The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (14 page)

Friends whom Ruggles told of the unnerving experience said to shrug it off. “The oil business is very litigious,” he says. Associates warned him that things like the Houston raid would happen, and that he had to protect himself by following the rules and having a good lawyer on hand. But the threat of investigations and court shouldn’t dissuade him from keeping on in the business, they insisted.

Ruggles spent the next six years hopscotching around the world, eventually landing at Bank of America. He had made good money by getting better jobs every few years, and also profited from some of the trading in his personal account. His intellect and creativity were respected, even if his attitude sometimes rankled. All in all though, Ruggles was restless. He was ready for the next challenge.

With the fuel book well in hand by mid-2011, Delta management returned to the refinery-purchase idea. Ruggles and others had been pondering the options that year, and had hired a refinery operator as a consultant on the project. Having done a good amount of research, the list of prospects had been narrowed down to two.

Late that summer, Ruggles, Jacobson, and others went to Richard Anderson’s office for a meeting to discuss the possibilities: a 185,000-barrel-per-day refining facility in Trainer, Pennsylvania, not far from Philadelphia, or a 250,000-barrel-per-day plant near New Orleans.

Anderson eyed the two huge printouts that were spread across his conference table. They contained detailed satellite images of the two facilities, both of which were owned by ConocoPhillips. “How much is this one?” he asked, pointing to the Trainer plant. About $100 million to $120 million, he was told. The other, the group believed, would command a far higher price—as much as $800 million.

The Trainer facility, while far cheaper, was nonetheless part of a struggling refinery belt in the mid-Atlantic region, where numerous facilities were being idled because of waning demand for gas. Among other things, Trainer needed a complete physical overhaul, known in refining as a “turnaround,” if it were to be in full compliance with environmental and other federal regulations. That meant the ultimate price could be twice what Delta was paying for the facility itself. Still, Ruggles, who had dealt since business school with refineries as either an operator or a consultant to clients who bought and ran them, felt that Trainer was a good value. The turnaround costs would be considerable, he felt, but Conoco had kept the plant in pretty good shape, and if Delta could keep the repair process to a tight enough schedule, it could limit the delays and expenses involved.

Anderson agreed. He told the executives to pull together a due-diligence team to take a closer look.

Thanks in part to its new hedge book, Delta was in much better financial shape by September. Still, unexpected setbacks, such as the Fukushima Daiichi nuclear meltdown in Japan in March and a winter storm that had forced Delta’s Atlanta hub to cancel a wave of flights, meant that the airline was now projected to be $100 million short of funding its employee profit-sharing pool.

In a meeting with a half-dozen of their senior division heads, Anderson and Bastian asked what could be done. Budget trims were possible in the supply-chain area, they were told, and perhaps some of the airline’s borrowing agreements could be rejiggered to free up cash. But even with those tweaks to the financial picture, they still had a big gap before the bonus pool was ready.

Bastian turned to Ruggles. “Fuel,” he said. “Anything we can do?”

“We could probably trade a bit and make some money,” Ruggles replied. Bastian appeared open to the idea. If the fuel group could generate $40 to $50 million, he said, it would help matters greatly.

Ruggles sensed an opportunity in heating oil. Often used as a hedge for airlines and other energy traders because it was correlated to crude and jet fuel, heating oil had been volatile that fall, and its trajectory might continue to be ragged. But Ruggles thought it would stay in a certain range until the end of the year, and figured that if he was right, he could make some money.

With heating oil then trading at about $2.80 per gallon in the contract markets, Ruggles made a complicated wager consisting of multiple parts, including the right to buy heating oil at particular prices and the right to sell it at others. Overall, though, his position targeted a basic price range in the coming months of between $2.50 and $2.90.

A couple of days later, Ruggles got a call from Trey Griggs, a senior salesman at Goldman Sachs, which was one of Delta’s primary brokerage firms. “What the hell are you doing?” Griggs asked. He demanded to know why the airline, whose primary need was to buy jet fuel, would possibly want to reserve the right to sell a commodity like heating oil, which seemed like a trade pretty far afield from its core needs.

Ruggles explained that he had a plan that had been approved by Delta management, but Griggs’s call, he knew, was a serious one. As a broker to the airline, Goldman had a responsibility to protect Delta’s financial interests, and a purely speculative trade like Ruggles’s might have seemed inappropriate. “The last thing you want to do is have the company blow up with wrong-way risk,” says a Goldman employee who was briefed on the Delta discussions.

Delta arranged a conference call with Griggs to explain their rationale for the trades. Managers vouched for Ruggles, who was by then on his way to making $100 million on the heating-oil gambit, helping to push the airline’s profit-sharing pool into the black. All in all, Delta’s hedge book generated $420 million in gains for the year, capping what could only be considered a remarkable turnaround from where it had been less than a year before.

But even though he escaped that particular attack, Ruggles was in other ways off to a very bad start. “From day one,” says the Goldman employee, “everybody in the industry thought he was a lunatic.”

T
wo and a half years after his record performance, Pierre Andurand was still doing incredibly well. His returns in 2009 and 2010 had been strong, if not superlative, and BlueGold had established itself as a major player in London’s commodity-trading business. The fund, which now occupied a gracious office in the city’s pricey Sloane Square neighborhood, an area famous for a particular brand of British gentry known as the “Sloane Rangers,” was a fixture in the international financial press and managed billions of dollars in client money.

Since its inception, the firm had returned more than five times its invested cash, or capital—all during a period in which the Goldman Sachs Commodity Index and the S&P had fallen hard. Noting the wild range of prices in the oil markets, “we are pleased with how we have navigated all of these energy markets—bullish, bearish, and last year’s trendless range bound market,” Andurand and Crema wrote in their January 2011 investor letter. In other words, even when there was no apparent direction in the markets, BlueGold made money, sacks of it.

That winter Andurand, who was by now an internationally
known hedge-fund manager living on Walton Place, a lush but quiet side street of West London near the department store Harrods, had also fallen madly in love. A friend had introduced him to a former model named Evgenia Slyusarenko at KX, the gym where he worked out most mornings in West London, and he had proposed to her after a brief courtship while lying in one day in bed.

Born in Vladivostok, on Russia’s easternmost tip, Slyusarenko, or “Genia” for short, had come to Paris as a teenager with no knowledge of French and little English. A soft-spoken, willowy brunette, she was taken in briefly by the Karin agency, which trained her to walk the international runway for brands like Chanel and Dior. But Slyusarenko resisted the physical toll of modeling, including the constant pressure to lose weight and to work exhausting hours. By the age of twenty-three, she had earned a degree from Vladivostok State University and relocated to Moscow. There she took up with the financier Nathaniel Philip “Nat” Rothschild, a British commodities investor and a member of a well-known European banking family, and eventually moved to London with him, where she switched careers and became an interior designer.

It was after her breakup with Rothschild that she met Andurand. Now Slyusarenko was newly pregnant and planning an August wedding with him near St. Petersburg. Furniture was to be flown in to the Catherine Palace, which the couple felt was lacking in elegant partyware, and Slyusarenko’s dress was being custom-made for
€
60,000 in Paris.

Andurand was still optimistic about prices in the crude contract market. He knew that the Arab Spring was creating a volatile period, but he felt that oil was still significantly cheaper than its natural levels and expected a rise over the next year or two.
During the first few months of 2011, he had purchased both Brent and West Texas oil contracts. Some were tied to prices in the near future, and others were tied to prices as far out on the “curve,” or calendar, as 2013. By buying both sets, Andurand spread his position over a longer period of time.

BlueGold was by that point managing about $2.4 billion in cash, mostly from outside investors. But, as usual, Andurand liked to think bigger, and he had used complex trades to triple his market exposure, leaving the fund with wagers on a rise in crude prices that amounted to about $8 billion.

London markets were quiet most mornings, so Andurand kept to a leisurely work schedule. He would usually sleep until 8:30
A.M.
or so, check the e-mails that had come in overnight for any oil-moving news, then have a bite to eat. Perhaps because of his pending nuptials, he was keeping healthy at the time, relying on foods like toast with goat cheese or salmon or fruit and yogurt for breakfast to stay trim. Each morning he would look at the Bloomberg computer terminal in his home office, read some relevant stories, and, if nothing earthshaking was going on, he’d head the few blocks to KX for a hard-core workout. After that, he would shower and throw on his usual casual ensemble of jeans and a button-down shirt, getting to the office at Sloane Square by about 11:30 or noon.

Crude had been trading in a range for some time now, and it was at a lower level than Andurand wanted. He had been astonished by the market’s fall in the aftermath of Osama bin Laden’s death, and was growing annoyed by the stagnancy of his positions. Come on, Andurand would think, looking at Brent contracts that were then stuck in the mid-$120s. When were they going to budge?

Good things rarely happened when Andurand got impatient; he knew that much. A methodical trader, he normally laid the groundwork to support his market thesis and waited calmly for it to become profitable, even if the process took weeks or months. But this time around, he was becoming antsy. He couldn’t help it.

Placing a big market wager was tedious work, involving the buying and selling of relatively small bundles of commodity contracts at a time followed by long waits to see how the trades fared. If BlueGold’s positions didn’t affect prices unfavorably, it could keep adding new contracts until the bets reached their desired size. But if prices moved against the firm, it would pull back, waiting hours, days, even months for a better moment to increase the stakes. It was the same painstaking book-building that Ruggles underwent. Little by little, BlueGold would build its positions, monitoring them constantly as contracts matured and market prices changed, assessing whether that left the firm’s portfolio up or down as a result.

In 2008 Andurand had done all the trading work himself. But after BlueGold’s first flush year, he and Crema had hired a pair of so-called execution traders to do the work for them. Neel Patel, the more senior of the two, was Andurand’s proxy when he was out. Early in the morning, Patel commuted in from his country house to check the markets and send his boss updates, and he’d continue doing so throughout the day, putting BlueGold’s market holdings in the context of the commodities market as a whole and warning Andurand when certain positions became a risk.

On May 5, the calamitous day in which BlueGold nearly lost a bundle on Andurand’s overoptimistic crude bet, it was Patel and his colleague Sam Simkin who first noticed the spiral. Andurand had spent the first hour or so of the disaster meeting with the
author of the book series Market Wizards and then, having run upstairs to help, doing little more than instructing his charges to sell a bit of crude at a time and wringing his hands while they awaited the results.

Late that afternoon, Andurand retreated to his enclosed office, where he could see his traders through the glass. Up on a pedestal and also encased in glass was a miniature model of the black-and-white Bugatti sports car he’d purchased after BlueGold’s first big year; it had arrived with a note from the manufacturer, saying “with compliments,” and was one of the few personal adornments in his office. Andurand switched on his PC and made a few more calls, still searching for answers to crude’s sudden sell-off. Crema and Paul Feldman, the company’s financial officer, joined him; all three appeared baffled.

Andurand had seen bad days in the markets before, but this one shook him to the core. Crude was behaving in a way he’d never seen before—indiscriminate selling, for multiple hours without abatement.

The sheer price drop in crude contracts, in which BlueGold was so deeply invested, was reason enough for panic, but the nature of the sell-off was unnerving as well. Crude had begun the day in backwardation, a situation in which the future prices of oil contracts were lower as their expiration dates stretched farther out in the calendar. In a case like that, contracts connected to a longer-term time frame—which, in BlueGold’s case, were a series of Brent and West Texas contracts tied to whatever prices were in December 2013—would almost always remain steady while the nearer-term futures dropped precipitously in price. But that wasn’t happening today. Everything was falling at the same time.

BlueGold’s large position in the market had by then become a
handicap. The moves it made, or even rumors of them, could affect prices to a large extent. By selling large numbers of contracts to limit its losses before prices fell even further, BlueGold was inadvertently pressuring other crude contract holders to sell off as well, and, in the process, making prices even less favorable for itself. It was an infuriating paradox for the hedge fund that had exactly the sort of market impact that advocates of position limits like CFTC commissioner Bart Chilton had imagined—albeit with the effect of depressing oil prices rather than spiking them.

As Patel and Simkin sold off their crude positions that afternoon, reporters began calling the office, asking questions. Were things okay? Was BlueGold blowing up? The traders had no idea.

Patel was busy trying to extricate BlueGold from its crude holdings, and he didn’t want to disturb his superiors with questions from the media. But his friends were sending worried texts as well. Around 4
P.M.
, he shut his cell phone off. They would all have to wait.

For the rest of the afternoon, Andurand, Crema, and Feldman were in and out of meetings, and Patel and Simkin sold as many Brent and West Texas contracts as they could. Each sale dragged down prices, but they had little choice other than to act before things got even worse.

Markets thinned out by about 7:30
P.M.
in London, when it was 2:30
P.M.
in New York, and little could be traded efficiently after that. BlueGold had managed to sell off more than $3 billion in positions, losing $500 million in the process. It was a massive amount to sell, maybe even suicidal.

“That was the scariest day ever of my career,” Andurand says now. “That really froze me. Usually I know how to manage—the front goes down more than the back,” he said, referring to the
timetable used to discuss commodity contracts, in which the front is the nearer term and the back is the later, “and you can recover and go the other way if you need it.”

But this time around, both ends of the horizon had been moving, with the front end at moments falling three or four times as much as the back, causing BlueGold to lose much more money than Andurand had anticipated.

“I thought, if the market’s starting to act like that, then we don’t know how to manage it,” Andurand recalls. “It was a psycho market.”

Patel and a research analyst stayed late that night, watching the markets and rechecking BlueGold’s remaining positions. The firm had decided to hang on to some of its West Texas holdings as well as its back-end contracts, but there would still be more distressed selling in the morning.

Patel left Sloane Square around 11:30
P.M.
and caught one of the last London Underground trains out to Zone 4, on the city’s farthest outskirts. The ride home to Chigwell, his quiet town northeast of London, was an hour. He sat numbly through it.

When he walked into his house after midnight, his live-in girlfriend was irritated. “I’ve been trying to call you for hours,” she said. “Where have you been?”

“It was a bad day,” Patel muttered. He didn’t have the energy for a confrontation, and he didn’t like to talk about work at home anyway. Nobody outside of the commodity markets, he felt, could really understand the sheer terror that accompanied BlueGold’s sort of risk profile.

Patel walked into his home office and turned on the PC to check
the markets again. He was only twenty-seven, but he’d invested all his savings in BlueGold; the place was more than just a paycheck to him. Even though the markets were essentially closed, with only limited activity in Asia, he couldn’t relax. He felt unable to disconnect.

His girlfriend had gone to bed after their argument, and he too tried to lie down. But he was too anxious to get any sleep. At 2
A.M.
, he put on his gym clothes and climbed onto the treadmill for a five-mile run.

When the alarm on his cell phone rang at 8:30 the next morning, Andurand thought he’d had a terrible nightmare. Crude had dropped precipitously and BlueGold had lost a bundle. He glanced at his BlackBerry, which lay on the nightstand. Oil in the Brent market was down another $5 to the $106 range, a full $15 from where it had started Thursday morning. Andurand hadn’t dreamed the carnage after all.