CNBCfix review: Excitement
in Kate Kelly’s Secret Club
is in backwardation
Posted: Monday, June 23, 2014
In all of their conversations, it apparently never occurred to Kate Kelly to ask Jon Ruggles, “Why do you do this?”
The greatest shortcoming of Kelly’s The Secret Club That Runs the World is that it makes not a dent in the off-and-on debate over speculation in energy markets.
That would be forgivable if she had some sexy stories to tell.
Kelly, CNBC’s Wall Street reporter, claims in the preface she became “hooked” on commodity trading. She’s unable to share the habit with readers. Her sources, while undeniably rich, are altogether too normal and too dull.
Kelly’s day job is providing television soundbites. Club feels like a series of leftover background interviews with onetime significant commodity traders and select regulators, material that never made it out of the green room. It echoes wearily of post-2008 crisis works such as Too Big to Fail and The Sellout, except these players, and their meetings, aren’t nearly as interesting.
Kelly can write. She’s unwilling to opine. The inescapable truth about Club is that finance is caveat emptor, and regulators, for all of their countless hours of diligence, really have nothing. Those are conclusions Kelly is unwilling to draw.
Lost in all the reporting about meetings and conversations and which spouses were met where are provocative, unaddressed financial curiosities. One should wonder why airlines believe in hedging jet fuel prices. Kelly never questions the practice. Surely the lower the price, the better for airlines. Presumably, at most, airlines might want to buy call options at higher strike prices as a form of insurance. As a simplistic example, if jet fuel were trading at $2.50 a gallon, an airline might pay for options to buy at $2.75 — a loss if prices remained below $2.75, but worth it in the event of a spike to $3.25.
Instead, Kelly implies that airlines are simply infatuated with trading and believe they can beat the system. That’s clearly the case with Delta, which bought its own refinery and relied on Jon Ruggles to bail it out of a bad quarter. Kelly defends these aggressive approaches in Chapter 6, asserting that in early 2008, Delta’s “modest contract-hedging effort was not sophisticated enough for what was to come.” Later, with shortfalls looming in the company’s profit-sharing pool, Ruggles suggests, “We could probably trade a bit and make some money.” If an airline makes money by playing the oil markets, then why aren’t all companies doing it ... IBM, Wal-Mart, Apple, Amgen, Procter & Gamble, etc.
Kelly in Chapter 11 at least acknowledges it was a “rich irony” (one of several dubious uses of the term) that when oil prices were trading relatively low, Delta was losing money on its hedging.
None of Kelly’s sources should fear a knock from Carl Levin. Despite considerable devotion to CFTC machinations, there is nothing in Club to suggest that these traders or their “fraternity” were manipulating the price of oil. Rather, beginning with the introductory anecdote of Pierre Andurand’s rough week in May 2011, it seems they all got into a parabolic market at the right time and did well enough guessing at it to come out ahead. Like oil traders in The Asylum, by Leah McGrath Goodman, it seems the real prize is just landing one of these positions; the pipeline of money limitless.
The notion of a “secret club” in fact is the first problem with this book, a title, as in so many Wall Street books, that oversells to the point of absurdity, implying a cadre of shadowy international financiers jolting consumers to enrich themselves.
What about these traders, their presumed high-octane lifestyles? Biographical information — of any person — is generally interesting, but there is nothing that sets this group apart from the typical high-academically-achieving crew that applies for Wall Street jobs every year.
Pierre Andurand’s parents, French, were left-leaning, but there’s no indication they ever cut him off for making hundreds of millions of dollars. His gorgeous wife, who seems to have no relevance to his business activities but presumably made time for Kelly at some point, spurned a designer wedding gown for an off-the-rack ensemble. That Andurand is regarded as an exceptional risk-taker fails to resonate from the opening pages, when he simply instructed associates to keep selling out of a bad trade. This isn’t someone who defuses bombs in his spare time, though Kelly said that after making millions as an energy trader, he left Vitol needing to find his “equilibrium,” which eventually came in the form of financing a kick-boxing league. Perhaps he worries to this day about the impact of gravelly roads on his Bugatti.
What Andurand will most appreciate is that in this text, he, like the other traders profiled, is no villain. Fairly noting their deficiences, Kelly gamely attempts to provide colorful, slice-of-life material for people who are decidedly not colorful.
Jennifer Fan, a math wunderkind from Pittsburgh who ignored MTV and whose hobby is pointing out faults in medical journal recommendations, preferred dark pants and button-down shirts or blazers at the Morgan Stanley office and even wore scarfs when it wasn’t cold. Fan had the foresight to choose the index desk as her specialty. She even once made a mistake about the Bernoulli family. Society punished her success with the indignity of a speeding ticket in her BMW ragtop, “a rite of passage,” Kelly writes, “given that other Morgan traders had also been ticketed.”
Jon Ruggles, many will be glad to know, is a headhunter success story. Finding no fault with Gordon Gekko, he was “content” at Merrill Lynch despite jumping around a series of two- or three-year jobs and enduring occasional ribbing for his designer jeans. Upon landing at Delta, he wouldn’t accept the two-foot-deep desks he was provided. His greatest sale, it seems, was convincing his future wife that she shouldn’t date his friend. As Delta began to phase him out in 2012, Ruggles resorted to “eating junk food,” quit in a tantrum, and settled into his $956,000 Montclair colonial, complete with young Thai au pair before clamming up for Kelly, a move perhaps necessitated by the CFTC.
Alex Beard, named Glencore’s oil-division chief at age 40, found himself “buried in paperwork, interviews, and other administrative duties,” all the while having to “transition” from his prized low profile in London.
Ivan Glasenberg, despite the stress of inheriting the reins of Glencore, nevertheless kept his thinning, dark-brown hair “always neatly combed” while making the courageous decision to pursue an IPO and the even more courageous decision to raise his bid for Xstrata in exchange for control of the company.
While most people would gladly trade their own lifestyle for that of these individuals, a serious trade-off is evident. These elites travel and relocate constantly and tend to work enormous hours, often under high stress. Most people, however smart, simply aren’t that ambitious or restless or driven.
This is a tale of young upstarts able to make multiple millions in their 20s. Kelly points out that Marc Rich, once a premier upstart himself, transitioned into real estate in the 1990s. It would seem as though the Hall of Fame of energy traders is likely full of 20somethings with nothing to lose who entered the market when it was hot and decided to relax and call it quits when either the markets, regulators or business relationships got rough.
Conservatives will say that nothing squelches the entrepreneurial spirit more than regulators. And nothing will squelch a book faster than devoting Chapter 5 to CFTC press releases. Fascinated by Gary Gensler, a likable public official, and noting Wall Street criticisms of Carl Levin and Bart Stupak, Kelly avoids stating the obvious, that Hillary Clinton and Warren Buffett aren’t the ones being summoned for these roles, toothless government CYA entities that exist so Washington can pretend to share Main Street’s outrage at eight-figure salaries and $4 gasoline.
Needing some kind of demonstrable fault for this excess, they come up with position sizes, and then can’t actually agree on the relevance of that subject. Other things they can’t agree on are whether speculators cause oil to go up (there is, as Kelly reports, a seller for every trade) or whether agriculture prices toppled Hosni Mubarak.
Bart Chilton, a onetime advisor to Tom Daschle, was irked by the whispering at a cattle auction and figured the same thing must be occurring in the oil markets. He nearly choked on his Cobb salad when a surprising CFTC press release indicated otherwise but found solace in the TV cameras.
This is what Kelly should be mocking. Instead, she takes it seriously, even writing with an air of reverence about David Meister’s astonishing ability to have “generated hefty fines through sheer will” (it helps when a bunch of institutions get a national bailout for reckless lending).
Kelly is not at all sure of her audience. Several times it is mentioned that an option represents the right, but not an obligation, to buy or sell. Supplying this bit of information, as well as definitions of margin calls and contango, suggests Kelly wants, or needs, a Main Street readership. Yet she fails to make the case to these readers that any of the individuals she profiles is someone they need to know about.
Seasoned commodity traders will take interest in some of the negotiations between the firms. But Kelly produces almost nothing on the tactics used by the speculators to become so wealthy. It seems everyone makes a good guess here and there. The Bonfire of the Vanities delivers a far more compelling strategy. Not that Kelly's sources would be likely to share. They’re smart, and probably lucky. A cynic might say they were just in the right market at the right time.
In Chapter 5, Kelly makes a curious assertion. She writes that in June 2008, West Texas crude contracts had reached $130 ... and that “voters were outraged.” What particular election supports this point? Apparently the answer is in Chapter 1, when Kelly states that Congress held 40 hearings on $4 gasoline in the first half of 2008. She further states that the percentage of speculators in the energy market had been increasing, and that “Many motorists and corporate fuel buyers ... were demanding that the government somehow put a stop to their influence.” How so? Writing letters to congressmen? Press releases?
There is no question, anecdotally, the public wants to believe that certain rich guys are monkeying with the price of oil. They can only monkey with it when they’ve got money, and that is the overriding cause of higher prices, the amount of money flooding into the oil space in the 2000s. With stocks taking a massive beating around the turn of the century, oil, spurred by the emergence of China, became a safe haven. The amount of drilling — even with today’s astonishing fracking results — hasn’t kept up with the dollars. A home may seem attractively priced, until three rich people decide they must live in that neighborhood, and then we have accelerating demand meeting limited supply.
Kelly's CNBC persona is very pretty, very workmanlike. And anything but scurrilous. Her writing, given her background at the Wall Street Journal, is a decided strength, but her storytelling does not sail in the same manner as, say, Michael Lewis.
Club could be more tightly edited. In the worst apparent lapse, which unfortunately makes the most boring chapter all the worse, Kelly somehow omits first references to CFTC members Scott D. O’Malia, Jill E. Sommers and Michael Dunn. (That’s what indexes are for.)
Occasionally Kelly is prone to overwriting; “Instead of watching MTV on cable like other kids in the alternative-rock heyday of the 1990s” should just be “Ignoring MTV, ...” The text is also loaded with the occasional excess comma that slows readers, for example, “Ruggles was surprisingly receptive, and seemed to enjoy ...”
There’s bureaucratic jargon. Chapter 5 includes this passage, “The German Cocoa Trade Association reportedly dispatched an angry missive to the London International Financial Futures Exchange where cocoa is traded, charging that Ward’s company,Armajaro Holdings Ltd., had engaged in manipulation.”
In Chapter 8, Kelly says “Coke was joined publicly in their (sic) complaint ...”
In such a book, one expects the inevitable Gordon Gekko reference; the movie surfaces in Chapter 2, and Kelly delivers the man in Chapter 6.
Kelly has trouble with “ironically.” One usage in Chapter 3 is wrong and another in Chapter 10 is a reach. Kelly also feels compelled to write in several places that jet fuel had become the single biggest expense of the airlines.
It’s virtually a necessity for a book about Wall Street speculation to include a chapter on Goldman Sachs. Kelly’s offering involves Goldman’s handling of aluminum storage and complaints by Coca-Cola about transfer delays that purportedly inflated prices. The story here is just as dense as the original in the New York Times, which even led to her CNBC predecessor-turned-Fox-Business reporter Charles Gasparino being lampooned on “The Daily Show” by John Oliver for admitting he didn’t understand it. As would be expected in this text, Kelly adequately provides the Goldman defense; while the limited amount of storage options does seem dubious, it’s hard to tell how the consumer is getting pinched here.
By the end of the book, the reasons behind oil’s pricing remain mysterious, and readers are still free to believe that the commodities market is rigged, or more specifically, that oil costs too much and speculators make too much money. The most unbelievable statement comes from departing CFTC Chairman Gary Gensler, who actually told Kelly, “Every day was interesting.”
The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (2014)
Featuring: Aubrey McClendon, Marc Rich, Pierre Andurand, Neel Patel, Sam Simkin, Jeff Scott, Gary Cohn, John Arnold, Jon Corzine, John Paulson, Elton John, Isabelle Ealet, Paul Andersen, Jean Bourlot, Dennis Crema, Alex Beard, Goran Trapp, Denise Rich, Willy Strothotte, Bill Clinton, Ivan Glasenberg, Jennifer Fan, Morgan Downey, Dan Nash, George W. Bush, John Mack, Boris Shrayer, John Shapiro, Sheikh Ahmed bin Saeed Al Maktoum, Sheikh Mohammed bin Rashid Al Maktoum, Carl Levin, Gary Gensler, Elise Bean, Dan Berkovitz, William Bagley, Hunt brothers, Bart Chilton, Harry Reid, Walter Lukken, Francesca Danieli, Robert Rubin, Alan Greenspan, Lawrence Summers, Brooksley Born, Bart Stupak, Kent Conrad, Robert Gensler, Kenneth Medlock, Amy Myers Jaffe, Craig Pirrong, Barack Obama, Timothy Geithner, Barney Frank, Christopher Dodd, Blanche Lincoln, Anthony Ward, Steve Sherrod, Jon Ruggles, Edward Bastian, Richard Anderson, Collett Everman "C.E." Woolman, Troy Sternberg, Paul Jacobson, Ben Bergum, Charlie Sheen, Michael Douglas, David Becker, Ivonne Gonzalez, David Mooney, Trey Griggs, Evgenia Slyusarenko, Nathaniel Philip "Nat" Rothschild, Paul Feldman, Craig David, Dave Smith, Lloyd Blankfein, Paul Volcker, Tim Weiner, John Rogers, Brett Olsher, Mick Davis, Sheikh Hamad bin Jassim bin Jaber Al Thani, Ahmad al-Sayed, Michael Klein, Philip Purcell, Trevor Reid, Spiro Youakim, Nicholas Schott, Vince Cable, Thras Moraitis, William Vereker, Tony Blair, Michel Antakly, Sir John Bond, Christopher Cox, Athanassios Diplas, Mike Masters, David Frenk, Scott D. O'Malia, Michael Dunn, Jill E. Sommers, Ed Schultz, Mark Wetjen, David Meister, Ananda Radhakrishnan, Gary Barnett, Edith O'Brien, Pete Rouse, Jack Lew, Denis McDonough, Brian Hunter, Hillary Clinton, George Mattson, Edward Hirs, Jeff Currie, Tony Ward, Mark Hoffman, Nik Deogun, Nick Dunn, Lacy O'Toole, Dawn Giel, Mary Duffy, Brian Steel, Jim Cramer, Robert Frank, Phil LeBeau, David Faber, Mary Thompson, Gennine Uliasz, Max Meyers, Mary Ann Lateano-Fox, Patty DelVecchio, Bob Barnett, Adrian Zackheim, Emily Angell, Allison McLean, Will Weiser, Joe Perez, Chris Sergio, Jesse Maeshiro, Billy Dunavant, Buck Dunavant, Andy Kelleher, Herman Kohlmeyer, Doug Leslie, David Lilley, Jason Mraz, Beau Taylor, Eli Tullis, Chris Wibbelman, Trevor Woods, Stuart Burns, Chris Grams, Miriam Heywood, Brookly McLaughlin, Michael Southwood, Krista Dugan, Cassell Bryan-Low, Niels Bryan-Low, Jonny Horsman, Bruce Orwall, Dana Cimilluca, Sheelah Kolhatkar, Chris Stewart, Andrew Goldman, Sarah Ellison, Leigh Gallagher, Mike Siconolfi, Greg Ip, Charles Duhigg, Bethany McLean, Peter W. Kaplan, Clay Felker, Kyle Pope