The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders by Kate Kelly
Authors: Kate Kelly
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30-cent-per-gallon gain. The trade generated about $3 million.
Despite the performance of its occupants, the commodities building in Purchase remained a cultural backwater at Morgan. There was relatively little contact between the bankers and other traders in New York, where the firm was situated in a flashy tower near Times Square.
Morgan chief executiveJohn Mack, a veteran who had left the firm after a bruising boardroom battle only to be reinstated as chairman and CEO in 2005, was one of the only senior executives to visit the Purchase building regularly. Even then, it was only to use the gym on his way from home in nearby Rye to midtown Manhattan. Senior-level sightings were so rare that when Boris Shrayer, one of the top salespeople in the commodities division, was named managing director, he joked to Mack, whom he had seen frequently in the locker room, that he didn’t recognize him with his clothes on.
Mack, a Duke-educated former bond trader with Lebanese roots, could handle a blue joke or two from a subordinate. But when it came to the commodities unit’s general attitude, he was less amused. During one particular dinner with some of the commodities traders in Westchester, Mack was astonished by the group’s arrogance. Sure, they were generating billions in annual revenue, grabbing business from their competitors, buying physical assets, and trading lots of volume. But their demands for huge bonuses suggested that they thought the bank itself had nothing to do with their success, as if the Purchase trading floor was an island with no need for Morgan Stanley’s considerable resources. Mack left the dinner with a sour feeling. At some point, he thought, I’ve got to crush these people.
The key, as it turned out, would be for the commodities unit to not crush the bank first. In 2008 John Shapiro, Morgan’s head of commodities, retired. In the first half of that year, oil was peaking and the division seemed well on its way to a standout year in revenue terms. (And, to be sure, it was.) But when the market reversed that fall, a seemingly innocent crude-oil trade suddenly threatened to leave Morgan with billions of dollars in losses, and Shapiro, the godfather of the division—whose impeccable memory for detail was a source of both irritation to subordinates and, on the upside, prudent risk management—was no longer there to prevent it from happening.
The trade in question, a hedge meant to manage jet-fuel price risk for Emirates Airline, was the brainchild of Jean Bourlot, the irritable Frenchman who had fought with Andurand over the Singapore jet-fuel trade. Emirates was the official flyer of the United Arab Emirates, the tiny constellation of states east of Saudi Arabia. A government-sponsored company that had grown quicklyfrom its inception in the mid-1980s, it had a unique set of needs when it came to jet fuel. Emirates was a transportation hub for international flyers traveling to and from Dubai, the UAE’s financial capital, from thousands of miles away. To service those routes, Emirates operated some of the world’s biggest aircraft, including the two-deck, 525-seat Airbus A380. The airline had spent $3.2 billion on an order for a dozen of the 777-300ER, a sleek new Boeing aircraft, as well.
By 2004, the carrier’s annual fuel bill was nearing $1 billion, overtaking personnel as its number-one cost. And unlike some of the more conservative U.S. airlines, Emirates was willing to hedge its jet risks creatively, making it a perfect target for innovative bank commodities traders.
Bourlot, the Morgan commodity trader still fuming over the China Aviation Oil Corporation trade on which he believed Andurand had stiffed him, was then a rising star at the company’s London energy-options trading desk. The same year his China Aviation trade exploded, Bourlot helped arrange a hedge for Emirates that seemed guaranteed to make it money in the crude market under anything but a wildly volatile price scenario.
Despite the performance of its occupants, the commodities building in Purchase remained a cultural backwater at Morgan. There was relatively little contact between the bankers and other traders in New York, where the firm was situated in a flashy tower near Times Square.
Morgan chief executiveJohn Mack, a veteran who had left the firm after a bruising boardroom battle only to be reinstated as chairman and CEO in 2005, was one of the only senior executives to visit the Purchase building regularly. Even then, it was only to use the gym on his way from home in nearby Rye to midtown Manhattan. Senior-level sightings were so rare that when Boris Shrayer, one of the top salespeople in the commodities division, was named managing director, he joked to Mack, whom he had seen frequently in the locker room, that he didn’t recognize him with his clothes on.
Mack, a Duke-educated former bond trader with Lebanese roots, could handle a blue joke or two from a subordinate. But when it came to the commodities unit’s general attitude, he was less amused. During one particular dinner with some of the commodities traders in Westchester, Mack was astonished by the group’s arrogance. Sure, they were generating billions in annual revenue, grabbing business from their competitors, buying physical assets, and trading lots of volume. But their demands for huge bonuses suggested that they thought the bank itself had nothing to do with their success, as if the Purchase trading floor was an island with no need for Morgan Stanley’s considerable resources. Mack left the dinner with a sour feeling. At some point, he thought, I’ve got to crush these people.
The key, as it turned out, would be for the commodities unit to not crush the bank first. In 2008 John Shapiro, Morgan’s head of commodities, retired. In the first half of that year, oil was peaking and the division seemed well on its way to a standout year in revenue terms. (And, to be sure, it was.) But when the market reversed that fall, a seemingly innocent crude-oil trade suddenly threatened to leave Morgan with billions of dollars in losses, and Shapiro, the godfather of the division—whose impeccable memory for detail was a source of both irritation to subordinates and, on the upside, prudent risk management—was no longer there to prevent it from happening.
The trade in question, a hedge meant to manage jet-fuel price risk for Emirates Airline, was the brainchild of Jean Bourlot, the irritable Frenchman who had fought with Andurand over the Singapore jet-fuel trade. Emirates was the official flyer of the United Arab Emirates, the tiny constellation of states east of Saudi Arabia. A government-sponsored company that had grown quicklyfrom its inception in the mid-1980s, it had a unique set of needs when it came to jet fuel. Emirates was a transportation hub for international flyers traveling to and from Dubai, the UAE’s financial capital, from thousands of miles away. To service those routes, Emirates operated some of the world’s biggest aircraft, including the two-deck, 525-seat Airbus A380. The airline had spent $3.2 billion on an order for a dozen of the 777-300ER, a sleek new Boeing aircraft, as well.
By 2004, the carrier’s annual fuel bill was nearing $1 billion, overtaking personnel as its number-one cost. And unlike some of the more conservative U.S. airlines, Emirates was willing to hedge its jet risks creatively, making it a perfect target for innovative bank commodities traders.
Bourlot, the Morgan commodity trader still fuming over the China Aviation Oil Corporation trade on which he believed Andurand had stiffed him, was then a rising star at the company’s London energy-options trading desk. The same year his China Aviation trade exploded, Bourlot helped arrange a hedge for Emirates that seemed guaranteed to make it money in the crude market under anything but a wildly volatile price scenario.
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