traders with Commission Recommendations
, Washington, D.C., September 2008, http://www.cftc.gov/ucm/groups//files/12/97/69/f129769/public/@newsroom/documents/file/cftcstaffreportonswapdealers09.pdf.

grain prices were causing revolution
:
Troy Sternberg, “Chinese Drought, Wheat, and the Egyptian Uprising: How a Localized Hazard Became Globalized,”
The Arab Spring and Climate Change: A Climate and Security Correlations Series
(Center for American Progress, Stimson and the Center for Climate and Security, February 2013), http://climateandsecurity.files.wordpress.com/2012/04/climatechangearabspring-ccs-cap-stimson.pdf.

commodity indexes like the GSCI were to blame
:
David Frenk and Wallace Turbeville, “Commodity Index Traders and the Boom/Bust Cycle in Commodities Prices,” posted October 18, 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1945570.

2 percent on a single day
:
Matt Whittaker, “Traders Flee from Gold after Goldman News,”
Wall Street Journal
, April 16, 2010, http://online.wsj.com/news/articles/SB10001424052702303491304575187840789262772#printMode?KEYWORDS=Paulson+gold.

2.
THE SPECULATOR

French oil and gas company Total
:
Telis Demos, “Goldman’s Commodities Queen,”
Fortune
, September 25, 2008, http://money.cnn.com/2008/09/24/news/companies/Goldman_demos.fortune/index.htm
.

Singapore was a big oil processing center
:
“Singapore Overview,”
U.S. Energy Information Administration
, http://www.eia.gov/countries/cab.cfm?fips=SN.

China Aviation Oil
(Singapore) Corporation Ltd.:
Wayne Arnold, “Failed China Fuel Supplier Waited Too Long for Help,”
New York Times
, December 4, 2004, http://www.nytimes.com/2004/12/04/business/worldbusiness/04losses.html?pagewanted=print&position=&_r=0.

up to 10 percent of active, or “open,” contracts
:
David Cho, “A Few Speculators Dominate Vast Market for Oil Trading,”
Washington Post,
August 21, 2008,
http://online.wsj.com/news/articles/SB10001424052748704285104575491981967381818.

close to 10 percent apiece
:
“World Economic Outlook, April 2008: Housing and the Business Cycle,”
International Monetary Fund
, p. 81. http://www.imf.org/external/pubs/ft/weo/2008/01/pdf/text.pdf.

the most severe winter weather in fifty years
:
John Liu and Li Xiaowei, “China Tries to Restore Power; Storms Forecast to Ease,”
Bloomberg,
February 4, 2008,
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a44nuzlAd5Xo&refer=home.

poor government planning
:
Jane Louis
,
“Lights Out in SA, but Gold and Platinum Glow Bright,”
Hard Assets,
January 28, 2008, http://www.resourceinvestor.com/2008/01/28/lights-out-in-sa-but-gold-and-platinum-glow-bright.

“Peak Oil”
:
M. King
Hubbert,
Nuclear Energy and the Fossil Fuels
(1959),
and Daniel Yergin, “There Will Be Oil” (2011).

nuclear weapon in Iran, or labor strikes in Nigeria
:
Jad Mouawad, “Oil Prices Take a Nerve-Rattling Jump Past $138,”
New York Times
, June 7, 2008, http://www.nytimes.com/2008/06/07/business/07oil.html.

“This whole industry”
 . . . 1850s:
Jad Mouawad and Diana B. Henriques, “Why Is Oil So High? Pick a View,”
New York Times
, June 21, 2008, http://www.nytimes.com/2008/06/21/business/21oil.html?pagewanted=all.

Companies like Marathon Oil
:
“Even Big Oil Feels the Price Pinch,”
New York Times
, DealBook blog, July 31, 2008, http://dealbook.nytimes.com/2008/07/31/even-big-oil-feels-the-price-pinch/.

Ikea and DuPont
:
Larry Rohter, “Shipping Costs Start to Crimp Globalization,”
New York Times
, August 3, 2008, http://www.nytimes.com/2008/08/03/business/worldbusiness/03global.html?pagewanted=2.

American International Group
:
Adam Davidson, “How AIG Fell Apart,” Reuters, September 18, 2008, http://www.reuters.com/article/2008/09/18/us-how-aig-fell-apart-idUSMAR85972720080918.

WTI experienced a record pop
:
“Record One-Day Jump in Oil Price,”
BBC News
, September 22, 2008, http://news.bbc.co.uk/2/hi/7630513.stm.

3.
THE FIRM THAT MARC RICH BUILT

$4 billion in bank lines
:
Glencore Third Quarter Investor Update, November 12, 2008, p. 10, http://www.glencorexstrata.com/assets/Uploads/200811120800-Investor-presentation.pdf.

Marc Rich
:
Daniel Ammann,
The King of Oil: The Secret Lives of Marc Rich
(New York: St. Martin’s Press, 2009). Much of the information in this chapter related to Marc Rich and the history of Marc Rich & Co. is drawn from Ammann’s work.

first to take advantage
:
Ibid
.

a €7.5 million house
:
David Robertson, “Superbright, Disarmingly Quiet: The Stealth Approach to Wealth,”
The Times
, May 21, 2011, http://www.thetimes.co.uk/tto/news/uk/article3027294.ece.

“investment banking times three”
:
Eric Onstad, Laura MacInnis, and Quentin Webb, “Special Report: The Biggest Company You’ve Never Heard Of,” Reuters, February 25, 2011, http://www.reuters.com/article/2011/02/25/us-glencore-idUSTRE71O1DC20110225.

$87 million apiece
:
Ann Davis, “Commodity King: Aggressive Swiss Giant Rides Resources Boom,”
Wall Street Journal
, July 31, 2007.

record profits of $6.1 billion
:
Saijel Kishan, “Glencore 2007 Profit Jumps to Record $6.1 Billion,” Bloomberg,
March 11, 2008, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aS_wQurA8Kuo&refer=latin_america.

for €900,000
:
Jane Baird and Natalie Harrison, “Glencore Credit Derivative Spreads Widen Sharply,” Reuters, October 21, 2008, http://uk.reuters.com/article/2008/10/21/glencore-cds-idUKLL27496720081021.

an independent commission report
:
Paul A. Volcker, Richard J. Goldstone, and Mark Pieth, “Manipulation of the Oil for Food Programme by the Iraqi Regime,”
Independent Inquiry Committee into the United Nations Oil-for-Food Programme,
October 27, 2005. Glencore’s written response to the allegations can be found on page
196
.

fled the Nazis with his family
 . . . status in the industry:
Ammann,
King of Oil
and author reporting.

at least $1 billion
:
Kelly Phillips Erb, “Marc Rich, Famous Fugitive & Alleged Tax Evader Pardoned by President Clinton, Dies,”
Forbes
, June 27, 2013, http://www.forbes.com/sites/kellyphillipserb/2013/06/27/marc-rich-famous-fugitive-alleged-tax-evader-pardoned-by-president-clinton-dies/.

South Africa
 . . . Rich’s standing in it:
Ammann,
King of Oil
and author reporting.

Rich sold his 51 percent stake
:
David Henry, “‘King of Oil’ Marc Rich, controversial commodities trader and former fugitive, dies at age 78,”
Bloomberg News
, June 26, 2013, http://business.financialpost.com/2013/06/26/marc-rich-dies/.

three grown daughters
 . . . making it to the hospital:
Ammann,
King of Oil
.

upon his death from a stroke
:
Erb, “Marc Rich, Famous Fugitive.”

a controlling interest
:
Onstad, MacInnis, and Webb, “Biggest Company You’ve Never Heard Of.”

forced to sell
:
Eric Onstad, “Xstrata Shareholders Approve $5.9 Billion Rights Issue,” Reuters, March 2, 2009, http://uk.reuters.com/article/2009/03/02/uk-xstrata-idUKTRE5212JW20090302.

candle-wax trade
:
Javier Blas, “Commodities: Into the Spotlight,”
Financial Times
, April 10, 2011, with additional reporting by the author.

4.
THE BANKS

once used by the energy company Texaco
:
Elsa Brenner, “Morgan Stanley Seals Deal on Texaco Headquarters,”
New York Times
, March 31, 2002, http://www.nytimes.com/2002/03/31/nyregion/in-business-morgan-stanley-seals-deal-on-texaco-headquarters.html.

after the terrorist attacks
:
Ibid.