Tin Men

This past weekend David Kocieniewski wrote a lengthy New York Times article on Goldman Sachs’ influence over 27 industrial warehouses that store aluminium. Slate’s Matthew Yglesias queried the alpha return drivers on Goldman Sachs’ decision.

 

My gut response on reading Kocieniewski’s piece was that it had something to do with trading: probably proprietary desk strategies that used swing trading or that manipulated spreads. I had experienced that in late 2011 during my first trades, and pieced the evidence together from regulatory filings and visits to Mitsubishi UFJ Bank in Tokyo, Japan. Yglesias later confirmed my instincts when he linked to Izabella Kaminska’s FT piece that explained the Goldman Sachs trade.

 

I learned a couple of things from this exchange. Three years of hard work means I am starting to slowly understand how financial markets really work. I saw from a series of past trades how similar dynamics could be repeated today. My gut instincts about the Goldman Sachs trade were correct. But I didn’t have the precise, conceptual understanding of the commodities markets and the relevant central bank regulatory loopholes — despite knowing what contango and backwardation were — to nail the Goldman Sachs commodities trade in the way that Kaminska did.

 

This is a humbling intellectual experience.

Marc Rich

When I saw Sam Mendes’ Skyfall, I focused on the island scene where the villain Raoul Silva (Javier Bardem) tells James Bond (Daniel Craig) about Silva’s ability to intervene in geopolitical events, such as to affect election outcomes. It’s a classic scene about geopolitical risk arbitrage.

 

Two weeks ago I bought Daniel Ammann’s King of Oil (New York: St. Martin’s Press, 2010) and A. Craig Copetas’s Metal Men (E-Reads, 2010) about the legendary commodities trader Marc Rich. I remembered Bill Clinton’s last-minute pardon of Rich, whilst I was editing the alternative news website Disinformation. Now, over a decade later, I had a new appreciation of Rich’s oligarchical, market-making career.

 

I didn’t know Rich had passed away the week beforehand. I missed this Economist obituary:

 

From there, with cat-like tread, Mr Rich found his way round any political or moral obstacle. He sold Soviet oil to apartheid South Africa, despite a UN embargo, and between 1979 and 1994 made profits of around $2 billion there. He sent Soviet and Venezuelan oil to Cuba in exchange for sugar, ignoring America’s ban on trade. He sold on the global market surplus Iranian oil that had flowed to Israel down a secret pipeline, and kept the arrangement going seamlessly despite the Iranian revolution of 1979, another embargo, and the American hostage crisis. The Iranians respected their contracts, he explained. They could not sell their oil, so he bought and sold it for them, using shell companies wherever necessary. Keeping well below the radar, as he always did, he was soon the world’s largest independent oil-trader, with a turnover in 1980 of $15 billion.

 

John Allen Gay relied on The Economist obituary for his National Interest profile of Rich:

 

The quintessential Davos man was Marc Rich. Born in Belgium, which he left for the United States to escape the Nazis, he revolutionized the world trade in commodities. Markets emerged where none had existed—most consequentially, for oil. Breaking the grip of the big producers required creativity, both in business and in law. He carried out transactions that a more nationalistic—or merely more ethical—trader would have spurned.

 

Rich is perhaps a real-life model for Skyfall‘s Raoul Silva. The Economist obituary — and Ammann and Copetas’s books on Rich — are filled with the kind of juicy, biographical details which are necessary to trade the commodities and foreign exchange markets, but which are often missing from trading books.