The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders Read Free Page A

and crude-oil contracts sank to a fraction oftheir record high of $147. Underlying their sudden drops amid volatile times in the market was a broader story line: the whole commodity craze had by then begun to fizzle.
    Throughout the bubble in commodities, a core group of traders were siphoning much of the profit. They were industry veterans who, like Pierre Andurand, used a combination of strategy and heft to play the markets to their benefit. Along the way, their bets that commodity prices would rise had the ability to move markets upward, and their bets that prices would fall, the opposite. For the most part, they weren’t manipulating prices by hooking up with fellow traders to orchestrate group decisions, nor were they buying physical commodities to constrict supplies while collecting money by betting that the futures prices would go up, a classic commodity swindle known as cornering. But their intimate knowledge of nuanced industries, their access to closely held information, and their enormous resources gave them tremendous advantages that few others had. And even when they bet wrong, they were still so rich and well connected that they could usually return the next day and begin to make their money back.
    It was an industry of optimism, peopled by wealthy, focused traders who were not afraid of an occasional setback. Some had absentee fathers whose gaps they longed to fill with power and money, some were simply more comfortable with risk than their counterparts. After all, commodities were an area in which the market swings in a given day could be exponentially greater in size than the typical moves in stock or bond markets.
    “When you trade commodities, you realize really quickly that markets can do anything,” explained Gary Cohn during an interview in Goldman’s sleek New York corporate offices one day in 2012. “So I love when I sit there with guys who say, ‘that would bea three-standard-deviation move,’” that is, a shift in market prices that was three times as great as the typical one would be—as if that notion should come as a shock to the listener, he added: “In commodities, we have three standard-deviation moves in a day.”
    Commodity players can appear pampered, even lazy. Maybe they spend half the summer in Provence or Nantucket, working remotely from a Bloomberg terminal in their home office while their kids are minded by a live-in nanny. They might piddle away a serious investor meeting talking martial arts, move a long-scheduled international appointment just days in advance, refuse to take a view on the markets, or be too busy grouse-hunting in Norway to answer a couple of questions about the crude-oil business. All of the above happened with people interviewed for this book. But when it comes to trading raw materials, they are a shrewd and indomitable lot, and, at least for the moment, the contracts they trade are still so loosely regulated that the correct combination of money and skill creates irresistible opportunity. That’s why I am only half-joking when I call them the secret club that runs the world.
    In BlueGold’s prime, it had several hundred competitors in the hedge-fund business, each of varying size. Commodity hedge funds, typically based in London, Greenwich, or Houston, picked one or more raw materials they understood well, then made a business of trading in the related contract markets. Their investors, usually a combination of larger money-management firms and wealthy individuals, presented them with billions of dollars to trade. There were many winners, butJohn Arnold, a onetime Enron trader who went into business for himself after it folded, did the best of all; his natural-gas-focused hedge fund, Centaurus Energy, generated 317 percent returns in 2006. Several years later,Arnold retired, a billionaire at the age of thirty-eight. He became a philanthropist.
    Prodigies like Arnold were the superstars of the industry, commanding respect as a result of the enormous sums