Category Archives: derivatives

Q&A With The Global Journal: Oil Trading And The Casino Syndrome

Happy National Pancake/Leap Year/Week before Super Tuesday Day, all. It has been a turbulent past few months and not just in the oil market. I will get into why very shortly but, for now, let’s just say that after a long and dark winter, I am once again available for dancing in the streets. Without any further cryptic remarks, I’d like to share an interview I just did with The Global Journal, based in Geneva, which rang me up to discuss ‘The Asylum’ and what the future holds for the energy market and gas prices during this, our illustrious Election Year.

(Q portions courtesy of Janine Huguenin-Virchaux, the magazine’s books and culture editor.)

Your book mentions that “the market is no longer reflecting supply and demand.” What is the use of a market that does not reflect the true price of oil? Do we need new hijackers?

That’s a great question – do we need new hijackers? If we could get some hijackers that could take back the market so that it does reflect supply and demand more clearly, then I would say yes, we do! However, I would also say that there is a serious debate going on about the extent to which price does reflect supply and demand. I think there is very good reason to believe that the price does not reflect it anymore. There is also a very technical reason for what has been going on that has not really been acknowledged or understood by many people. And that is the relationship between speculation and price discovery. A lot of the information that I get is from people who read the book and then they come to me and bring me stuff that nobody seems to really know about.

A lot of these guys are just regular traders who trade physical oil and feel that supply and demand is not reflected in the price correctly anymore. Whereas their entire lives – some of these men and women have been trading oil for thirty years or more – they feel the price did reflect it. So they believe there’s a huge difference in what they are seeing today in terms of the market fundamentals versus the price. And what they used to do was see price and fundamentals fit together better. They see a lot of distortion happening now. A lot of these people are concerned with that. I want to say, it’s not all about making money for these people: some of them look at this and say “Oh my God, it’s not acting the way it used to anymore and it doesn’t look like it’s headed anywhere good.” And that is aside from the fact that trading has become so ferocious that it is more about preserving a global casino than about supplying oil to people who need it.

That’s the problem. The casino aspect overshadows everything. Most of the people who play this game don’t want oil. They just want to play the game.

What is the alternative? I mean, these are the people who are speculating on the price of oil. Is there anything that can change to make it different? To make it less casino-like?

Yes, I think so. I am considering writing about this much more, the nature of speculation… Continue reading Q&A With The Global Journal: Oil Trading And The Casino Syndrome

The Boy Wonder At The Heart Of A Disaster

Something to inspire your Friday: The story of a 30-year-old from Sunrise, Florida, who’s defying Wall Street — and not getting hit with a nightstick for it.

Who is James Koutoulas and how did this 30-year-old end up leading the charge to recover more than $1 billion for customers from one of Wall Street’s biggest bankruptcies?

By Leah McGrath Goodman, contributor

FORTUNE — James Koutoulas walked into one of the worst bankruptcies in U.S. history with almost zero legal experience.

“When I got up the first day in bankruptcy court and saw the look on the judge’s face, I couldn’t blame him,” he says. “Bankruptcy court is a rich man’s club where everyone is old, so I stood out. Honestly, when I’m shaved, I look like I’m about 12.”

Yet Koutoulas, 30, may be one of the only former customers of MF Global, the now-defunct futures brokerage house, with the gumption to publicly object to the way they are being treated. Since filing for bankruptcy Oct. 31, MF Global’s woes have rapidly piled up – chief among them losing an estimated $1 billion-plus of customer funds. The loss directly crimped the wallets of some of the futures market’s most active participants, from small-time farmers to ranchers to hedge funds.

Koutoulas, chief executive of three-year-old commodities fund Typhon Capital Management, stumbled into the courtroom drama accidentally. His Chicago firm, which conducts the bulk of its business in the futures market, discovered shortly after MF Global’s bankruptcy that $55 million of its $70 million under management had been dragged into the proceedings. This was a surprise, because, by law, customer funds are supposed to be kept completely segregated from a brokerage firm’s own assets. That wasn’t the case with MF Global. For Koutoulas and tens of thousands of other MF customers, it was a rude awakening.

“My goal is real simple: getting everybody’s money back,” he says. Continue reading The Boy Wonder At The Heart Of A Disaster

How To Make Someone Else Swallow Your Losses, The Mastercourse

It’s official: when a Wall Street powerhouse suddenly collapses and (possibly) more than a billion dollars goes missing, it’s no longer just the ordinary taxpayer’s problem. Now, it has moved up the chain. Below, the piece I wrote today for Fortune on what traders do when you misappropriate their money.

While Occupy Wall Street was holding its two-month anniversary rally in Manhattan last week, traders were quietly mounting a rather more sophisticated version of OWS on their own. Call it Occupy Wall Street Bankruptcy Court.

FORTUNE — Big institutional investors are getting a taste of what many frustrated taxpayers experienced during the financial crisis: Being on the hook for losses of a major financial firm against their wishes.

This time, of course, it’s MF Global at the center of the dispute. A once-trusted brokerage with roots dating back to the 1700s, MF Global is now a bankrupt firm suspected of misappropriating customer funds to the tune of at least $600 million.

More than two weeks after MF Global’s Halloween bankruptcy filing, there are more questions than answers and a surfeit of conflicts in an investigation that should be aiming to restore the public’s confidence, but is doing the opposite. On Monday, the bankruptcy trustee for the case announced that there may be much more than $600 million missing from MF Global accounts — perhaps as much as $1.2 billion.

Hundreds of millions of dollars of trading capital and collateral were frozen without notice, dramatically disrupting the derivatives marketplace and ushering in a phalanx of federal prosecutors, regulatory agencies and forensic accountants working around the clock to determine where the missing money is. This, after a lawyer for MF Global assured a New York judge earlier this month “there is no shortfall.”

What’s different about this case?  One hedge fund executive summed it up best: “What is scary about MF Global is that there is no political will in this country to look out for people. Let this be a lesson that, if someone tries to steal from you, there is no one who is going to save you. I mean it is literally the most frightening thing that can happen in finance.”

Led by a sense of outrage — as well as the conviction that if they don’t look out for themselves, no one else will — investors have been pooling information and banding together to defend themselves for weeks. Continue reading How To Make Someone Else Swallow Your Losses, The Mastercourse

A Certain Stylishness In Hating The Rich

In Marie Antoinette's days, the guillotine was called the 'National Razor.'

Our national discourse on the nature of wealth has been a good cure for sanity of late.

News that a book coming out from the surviving son of Bernard Madoff, mastermind of the largest Ponzi scheme in history, elicited comments from readers that could be called anything but charitable. Alongside an interview with Madoff’s wife, Ruth, whose picture speaks volumes about the toll the scandal has taken on her life — not in the least the suicide of her other son — are comments that plainly show how bitter the feud has become between the rich and the working class in our country. In response to Ruth’s claims of not knowing of her husband’s illegal financial dealings, readers wrote:

“What a bunch of lies. Anyone in the industry knows that the returns had to be made up…the sons knew it, the wife knew it, everyone knew it.”

“I do not think Ruth knew, but she strikes me as remarkably incurious and shallow.”

And:

“This is a woman who married at 18 and never took responsibility for her own financial security. True, she raised their children but she chose to ignore the choices made by her husband.  Now she claims to be a victim. I am sorry but I do not buy this. She chose to remain ignorant.”

Overlooked was this part of the interview, in which Ruth Madoff discusses falling in love with her husband, as it would inevitably inspire some modicum of humanity.

Aside from Madoff-venting, the debates rage about the solutions. At Occupy Wall Street, which I visited last week, you have, on the one hand, a number of concerned Americans questioning — or outright decrying — capitalism in all its trappings. They suggest that the only solution is to raze and rebuild the entire political and financial system.

Unfortunately, they are still experimenting with new models to offer in its place.

On the other, you have national leaders quick to denounce the financial crisis, but just as quick to vote down any new rules aiming to prevent a financial crisis in the future.

Two G-Men (Goldman, that is): Obama and Corzine wave for the crowd

Already, we are seeing the results of this splintering of the populace: we remain effectively paralyzed to redress our own fragility, forced to lurch from one crisis to the next. Large financial powerhouses continue to fail spectacularly as the Department of Justice, the Federal Bureau of Investigation, the Securities and Exchange Commission and a smattering of other government agencies struggle to keep up with reports of unchecked theft, negligence and fraud amid budget cuts frequently meant to hobble them (as if the backlog of cases they’re drowning in wasn’t enough).

In the meantime, too much money in all the wrong places undercuts the healthy cleansing that might otherwise be achieved through a democratic elections process. As one hedge funder told me while in New York last week: “Nothing can pass C0ngress, because the Republicans believe all regulation is bad. They don’t want another financial crisis, but they don’t approve of any new rules either. They haven’t quite worked out their dogma yet.” And we know Obama and the Democrats, whatever the dogma, do not appear capable of executing a plan.

Last week, former U.S. senator, New Jersey governor and high-ranking Goldman Sachs executive, Jon Corzine, stepped down from a job he held for just over a year as head of the world’s largest futures brokerage house. The 200-year-old-plus brokerage, MF Global, handled traders’ transactions in the multitrillion-dollar futures market, where people bet on the future prices of everything from soybeans to gasoline to interest rates.

Corzine’s company, which sought to become a mini-Goldman Sachs, filed for bankruptcy after betting more than $6 billion on bonds tied to the European debt crisis and getting caught short. Corzine, a self-described son of an insurance salesman who grew up on a “small family farm” in Illinois, raked in hundreds of millions at Goldman as he ascended to its highest echelons after starting out as a bond trader there.

Given his trading background, Corzine very likely understood exactly what kind of risk his brokerage was taking ahead of its downfall. (“A good rule of thumb is, if the guy is not a former trader, he probably didn’t know what hit him,” the hedge funder told me over a nice-sized steak. “But if you’re a former trader, you get the joke. You probably wrote the joke.”) Continue reading A Certain Stylishness In Hating The Rich

Fortune Features ‘The Asylum’ As Weekly Read

Since publishing “The Asylum: The Renegades Who Hijacked The World’s Oil Market,”  I have received a great deal of response (most of it in private correspondence and some in public forums, such as the press and in the courts, where I spent the better part of my summer languishing in sunless quarters).

You would think it would be the very traders about whom I wrote who would have caused the most trouble. This has not been so. On the contrary, most of them have been supportive to an unwarranted degree, including a rare few who have had every reason to be furious about what I wrote, but instead were reasonable.

Many of them also expressed a sincere belief that the global oil market has run off the rails and that prices are no longer set by supply and demand.

Enter the “market fundamentalist” academics, think tanks, lobbyists and politicians. These folks have been some of the worst offenders. What I have had difficulty understanding, mainly, is what they are getting on about and why. They certainly do not get paid well enough by Wall Street to justify the damage they cause by promulgating misinformation. Any money tossed their way is literally kibble, compared with what is being made off their backs. How much does a senator or academic cost? Not very much, I’m afraid. Continue reading Fortune Features ‘The Asylum’ As Weekly Read

What’s Left Of My Childhood Home

My New England home was my favorite place in the world when I was little. We bought it with several acres of land and it was surrounded by fields and forests and freshwater ponds on all sides. Our property was flanked by the longest line of ancient green-and-blue fir and spruce trees in the state. My parents were very proud of that. We grew up blueberrying and ice-skating and catching painted turtles.

My parents, who were born of Depression-era parents, were fiscally conservative and hugely diligent savers. They bought the house for $49,000 in the mid-70s and sold it for almost a half million in the late 90s when they retired. In the interim, they ceaselessly worked the land to make it beautiful.

Growing up, my mother was the only mother I knew who fed her kids from her own orchards and gardens year round, just for the pleasure of it. A teacher and artist, she set her summers aside for planting and canning for winter. My father was the only father I knew who could build and landscape almost anything from nothing. He loved deep-sea fishing and we ate seafood — mussels, scallops, flounder, bluefish — year-round hooked off his boat. He caught so much he would often give it away to the neighbors. Continue reading What’s Left Of My Childhood Home

Trader Threatens To ‘Kill’ 47 U.S. Officials

‘I was being sued…it upset me.’

A midlife crisis can take many forms. Cheating on your spouse. Purchasing a Maserati. Wearing Billabong. Buying into The Lynx Effect. Just being a jerk. But putting up an “execution” list on your Web site of high-ranking financial and government officials and urging people to buy guns to help you kill them is one I haven’t heard of. Among those on the hit list of the smiling man in the orange tie to your left: the head of the Securities and Exchange Commission Mary Schapiro and the chairman of the Commodity Futures Trading Commission Gary Gensler — both heavyweight Wall Street watchdogs.

“Go buy a gun, and let’s get to work in taking back our country from these criminals,” he wrote on his site, according to prosecutors. “I will be the first one to lead by example.”

The 50-year-old from Long Island is accused of threatening the lives of 47 current and former officials. (Yes, I said 47. You cannot make this stuff up.) Continue reading Trader Threatens To ‘Kill’ 47 U.S. Officials

Interview on ‘Keiser Report’ – Russia Today

Many of you have written to ask for a good bit more on the shenanigans prevalent in today’s oil market. Check out this show, aired today, from minute 14 on…(Thankfully, you can scroll through to the juicy stuff.) More to come on DOJ, FTC, CFTC and FERC investigations into the price of oil and gas — and where the biggest challenges lie for those who seek to break the back of the corruption.

 

‘The Asylum,’ Or How Capitalism and the American Dream Met Their Deaths

June 2011  by Rogue Philosopher

The Asylum: The Renegades Who Hijacked the World’s Oil Market by Leah McGrath Goodman details how a handful of commodity traders on the New York Mercantile Exchange (NYMEX) manipulated the energy futures markets and thereby did more than their share to destroy to our economy.

A singular tragedy in this sordid tale is how the commodity markets finally succumbed to the unbridled greed and power lust that characterized the rest of Wall Street. The commodity futures markets were always the bad boys of the financial community. They didn’t play by the stuff-shirt, pinstriped rules of the banks and investment community. The players on the NYSE and AMEX were mostly dullards. By contrast, the boys and gals at the Commodity Exchange Center in the World Trade Center were a colorful, indeed, even charismatic lot.  The traders were outcasts, renegades, cowboys. They stood apart from the financial herd. They drank hard, partied hard, and womanized shamelessly.

In short, they were a lot of fun.

The commodity futures markets were also the one last place in the financial community where someone starting out from humble beginnings and without the advantages of social or political connections could, with some assistance from Lady Fortuna, make it big. Or at least make a real good living for himself and his family. Traders like these represented one of the few remaining symbols of the American Dream.

No more…

Continue reading ‘The Asylum,’ Or How Capitalism and the American Dream Met Their Deaths

How Fear, Greed Factor Into the Price of Gasoline

The price of oil is set not in Vienna at the headquarters of OPEC, but at the New York Mercantile Exchange.

Llewellyn King, PBS

Sunday, May 1, 2011

WASHINGTON — The fate of the Obama presidency hangs not on a birth certificate or the red ink on the federal budget but by the hose nozzle of your local gas station.

Electoral discontent is measured by the price of a gallon of gasoline. Heading past $4 toward $5, that is a lethal trajectory for President Obama.

Enter the demagogues, especially the clown-in-a-business-suit, Donald Trump. Unfettered by the gravity that goes with facts, Trump says that he would fix the oil price — now around $110 a barrel — by facing down the producers, particularly the Organization of the Petroleum Exporting Countries (OPEC). He told an interviewer on television that he would call OPEC and tell them to pump more or face the consequences. The latter, he did not specify. War? Against whom?

In a compelling book by Leah McGrath Goodman, The Asylum: The Renegades Who Hijacked the World’s Oil Market, the author lays out the ugly fact that often — in fact, more often as not — the price of oil is set not in Vienna at the headquarters of OPEC, but in downtown Manhattan at the New York Mercantile Exchange (NYMEX).

Tens of thousands of future contracts are traded in nanoseconds at the NYMEX, and the price of oil is set. This price affects not only the price that will be paid when these contracts expire and delivery takes place, but also, according to Goodman, the all-important over-the-counter market, where sellers trade more directly with buyers without government oversight.

Goodman contends that there is little oversight of the NYMEX because the agency charged with the role is the weak and ineffectual Commodities Futures Trading Commission (CFTC), where many staff and commissioners are busy burnishing their resumes so they can cash in later as market executives.

The over-the-counter market is not regulated at all because of a pernicious interference from Congress known as the “Enron Loophole.” How did it get into law? It is one of those pieces of special-interest protection that owes its existence to legislative immaculate conception. It was not in the committee version of the bill; it slipped in along the way without parenthood, but is largely believed to be the work of former Sen. Phil Graham, R-Texas, whose wife, Wendy, was chair of the CFTC.

In classic theory, a market is where a willing buyer and a willing seller strike a price. In the world of traders, it is something else: It is where volatility is rewarded and myths hold sway.

Today there is no actual shortage of crude oil. Supply and demand, according to those who monitor these things, is in balance. But fear stalks the trading floors because fear is good for traders; and fear is a critical part of the oil price. Continue reading How Fear, Greed Factor Into the Price of Gasoline