Originally published on fortune.cnn.com on Mar. 9, 2011
In this excerpt from The Asylum: The Renegades Who Hijacked the World’s Oil Market, Leah McGrath Goodman witnesses a NYMEX energy trader hazing ritual and watches Bill O’Reilly uncover how those traders set the price of a barrel of oil.
It was dawn when I received my first of many after-hours phone calls from Mark Bradley Fisher, otherwise known as the Fish. A self-made millionaire with a Napoleonic sense of his own destiny, Fisher prided himself on his work ethic, his intellectual prowess, and his ability to rise early in the morning and toil late into the night. As a result, he had a habit of calling me almost exclusively at inconvenient times.
It was February 2005, the year Wall Street began to realize something was wrong with the oil market. Fisher, however, was not particularly disturbed. After all, he was one of the wealthiest and most powerful energy traders in the world.
Fumbling in the darkness, I nearly fell out of bed trying to find my cell phone. As I flipped it open, Fisher sounded none too pleased at the five-ring wait.
“What are you doing?” he barked in his trader’s rasp, the line crackling softly in the background.
The Fish never identified himself over the phone. You were just supposed to know it was him. Despite his coarseness and affinity for semi-sadistic pranks—often inflicted on the less fortunate of his many admiring acolytes—he was one of the few oil traders off Wall Street who boasted a fistful of Ivy league degrees. Traders in the multitrillion-dollar commodities market had long been aware of his indomitable presence—often acutely so—but, to the rest of the world, the Fish was a virtual unknown.
And he liked it that way.
He was already at work. Maybe he’d just arrived, or maybe he’d never left. Some traders swore the Fish never slept. That was how it was in the oil market, brimming with tall tales and conjecture. I could envision him sitting bolt-upright behind his desk, office shower to the right, views of the Hudson to the left, buried in a flotilla of computer screens and price charts, guzzling a can of soda in the dark, silent office building. Fisher had a penchant for sugar and his poison of choice was Pepsi, a can of which was by his side for much of the day.
“Nothing,” I answered, struggling to wake up. “Sleeping.”
I’d met Fisher before, but this was the first time he had contacted me at home. He coughed, attempting to disguise the laugh that confirmed, at least to him, I was a slacker. “Come by my office today at eleven. I want you to see something.” he paused before adding: “But you have to promise me I won’t read about it tomorrow in the Wall Street Journal.”
As a reporter for Dow Jones & Co., the financial news service that, along with the Journal, is owned by News Corp. (NWS), my beat was the energy market. My duties included writing two wire stories a day, one in the morning and one in the evening, about where oil prices were heading and why. So far, it had not been a difficult job, because ever since the start of the Iraq War oil prices went mostly one way—up.
There was a small problem, though. With oil prices going up every day, I was beginning to run out of clever narrative devices and plot twists to keep my commentary interesting. Most of the time, I would just sit at my desk, trying to think of a new way of saying the same thing I’d said the day before—that there no longer appeared to be enough oil in the world to meet rising demand, that the rock on which modern industrial civilization had been built seemed to be slowly crumbling.
The strange term being tossed around by experts at the time was “peak oil.” Dismissed by the opposing experts as a ridiculous doomsday scenario, it referred to the moment when the world’s oil production would begin to decline until supply ran out. The feeling was that this would not be a good thing, since there was no decent alternative for oil and no reliable way of knowing exactly when the planet had reached its tipping point. In the meantime, guessing when peak oil would arrive had become somewhat like a parlor game to industry insiders, each trying the shout the others down. But behind the scenes, a much more terrifying question overshadowed the debate: had peak oil already arrived—and nobody wanted to admit it yet?
On one point the experts could agree. The world was not prepared for the catastrophic end of oil. Without question, its depletion would mean more wars, more political strife, and more awkward death matches between the West and the oil-rich Middle East.
Still, even as the United States fought wars in two Middle East nations and kept drilling for oil in ever more perilous depths of the ocean, nobody seemed especially alarmed at the thought of oil drying up. By all appearances, switching from oil to something less dangerous was going to be gut-wrenching, no matter how high oil prices got. Americans remained bent on driving their monster SUVs while an endless stream of upwardly mobile classes in increasingly populous nations such as China and India wanted nothing more than to drive monster SUVs of their own.
I arrived out of breath and a few minutes late for my appointment with the Fish after getting off the train at the World Trade Center pit. Dodging traffic on the West Side Highway, I passed a slew of trader hangouts: the Pussycat lounge & steakhouse, a seamy gentlemen’s club and Wall street institution; Cordato’s Deli, the sub shop next door with the secret champagne room in back with an even more secret passageway to the Pussycat; and Moran’s, the church-turned-Irish-pub that remained, either way, a place of devout worship.
It was just after eleven a.m. when I reached the spot where Fisher plied his trade: the New York Mercantile Exchange, called Nymex, the biggest, most influential energy market in the world. Just beyond its doors, bets were placed on the future prices of the planet’s most important commodities—crude oil, gasoline, heating oil, and natural gas, as well as gold and silver—in a football field–size room teeming with sweaty traders. A members-only club favoring the rich and well connected, this was the temple of the chosen few who stood as the final arbiters of what the world paid every day for a barrel of oil or a gallon of gas.
Power plants, gas stations, fuel distributors, and oil companies across the globe paid close attention to this rarefied casino, watching carefully for any price changes that would determine how much they would pay for fuel and what they’d charge their customers, the ordinary consumer. Newspapers and television networks trumpeted Nymex’s prices as the holy gospel, beaming them throughout the continents for all to follow—banks, hedge funds, Wall street investors, even the top-producing oil nations of Saudi Arabia, Iran, Russia, and Norway.
Yet nobody seemed to know who, exactly, these New York oil traders were or how they, of all people, got to wield such immense power. how did someone like, say, the Fish, a balding, middle-aged father of two from Long Island, come to dominate the market that decided what consumers would pay to drive their cars or heat their homes? Wasn’t the Organization of Petroleum Exporting Countries—the mysterious oil cartel known as OPEC—supposed to be dictating the price of oil? What about Saudi Arabia, the country holding the world’s largest proven oil reserves? Where was its energy market? And what really happened behind the tightly closed doors of Nymex’s heavily guarded, sixteen-story building?
The answers, I soon found out, lay in the secrets of the pits, the clandestine trading arena where market speculators, mostly men in their thirties and forties, gathered every day to beat and berate one another in a money game so absurd that even they could scarcely believe they were being allowed to play it.
As I approached the building, I noticed what seemed like some sort of triumphal procession under way. Passersby were oblivious, just as they’d always been oblivious to the giant energy market in their midst. Nymex had camouflaged itself well among the high-rises of its upscale neighborhood.
What I didn’t know then was that I was about to witness my first Mark Fisher signature event. This is what Fisher wanted to make sure I saw—one of his grandiose exhibitions of power. Hundreds of people poured out of the revolving doors of the skyscraper on the Hudson River: traders, executives, secretaries, compliance staff, technical personnel. I knew that the exchange was open and the oil market was trading, but who was trading it, I could not guess. It seemed as if all the market’s members had dropped whatever they’d been doing to flock to the pier. Among the rabble, I even saw Mitchell Steinhause, the oil market’s token chairman.
As I quickly learned, the Fisher event usually involved a boisterous horde, a smaller group of scapegoats, and some sort of ritual sacrifice. Today was no exception. At the center of the crowd stood Fisher’s herd of sacrificial lambs, four or five men in their twenties, all rookie energy traders in various states of dress. They teetered at the edge of the ice-strewn Hudson, shivering in the subzero squalls. Beside them was the master of ceremonies himself, the Fish, who even looked a bit like Napoleon. A short, stout forty-four-year-old with a preternatural gift for fiery oratory, he addressed the throng from the comfort of his winter parka. Despite his height, Fisher seemed to tower menacingly over his captives.
These young men, he said, had been summoned to the river because they had bet they could win a round of Texas hold’em, a poker game they’d unwisely proceeded to lose. since the wager had indicated the losers would swim the freezing waters in sight of their colleagues, it was now time for them to pay up.
Some of Fisher’s victims had come prepared. Two were wearing professional wet suits. One had his shirt off. Another had stubbornly opted to dress as if for a normal day, keeping on his Gucci loafers with the gold clasps, worn without socks, as was the style.
How you took your punishment said a lot about you. The traders who were wearing the wet suits were seen as cunning; the trader without his shirt on fearless; and the last, the one with the designer shoes, an admirable stoic. These were all excellent qualities to have if you were a trader in the pits, where how you took your medicine often determined how well you got paid.
Fisher had positioned emergency rescue workers along the marina to go in after anyone who didn’t make it out, ambulances idling nearby. The market spectators tittered with eager anticipation. That is to say, the staff and attendant membership of the world’s reigning oil market exhibited the basic characteristics of a lynch mob, heckling the traders and urging them to jump. A couple of the young men whose cardinal sin had been to play poker badly tried to laugh it off, but as Fisher began the final countdown to their plunge, there wasn’t a person in the audience who didn’t see the fear on their faces.
No one attempted to stop the brutish hazing. On the contrary, the bystanders were fully into it. Fisher, the market’s ringleader, had everyone in his thrall. This was one time I was glad to be the reporter, observing but divorced from the events.
As I watched the scene unfold, I wondered just how long had the oil traders been acting this way? These were the chosen ones? The ones who called the shots on what we paid to drive our cars and heat our homes?
It was all too surreal.
If those who held the key to the global energy market could stand by while blithely throwing their own traders, their life blood, into the hudson, then what would they be willing to do to us, the faceless public?
That day, oil prices topped $50 a barrel.
The pit traders just shrugged.
And that was only the beginning. Over the next three years, oil prices would slingshot to nearly $150 a barrel before crashing back toward $30 in a matter of days, roiling the global economy and raising suspicions that oil prices were rising and falling on little more than pixie dust. Against the backdrop of Washington politicians lamely suggesting that altering daylight savings hours or offering gasoline tax holidays might offer lasting relief, Fox News commentator Bill O’Reilly fumed at energy market executive John D’Agostino during an April 2008 interview on his television program, The O’Reilly Factor. What followed was a truly bizarre exchange, revealing what even supposedly informed individuals think about how the oil market works.
When O’Reilly is told that a group of traders in New York are responsible for the price of oil and gas in much the same way that traders of the New York Stock Exchange are responsible for the price of Microsoft (MSFT) stock, he simply cannot believe his ears. Instead, he concludes that it must be the sheikhs of the middle east or Venezuela’s ultra-leftist president, Hugo Chavez, who are arbitrarily slapping price stickers on barrels of oil. As the conversation gradually deteriorates, a member of O’Reilly’s backstage crew is heard to say, “Oh shit, Bill’s made an ass of himself again.” But O’Reilly’s confusion about the method behind the madness of the global energy market is typical—and worth hearing in full.
O’Reilly: OK now, look, in my town out on Long Island, gasoline has gone up 75 cents a gallon in about a month, a month and a half. Why now? Why this point in time?
D’Agostino: Well, a couple of things. One is oil has been high and has stayed high.
O’Reilly: Now, who’s driving that? Is that the greedy sheikhs and Hugo Chavez?
D’Agostino: No, no, no, I don’t know about that. What we know for a fact is that we have a weak dollar. We have global demand that’s staying put, no matter how much the price has gone up. [A weakened dollar means you need more dollars to buy the same amount of oil, hence a higher price.]
O’Reilly: We had that last year. The demand has gone up globally since last—but let’s—wait a minute. let’s walk through it so everybody understands what we’re talking about. The Organization of Petroleum exporting Countries sets the price for a barrel of oil. And they keep raising it and raising it and raising it. Dick Cheney went over there and tried to say, “hey, give us a break.” They gave Cheney the middle digit. All right? so they can, they can charge whatever they want to charge, correct?
D’Agostino: No. OPEC only sets the oil supply. . . . The price of oil is actually set in New York. . . .
O’Reilly: Is there a guy who says $125 a barrel?
D’Agostino: No. There’s a huge market. It’s filled with hedgers. It’s filled with speculators. It’s filled with moms and dads, average Americans. It’s a big market that sets the price.
O’Reilly: somebody has to put the $125 on the barrel. Who does it?
D’Agostino: They’re getting it from this market. . . .
O’Reilly: Who is “they”?
D’Agostino: The oil producers. They’re looking at this, just like when you decide how much a share of IBM (IBM) is worth. You look at the price on the New York Stock Exchange.
O’Reilly: The CEO of Shell (RDS) or the CEO of Exxon Mobil (XOM) says, “We’re going to pay $125 a barrel.” Is that what they say? I thought it was the sheikhs and Hugo Chavez saying, “We’re going to charge you $125 a barrel.”
D’Agostino: No. They’re all looking to the exchanges, the free markets, to set the price. . . . The free markets right now are saying the price of crude oil is about $120 a barrel. It’s been going up. It continues to go up. And gasoline prices are directly related to crude oil prices.
O’Reilly: . . . But you still haven’t explained, and I don’t know if you can, Mr.—with all due respect, Mr. D’Agostino—who puts the $120 on—a human being has to do that. And somebody has to make a decision.
D’Agostino: It would be great if there was just one person who was doing that, because then we could go talk to him.
O’Reilly: But there has to be. Because just to get the word out, somebody has to say the word. so if you don’t know, you don’t know, because I certainly don’t.
The viewers of the O’Reilly Factor also could not believe D’Agostino was telling the truth. After the program aired, they responded with dozens of furious e-mails.
And one death threat.
Contrary to popular opinion, oil prices were not being controlled by Arabs or leftist dictators. They were being controlled by the same bootstrapping traders who had embarked on an extraordinary experiment from the depths of a redbrick mansion in downtown Manhattan exactly thirty years earlier.
Individuals who, like the anonymous Wall Street professionals about to unleash a crippling financial crisis on the world, took the subway and ferry to work, earned unheard-of riches, gave to charity, and thought nothing of bringing the global economy to its knees.