Killing Your Own: The Truth About Oil Speculators

In the mid-1990s, the U.S. Marine Corps sent more than a dozen generals, colonels and other high-ranking officers to the trading floor of the New York Mercantile Exchange, the world's reigning oil market. Their mission: to see how the traders behaved when forced to make tough decisions under high stress with incomplete information.

What they found taught them a lot about the nature of the oil speculator.

The Marine Corps considered its task to be of great tactical importance, as it was in the process of moving the nation's combat functions to computers and were unsure of the immediate effects on warfare. Would U.S. servicemen find it easier to inflict pain via the screen? Would they become more aggressive while waging war at arm's length? There were fears that computerization would lead to desensitization.

The heavily guarded oil-trading pits of downtown Manhattan -- the same market where oil prices shot to nearly $150 a barrel in 2008 and surpassed $100 in recent weeks -- turned out to be the perfect place to conduct these groundbreaking observations. In combat, stress often happens in deadly bursts, lasting only a few seconds. But in the Nymex trading pits, "combat" stretched for hours at a time, sometimes late into night.

The marines found the oil traders were not only able to make the same kinds of split-second decisions that U.S. servicemen were expected to make during firefights, but when compelled to act blindly based on limited data -- whether delivered live or electronically -- did so capably by way of long-honed survival instincts.

Still, the Marine Corps wanted to see what the traders would do when put directly behind the computer screen and asked to draw blood. Devising a battery of computerized war games, Francis "Bing" West, former assistant secretary of defense for international security affairs with the Reagan administration, looked on as two dozen Nymex traders met with a group of marine and navy officers on the World War II aircraft carrier USS Intrepid in New York to face off.

The traders and officers broke into two opposing teams. Each received the same number of jets, troops, and scud missiles and asked to destroy a series of targets within a certain amount of time. Both teams needed to decide separately on the best course of action when dispatching troops and munitions in ordering strikes.

As it turned out, the oil traders proved to be far more bloodthirsty than the marines. They were willing to sacrifice more munitions and also troops to achieve their goals. (In the words of one oil trader on the Nymex team: "If the traders lost 50 people, well, at least we got the job done.")

The Marine Corps, which initially planned on releasing the final scores of the match, decided it better not. West, who vividly recalls the skirmish, says the outcome was unexpected. "It turned out the traders had a much more quantitative instinct for risk-reward when applying force on the battlefield," he says. "They focused on obliterating the enemy. The generals had to explain to them that the thing they were missing was that the payoff wasn't simply hurting the enemy, it was also that the enemy did not hurt your troops."

Two decades later, it is safe to say that the enemy is, indeed, hurting our troops -- only both the enemy and the troops are us. When it comes to oil trading, not to mention speculation in the stock and other financial markets, action has largely moved to the screen, which is ruled by speculators who remain, as ever, bloodthirsty.

Yet instead of killing off troops by means of traditional warfare, they are ticking off Americans in a game of financial warfare that many Americans don't even know they are playing.

It is naïve to blame only the speculators -- traders who bet on prices for a profit -- many of whom have never been the least coy about their pecuniary objectives or appetite for risk-taking. Greed is not about to disappear anytime soon on Wall Street. For those keen to point fingers, consider the men and women throughout this country (especially in Washington) whose job it is to protect Americans and the integrity of our markets, yet primarily use their powers to curry favor on Wall Street in exchange for top-paying posts in the private sector, all while telling taxpayers how hard they are working to fix the entrenched problems.

The evidence is so overwhelming it can no longer be called anecdotal. Speculators, in the wake of the global financial crisis, are still allowed to take huge bets with almost no money down. We could make them pay more money up front. That would automatically clip their wings. We don't let our teenagers go on $1,000 shopping sprees with $50 in their pocket. Why would we let Wall Street after watching it bet the house, lose spectacularly and stick the taxpayers with the bill?

In the oil market, when Congress was given an opportunity to rein in traders' ability to make big bets with almost no down payment, guess what it did? It backed off and marched Big Oil into Washington for a public berating instead. Astoundingly, that decision was made just before oil prices hit their record high of $147.27 a barrel a few years ago and gas punched above $4 a gallon -- an area prices are again targeting.

Worse, it's no secret that New York's oil speculators brought drugs, strippers and weapons right into the trading pits. The market even had a fully stocked bar open all day above the trading floor as oil prices raced to their apex.

Did you know there's a watchdog agency in Washington responsible for keeping an eye on the energy market? It is called the Commodity Futures Trading Commission. But rather than fulfilling its mission with marine-like precision, its chairmen mostly use it as a way to cozy up to Wall Street in exchange for the lucrative jobs they really want. In fact, as oil shot to its peak in July 2008, the CEO presiding over Nymex was none other than James Newsome, the previous chairman of the CFTC.

Newsome received 10 times his CFTC salary for crossing over, but he is hardly an exception to the rule; his successors and predecessors have done similar things. This is not a problem of the individual, but a problem of a spectacularly broken system. President Obama's appointment of the current CFTC chairman, Gary Gensler, has not been seen as very reassuring, since he is a retired banker from Goldman who once strongly opposed stricter regulation of Wall Street while working at the Treasury Department from 1997 to 2001.

The woefully underfunded CFTC also hasn't followed the example of the Marine Corps in monitoring oil's transition to computerized trading, which began in earnest a year before oil prices topped out. To be blunt, technological advances do not seem to be putting an end to the energy market's long history of price manipulation (or as the traders call it, "price management"). Prices are spiking more dramatically than ever, and there is even evidence that high-frequency trading has made things worse.

In July 2009, federal authorities apprehended a Russian-American computer programmer who worked at Goldman Sachs developing top-secret trading software that could, according to Assistant U.S. Attorney Joseph Facciponti, "manipulate markets," specifically, the commodities and stock markets. But Goldman's possession of such software, oddly, was not the chief concern. The reason for the manhunt was the programmer's theft of the software from Goldman, which Facciponti stated was worth "millions upon millions" of dollars -- the loss of which, he said, would be "very substantial" to the bank.

This past December, the programmer, Sergey Aleynikov, was convicted. For some, justice is swift.

To make this a partisan issue is to miss the point entirely. This is not about Republicans or Democrats. This is about money and who extracts the fattest pound of flesh. The illusion being peddled to Americans is that the cops are on the beat when the "cops," in truth, have joined the league of the risk-takers. Washington has caught the Wall Street disease, and the profit motive transcends all.

We can no longer deny that fancy jobs and favors are effectively being used as bribes to influence our key regulators, state functionaries and elected officials. Are we surprised Wall Street is doing this? Or should we be more dismayed still that we are witnessing our own betrayal -- then being asked to pay for it?

The solutions to the problems are well known and have been well known since the Great Depression. When put into place and enforced correctly, they work. When reduced to Swiss cheese -- as they are now -- they do not. What is lacking is not the knowledge, but the political will to impose them. When you hear that Congress or the Securities and Exchange Commission or the CFTC needs more time to hold another hearing or conduct a new study, be warned. These are often just ways of stalling.

We need to ask ourselves, what do we believe is the end game here? With weak rules in place, many have thrived who otherwise would have not, but not for the right reasons. With the passage of the Frank-Dodd Act, we are being promised a rules renaissance and financial reform. But the lawmakers and policymakers rewriting the rules are not only part of the problem, they continue to conflate quantity with quality. How about a few commonsense rules instead of a pile of complicated ones?

We have replaced a nation of hard-working capitalists with a fake kind of capitalism that all can see rings hollow -- including our global competitors, who already smell blood on the water.

Now that we must undo the damage, the pressure is on to undertake the Great Head Fake -- and we, the enemy, are winning.