Friday, February 25, 2011

Nymex, Insider Trading, and Peak Oil

It would be hard to find a more readable account of the financial aspect of our present oil crisis than The Asylum by Leah Goodman.  It’s especially interesting (and a little surreal) to read this while sitting in front of newspaper headlines about the unfolding crises in the Middle East, Oil Prices spiking over $100 a barrel again, and a stock market that’s starting to shudder in what, we can only hope, won’t be a repeat of the financial earthquakes of 2008.

Futures trading has long seemed so obscure as to be almost magical to me. Why would the producers of goods allow their stuff to be traded so wildly and unpredictably? Why not just slap a price tag on their oil, their corn, their pork-bellies—whatever—and sell it to a willing buyer, charging what the market will bear?

Goodman does a good job explaining the basic concepts here. Sellers use a futures market because it guarantees them a price for their goods at a future date, and consumers (be they individuals or businesses) can plan their future operations knowing what they’re going to be paying as well. And then if there are changes to the value of stuff in the mean-time, the traders are there to absorb the risk—taking the hit or pocketing the profit depending on what happens during that time.

There’s a conflict here between the producers/consumers who want stability to plan their business, and the traders who want volatility so they can take their cut. This conflict is a good thing. It’s supposed to keep the system in balance. That’s why there’s federal regulations (supposedly provided by the Commodity Futures Trading Commission, or CFTC) that are supposed to limit volatility, placing caps on price swings and the like.

What Goodman shows is how little the CFTC has done in performance of their role. Regulatory chairmen leave their positions within the government to head the very exchange they were supposed to be regulating, calling up their old cronies when opportunities to profit present themselves. The conflicts of interest are staggering, and they led to the Enron loophole (which I’d vaguely heard about) and the London and Dubai loopholes (which were new to me) and which played a huge part in the downfall of Lehman Brothers, the troubles with other major bangs which we all ended up bailing out, and the financial bubbles that seem to keep popping with increasing frequency in the 21st century.

nymexThere’s a colorful cast of characters here, and more action than you’d expect from such a dry subject. Cross-dressing, hookers, fist-fights, drugs and booze on the trading floor; class warfare among millionaires; politicking and intimidation and death threats. Goodman also does a nice job tracing the history Nymex, the New York Mercantile exchange from its roots in agriculture (mostly potatoes) into the powerhouse that controlled the most important resource ever traded on our planet, all the way to its purchase by the Chicago Mercantile Exchange, and the changes that hit its players as they went from trading in the pits of the trading floor to the computer screen.

Goodman herself seems to be awfully chummy with some of the story’s players. Even as she reveals their most salacious and rapacious dealings, she shows them a great deal of respect—even affection. She’s reported on these guys for years, attended their conferences and functions and dinners. And in the acknowledgements she thanks them for sharing details that had to be uncomfortable. “To know you was a privilege….Your humor and sagacity transcend your extreme-capitalist alter egos,” she writes. All this after spending 400 pages detailing how they stole from their customers, taxpayers, consumers, and their own market. The assumption being, I suppose, that any one of us might have behaved the same way, if given the same opportunities.

I suppose she wouldn’t have gotten such a good story if she hadn’t been friends with these guys. But her admiration tastes a little funny at the end of a book about insider trading.


  1. I was an energy futures trader--local--and member of NYMEX for 20 years, from the mid 1980s into the mid 2000s. Goodman's book is an entertaining read, fairly well grounded in veracity--but still only begins the scratch the surface of the story. While many of the men who came and went during those years are indeed colorful, varied, eccentric, interesting and eclectic--it cannot be disputed by anyone who was there that hundreds of millions, even billions, were heisted by all matter of practice that was not sanctioned within the law. It is interesting and ironic to note that simultaneous to the Justice Department closing the noose around organized crime in the US--pretty much shutting down the millions pilfered by mob families--they were totally blind, deaf and dumb to the much larger larceny taking place each and every day on the trading floors, all perpetrated by people who, without benefit of that venue, would otherwise have been driving cabs, selling aluminum siding, or pushing a Chipwich wagon. Although, now that it has all come to a sudden and crashing end, I cannot but confess that I will miss it forever.

  2. Anonymous -

    Thanks for the feedback. Are you still trading today? It certainly sounded like a wild ride.

    I would imagine the opportunities for fraud would be even greater now that all the trading is done from the privacy of our home computers. Or is there software in place to regulate traders where warm bodies on the floor were so ineffective?