The Renegades Who Hijacked
the World's Oil Market
By Leah McGrath Goodman
Morrow, 398pp, $27.99
Anyone who accuses New York Mercantile Exchange (CME) traders of being greedy and lawless anarchists who blow up markets obviously was not working the floor in 1978. In that year a sign at the entrance decreed: Please check your guns at the desk. "A gunshot never went off on the floor," claims John Tafaro, a trader at the time. "That's where we drew the line." He says traders were pretty dutiful about checking their guns, too.
The rest of the rules, though, they ignored, skirted, or subverted, sometimes with brazen crudity, sometimes through deft manipulation of the law—at least according to Leah McGrath Goodman's The Asylum: The Renegades Who Hijacked the World's Oil Market. "Any customer who traded there was molested, if not raped," says one ex-regulator with the U.S. Commodity Futures Trading Commission, speaking metaphorically, one hopes. "As far as we could see, the NYMEX traders did nothing but run scams."
They weren't always oil traders. They only stumbled upon oil futures after screwing up Maine potato futures. A whole industry had been built around predicting the Maine potato harvest, and—more importantly—trying to manipulate it. However, the market was closed by regulators in 1976, after defaults on deliveries of more than 50 million pounds of potatoes.
Casting about for something else to trade, then-Chairman Michel Marks tried to boost futures in boneless beef and plywood. After that didn't work, in 1978, he introduced heating oil futures. The market proved a gusher that led to 30 years of good times. Booming with the oil scares of the late '70s and early '80s, heating oil futures begat natural gas futures and became a huge market revolving around the price of West Texas Intermediate Crude, now the benchmark for a barrel of oil.
The years trading potatoes help explain why the NYMEX was able to trade oil for so long without worrying about meaningful oversight. Formed to offer hedges for farmers, the futures exchanges are under the purview of the same people who produce the omnibus farm bills: the House Agriculture Committee, which also runs the regulator in the business, the CFTC. In Goodman's account, the CFTC issued more exemptions than rules and, in any case, only enforced the latter gingerly. The first big exemption, allowing large trades for a financial participant, went to Goldman Sachs (GS) in 1991. Others soon piled in.
The NYMEX traders succeeded in spite of themselves. They booted their most able chairman, Marks, soon after he opened the oil market. In the ensuing years, traders and their clients rode the frenzy in oil right up to and over the precipice as speculative money, freed by exemptions, flooded in. When Congress held an inquiry into the runup in pricing, they were solemnly warned by then-NYMEX President James Newsome, a former head of the CFTC, about the dangers of "substituting the judgment of Congress for the judgment of trained financial investment professionals." Congress deferred to Newsome, who had majored in livestock production in college.
Books about trained investment professionals have their own regulations. One is that they must include some minimum number of scenes involving hookers, strippers, drugs, and parties. Here The Asylum is in full compliance. As the traders got rich, they indulged in the kinds of tastes developed in a room with no windows, full of men screaming at each other. Call girls, Goodman writes, were flown in on private jets from Brazil or deployed at parties in "canned hunts." At one particularly good party at the Hard Rock Hotel in Las Vegas, traders drank enough Cristal champagne that the managers were persuaded to move Jon Bon Jovi to another table—likely the social apex of the entire oil trading profession.
If it's any consolation to that cross-section of readers both outraged by Wall Street and willing to read long books about its culture, the NYMEX traders traded themselves into oblivion. They so loved their crude world that they refused to adapt to the computerization of the markets. That was the last of the bad decisions. In 2006 the NYMEX went public, earning the seat owners millions and the traders who rented their spots absolutely nothing.
There was no longer any point in waving chits of paper and wearing funny-colored jackets. Purchased by the Chicago Mercantile Exchange Group in 2008, the NYMEX has become a brand name for certain futures and options, such as the price of a barrel of crude. The oil pit remains, but only a few traders show up, executing their orders on laptops. It's odd, but one feels nostalgic for the amoral furor of the pits. The traders were undereducated, drug-taking greedheads who would "rip your heart out for a penny," as one reminisces. But at least they were human.