The Evolution of Commodities Trading (w/ Greg Agran)

Should. We really basically be unwinding. The biggest book ever, in history of base metals markets just on the trading desk while everybody, else is sitting, there he really was throwing the kitchen sink at trying to keep the market elevated, so, there were you, know crazy swaptions. Unphysical I feel like crude. Probably. The next five to ten is up but I'm not a hundred dollar crude guy but to me it doesn't feel like the, general market at large, feels. Like goals is as big a barometer, as it used to be if one and a half percent growth is what we get but we also only have one and a half percent inflation I actually think the stock market could rally pretty strongly into that. Hi. This is Tony Greer of T G macro I am really excited for my conversation, today with Greg Agron on behalf of real vision Greg, is a Harvard graduate a 26-year, veteran of Goldman Sachs when, he left the firm in 2017. He was partner, head of commodity, trading we've got a lot to talk about and I'm excited to get started I'm here today with my friend Greg Agron he, was a Harvard graduate, 26. Year veteran of Goldman, Sachs, when you, left the firm in 2017. You, were head of commodity, trading, and a partner of the firm so. We have a lot to discuss and I am looking forward to getting started well thanks for having me we may as well get started right, at the beginning because, I like to see where trader brains like yours get started, so why. Harvard, and how. Has that impacted. Your life today, you know I think we, came from similar backgrounds, I I grew up in you. Know central, New Jersey public. School you, don't. Really know what you're capable of, and when. I was applying I didn't. Think I was capable of getting into a place like Harvard but. I was lucky enough to have a, coach. He. Had a nephew that had gone Harvard, and, you. Know he was really he. Was really passionate about me trying to lift. My my, goals a little bit and he. Convinced, me to apply there and you. Know I had a great trip there, were a lot more what I would call normal guys then, my. Impression, was what a place like Harvard would have a stayed with. This awesome guy from, Melrose Massachusetts. It was just kind of like salt of the earth, you, know Bostonian, type and. Once. I came back from that trip I'm like I'm going however it's you, know great opportunity, great guys yeah is it are you still involved with the network today oh yeah like I'm I'm pretty involved with the Friends of Harvard baseball which is you. Know sort of alumni, group that kind, of helps try to keep raising. Money so they can do cool trips in the spring and pay, for the things that the school doesn't pay for and. Yeah. I'm pretty involved with with the Harvard community a lot lay large have a couple scholarships, outstanding, there and a few cool things it was a really big. Formative. Part the early years for me so I got you punching above your weight class at a young age yeah like you say you know what did it mean to me I don't, necessarily think when you go to these schools you learn, anymore, you would at Harvard. Than you would at a state school but. What, it did allow me to do is it allowed me to benchmark myself, against the best people in the world and what. I found out was I was actually a little bit smarter than I thought and. You. Know I got there and said man, I'm probably, barely gonna make it through this place I'll be lucky to even be here as a sophomore and then, all of a sudden I got there and I'm like okay you know I'm, I'm okay here you know I mean I'm not the smartest guy here but I'm certainly, not the dumbest guy here either and I. Think that really helped for. Me kind of place myself in terms of all. Right now now I can compete with the best and, I. Wasn't intimidated, about like what would come after because, I felt, like I had proven myself a little already yeah very interesting very interesting so after, a, cup of coffee at UBS, you joined Goldman Sachs yeah I'm more curious about your broad idea coming out of Harvard why, straight to Wall Street obviously, you could have gone in any direction that you wanted from there yeah I mean this, is 1990. So it's, it's a very different, era for finance, and I think. In terms of the mix of what people, were interested in doing plus you, know what was available things like technology. Didn't, really exist yet and the. Hedge funds didn't really exist yet so, they're you know if you were in finance, you were either gonna go to sell side, which. Was pretty, prestigious and in 1990. Or are you gonna go to by side but by side was more like go to fidelity, or mostly.

Passive Money managers, there really wasn't. Any very. Exclusive active, managers, yet and it turns a more broadly going to Wall Street I guess for me it was two things one I was always kind of interested, in even when I was in high school I would I would ask my, mom or dad questions about, like, why is this stock worth more than this stock and I remember you, know one question I asked my mom is well this stock it's worth 50 that one's worth 40, you, know why is this one worth, you know trade more and she's like oh well it's worth more and I go oh no I mean what, about the share count you know one might have more shares and even she was like okay, well you're already over my you know and so, I was. Always curious about why things were worth something or how the market, saw, value, and I. Was curious about those kinds of things and at, that time you know finance was it was so exciting there was it, was growing so fast and. You. Know I I didn't, expect, to get into commodities I didn't even really want to get into commodities it wasn't, seen as a very prestigious, line, of. Entry, into finance, everybody wanted to be in equities, back there and it, was kind of a gecko era and everybody, you know it was like go go for equities, so equities. Was what everyone wanted to do and you sort of took a fixed income type job if you couldn't get into equity which, was my case yeah so. You. Know that it just seemed like at that time it was the most exciting, place you could be yeah it was literally bud Fox yeah, Gordon Gekko. College. When, that came out I mean so it was it, was still pretty you know Michael, Milken was around Boesky like some legends, you. Know that obviously went to high highs and then low lows but. Some of these guys were still kind of on high highs today I mean we didn't even have Steve Cohen yet yeah yeah. Just to really play the timing on it so you, you. Then decided, that you wanted to have this career in finance you've got a natural, curiosity of, a trader, and. You find yourself when, I joined, the J Aaron division so I sort of felt like I had joined the Yankees of commodity trading and what year do come 93 93 yeah exactly so you were running base metals yeah London, and I was probably out 93, I'm only 25. Years old yeah it, just tells you what kind of Wall Street we walked into we're a 25, year old it's growing so fast yeah, things are changing so quickly that. Even as sort of smart and semi motivated, 25 year old can get a big opportunity like that yeah and it was really that, that's what I want to talk about because from, the minute that I got sent to London to help out in a general rotation, or some sort and you and I started, getting to know each other I was, blown away at your acumen, in managing, base metals risk because here, I am as a sort, of currency trader that's pivoting, just beginning to pivot to become a commodity trader, and you were, the one that sort of highlighted, and enlightened, me to there's, a lot more than flat price on the screen my man right so could you just tell me a little bit about what your life was like managing, base metals in all of the market structure and things that were sort, of you know on your mind at that time well I think one, of the first things that really impressed me upon. Coming to jr.. And goleman was. It. Was really a time in the industry where, spot. Trading. Had dominated commodity. Trading kind of from ever, until. The late 80s and a lot of these contracts, like option contract only came listed, in late, 80s so these. Were pretty new things still and there, were a lot of older, guys that. Were really, really accomplished, spa traders but, what I noticed is there were a lot of other things that the. Firm could make money from, that. The older guys didn't. Understand, and didn't really want to put the time in because you, know they were already in their forties in pretty wealthy so they were kind of like I don't want to have to like learn how to do that from scratch and so, I was always this guy you, know that got the job that note that at the time nobody else really wanted you know they'd say hey Greg. This client called up and he wants to do this swaption, in aluminum can you try to figure out how to price this because. I don't feel like doing it you know yeah not really because you would be the best guy to do it or I'm not smart enough to do it it, simply was kind of the it. Rolls downhill short, yeah and and so I got a lot of these jobs, but. That turned out to be a real godsend because I, became, a bit of a jack-of-all-trades and, somebody. That people would rely on to, do things that were a little bit offbeat, and at. The time there, was a lot of those kinds of enquiries that came in and most of them had, a lot of profit opportunity, because there weren't very many people in the market that knew how to do these things and so.

That Quickly kind of became you know my like, my stamp and that's and so, when base metals came around that, was. Pretty new Goldman. Wasn't. Doing base metals you know Jaron was, a precious metal shop coffee and cocoa that was the history of Jaron like in the 80s when, Goldman bought them and even pretty much through. The late 80s when. I got, there they got interested in base metals while hiring Gary Cohen to. Focus he was in a silver pit at the time but they say hey come on and let's, try to start this new business and base metals and you. Know since I had already developed a little bit of a reputation. As somebody that could kind of do new things, gary. Was like hey I want to try that guy he seems like smart, and motivated and not intimidated, to try different things and you. Know I still have a super, great memory. Of my first real, serious meeting with him we went to Rao's in Soho and, I. Just, had never sat in front of somebody. As charismatic, and. Some. I could just see from the dinner I'm like this guy's going places yeah now I never had. Any idea, that he, and Lloyd would ascend. To the seniority, at the firm they did but, you, kind of know when you're in the presence of greatness yeah yeah, we knew there's nothing. To know yeah like like, I just looked at Gary. And said I can learn a lot from this guy that. If that's all that happens, I'm still gonna it's a good trade for me yeah yeah so he gave me the opportunity to move to London, you. Know in typical Jay Aaron style I had about two weeks to pack my bags and sort my life out yeah and you, know plopped down in London as a, 24. Year old guy that I'd, only been, to Canada as my only other you. Know trip outside the u.s. a really. Big deal to go, to London and move there a sport, yeah you, know it was crazy. So, it was it was a very exciting and timid ating time but you, know it was a great time to be at, Goldman, in London and base metals because, the market was growing and we, actually came into that market, with, a real ax to grind, because, we were the first big balance sheet and that, really, really mattered, because, remember, right when you came in. Russia. Was kind of depleting. Itself of all its inventory because of the currency, crisis and there, was just tons and tons of inventory on the market and there, really just wasn't any balance sheet to finance, it and simply, the. Opportunity, that Gary saw at the beginning was hey. We're financing, you know we have these tiny equivalent. Of trade houses, kind of but by, today's standards, they were micro. Trade houses that, are financing, this inventory but they're out there on the market at two three times the. Balance sheet cost that we are we. Can just do simple like our full, is simply less than their full care yeah it doesn't have any more scales yeah it doesn't have to be any more complicated than that let's just go out buy, some aluminum, sell it forward, earn some carry and then use that somewhat. Free income, to. Try to plow back you can invest in the business and see if there's, other angles, that we can you, know develop and ultimately, over time I think we became we brought in. A very important role for us was we really brought hedge funds to the market yeah you know at that time you, had producers, you had consumers, you, kind of had what, I would loosely, call speculators, but they were European. Trade based speculators, not. Like the traditional active. Money. Hedge. Fund that we know of today so, we were really the first company. In the LME to bring access. To, those markets for these guys yeah who didn't really know the European, houses, and wanted to deal with a more traditional US. Bank so, that was an that was kind of like the second thing that we brought and then you know we brought the rest to J Aaron which was risk, management, and, eagerness. To, take on and facilitate, client risk which at the time, because. There weren't big balance sheets when. You had a producer that wanted to do a big trade there, weren't that many guys out there that wanted to do one price you know equivalency. Of block trading, right and just say hey I want to sell 5,000. Lots of aluminum and our challenges have a guy yeah, normal. Guy in the floor would say okay I'll work that for the next week and let you know what you do you know I'll come back to you when I'm done right and we'd be like here's your price and yeah we, were kind of one of the first guys I think to, offer a service like that yeah, that was that was completely enlightening, the first time I came over there from, having quoted, precious metals here in New York you know you predominantly, quote in gold and silver to the types of clients that you said small hedge funds mutual, funds, etc etc some, speculators, and then, you go over to London and, it's twice as busy and you're quoting five base metals and the pace doesn't stop because of the time zone they're in jam, between Tokyo, and New York yeah and that.

Was A real trial by fire for, me just being in that time zone and, learning from you so it's a brutal day you know you start the. Market ellamy market didn't open until 11:55. London, time, technically, that's when the first floor happened, but you, know you were basically Ashton, SOCOM yeah you were active kind of from 8:00 in the morning and, then they. Kind, of all the real work would, happen when. The market was closed because then New York were a lot of the management hey, I need you to do this talk to this client do this you know we were we, were working like long long, days it was pretty, common, for us to be in the office like 7:30 in the morning till 9:00 or 10:00 at night which by, today's standards, seems pretty crazy but, you. Know we were 25, and super, and yeah I was busy and exciting so, yeah we were happy to do it I remember coming over there and figuring out that I was gonna maybe go to the gym or something like that after to work and you know after work was 8 o'clock yeah it was no we go to the pub yeah yeah. So, let's go to in. 1995. Nick. Leeson at Barings Bank loses. A billion dollars yeah and we're all sitting around the desk going oh my god which turned out to be a big boon for Goldman because one I you know that early partner another Harvard graduate friend of mine named Dave Heller was, on the other side of Leeson trade so, that was that really credential, as Goldman in equity, options right so that's one side of that trade that you just went into then, I went and then I want to go into September. Of 1996. When. Sumitomo and now yeah they lost 1.8, billion dollars, yeah and something nobody even really copper. Trader right, and so, Sumitomo, was then an investor, in goldman sachs and one of our counterparties. In the metals ma it was I think at that time I think it might have been the only private. Him outside, of partners I think arrived. An investor so what we learned was they. Had a rogue trader Yasuo, hamanaka, that, was, manipulating. The copper markets then in, September, of 1996. They, announced, that the loss was more like 2.8, billion, dollars, yeah so, from there I'm, not sure they really I mean I came to know they really didn't know how much they had lost right that's what we figured but till we get there at that point Yasuo, hamanaka, goes to jail for eight years and Greg, Agron gets the unwarranted, yeah. Right I mean with others but yeah others but can you tell me a little bit about number, one I'd love to hear how he was, what he was hiding from the markets and how he, you lady and what was it like to unwind a rogue trader that happy, somewhat, hairy well first the start of the story is such a great start which is you, know how I even came to know that we were going to be involved, yeah we were not a marquee, LME house then we were probably like, a something. Like a B or maybe a best a B+ player but, there were lots of you gotta remember the LME even in 1996. Still had over a hundred years of history and there were houses that it existed for most of those so you know we were a relative, newcomer, but. You know definitely Gary, Jim, Riley the other leadership, and commodity, they. Saw this and they knew about the senior relationship, at the summe level from, the ownership stake in Goldman, and they, saw this hey maybe this is an opportunity to credential as ourselves but they had to also be thinking you. Know can we actually do this right right. And so you know they decided well the first thing to do would be to meet with them and get. A sense of what they have and see if we can, do it or not and so you, know I was, this, is a great this is I think the greatest part of the story which is it, it was a weekend, and Gary. Calls. Me on a Sunday early, in the morning like seven or eight in the morning hey you, know come to this this. The, suite in the Park Lane Hotel I'm. Like well why are you in the Park Lane Hotel you, own a beautiful house and a Holland Park yeah just. Get here now as you all remember you, know Jay Aaron back then there. Was a prank every now and then you know so my first thought is I wonder. What kind of prank they're gonna pull yeah, I'm. Gonna be you know the stupid guy that shows up at eight in the morning but, whatever, I'm gonna have to go so so. You know I throat jeans baseball, cap, sweats. On and, you. Know I show up and I'm, at this point even when I knock on the suite door I'm mostly, prepared, for a prank not for a real opportunity and Gary. Opens the door he's in a suit and tie and I'm like oops, I'm underdressed, yeah and, then I kind of peek around the corner and I see a bunch of Japanese, guys on the couch with. John Thain who's the CFO at Goldman at that point and then, I'm like definitely. Underdressed. Yeah yeah come, in and. So you know we we wind, up having a fairly, short meeting while I was there they had in there a long time pretty. Much all night I think there. Are a few senior people from sue me there, was a guy from me D the Japanese, trade ministry.

And. So Gary, kind, of you know they're talking, Gary has me off to a side, he. Brings me this phone, book sized, pile. Of papers and he says hey I need you to take a look at this and give, me an idea of what. The mark-to-market is, and. You know I'm looking through it and I'm just like I mean this, is it there's not a single summary, there's nothing like this is just literally. What we would know as a flat report, like it's our list of position, by position of. Everything. They have in their book and they're the largest base, metal traders in the world so I'm. Like okay. You know. I'll take this back to the office let. Me call a few guys we'll try to get it into our system you, know in a couple of days maybe I'll give you an idea he's. Like no, this can't leave the room I'm. Like well Garret huh I don't, even have the. Computer. Or anything, he's, hands me an HP 12c and then, he whispers in my ear and he says just get me to the nearest billion. Like. As you say right this is Nick Leeson lost a billion yeah, now they're lost, so much money they. Just need to know within a billion how, much they've, lost so. I'm I'm like okay I mean I don't want to set your hopes too high this is a pretty much it's, a mantra sefar so I'm there, most. Of the day you. Know at around 4 or 5 o'clock, he's. Like what do you think you know so now we're like 6 8 hours in and I'm like it's billions, I don't know yeah, you know if it's 2 if it's 5 but, you. Know I like, I found one that you know the thing that scares me is I found one position just. One line that was down 600 bill so. I said, you know I just don't know was that an outlier maybe, there's an up 600 somewhere. But. It's hard to know like you, know what how many of those torpedoes, could, be in the book, but. I'm you know I'm kind, of two bit at five right now. So. We basically worked through the, evening by, about sort, of 11 10 11 it was late that night I kind, of had in two, to three area, and. Gary. Said I think that's good enough why, don't you go home and I'll, call you I basically. Barely, got into my house. And you. Know he's back on the phone he said okay who, we gonna need to, deal. With that okay we need your. Office, guys, Ritchie, Schwartz Robert Cole you know free yeah you gotta, have all our guys cuz, we need mostly, what we need is we need the input, and clerical, because, it's gonna be just such a monumental, effort to manually, put this in they, didn't have it on a disk or anything like we we're gonna have to type in the position have, many people double-check, it so. You. Know there was a massive, effort they. Didn't give us the job right away because, they, were debating over fees but. They signed, a non-disclosure and, they said okay look wanna you get started it. Turns out they were competing us against somebody else which, I didn't know or really care at the time but, over the course of about a week we wound up getting the mandate and you. Know we so, that required, especially. By, those standards, there. Was a real we. Even we were really concerned, hey. Like maybe, we should try to have some compliance, like, in terms of should. We really basically be unwinding. The biggest book ever, in the history of base metals markets just on the trading desk while everybody, else right, is sitting there or, should we try to have some, semblance of, separation. For this and you. Know Gary and everybody, agreed. That we we had to figure something out so we. Wound up having like a three prong system. Where. Gary went and essentially worked for Sumitomo so, he, cordoned, off like a section. That you needed a special ID card to get into and he, went into there and we never saw him again for like three months because it took a long time for us to unwind and he, was like their advisor and then. He, would give us orders and, we couldn't ask him hey what's coming next or how much do you have left, we.

Had Some sense because I had seen the whole book and we were trying to keep track through the process, of what we had done but. Frankly, like he you know he did a pretty good job as he should have because really, he was working for them at that point of, shielding. Their intention. And sometimes. He'd come out in a day and be like hey today we want to buy and I know, these guys are still long like 40,000. Lots but yeah okay. So it. Yeah so, that, and then me and Chris Correra kind of split up the. Execution part which. Was a big big job yeah he was focused on the spot and I was focused on everything else and you, know everything, in soomi's book when, you say everything else so we're talking about four words physical, options. Right, yeah so this is not just everything else that's a small wine item and everything else is the tip of the other end of the iceberg, I mean you know outside, of the fact that the spot position was huge it, was obviously kind of simple because it's just like he was long everything, you. Know in future and spot form and hiding, yeah yeah. Well I wouldn't, I don't know how, much I'd say hiding, because there, wasn't great reporting, back then it was very easy to just basically have inventory that didn't make the official report so I don't. Think he actually did good had to go to great lengths to conceal the. Size of his position I see now I think the market had a sense because he always bought and it never showed up in the inventory report so, people would say well he'd say I'm selling it to consumers, but at. Some point people felt like hey we should be able to find this somewhere and you, could in and so I think the market had a pretty good sense by, the summer of 96, that stuff, that was a Miss, and. Yeah. So the everything else was you, know he really had you know he had thrown the by, the time we got to the end in like September October if. He really was throwing the kitchen sink at trying to keep the market elevated, so, there were you, know crazy swaptions. On physical, and hey I want, to sell you this option on physical, where I have five different options to deliver into and you. Know he had sold, so much crazy optionality, that. We. Just were like who is ever gonna let, us buy this option, back I mean why, would you this option could be worth ten times what he sold it for because. He wasn't trying to be price sensitive, he just he, was just trying to progress at, the end especially right, so. So, yeah the complexity, of the book turned. Out to be pretty significant, and in, actuality we neutralized, the spot and the, active delt on on everything, very quickly like inside of a month you, know partially the market was set up for it there were a lot of speculators, a few hedge funds and a few LME houses that I wouldn't, say at the other side but were well prepared, what. Really took a long time more, than six more months was to get out of all options yeah, and we. Just in, some cases we just couldn't find guys who wanted to sell us back the most esoteric, stuff, that he had sold, and. They, still obviously dictated. Whether the price was fair so you know they'd come back and say hey but, he sold this option for, $16. A ton and you're telling us that's worth two hundred and twenty-five dollars ton, or.

Like Yeah that's the best price we can find and we don't want to sell it to you so you know what what, do you want to do yeah and so they held out for a long time months. And months and months and. Then. I think there was a little bit institutional. Fatigue like the senior, management at Summa he wanted to separate by, this point Yamanaka had kind of already been prosecuted. And it, was well fleshed out like. That the extent of the deception that had happened and, Sumitomo. Senior management wanted to separate. Themselves and, kind of start with a clean slate so, to speak so. They. Kind. Of went to Gary and said okay, how, do we just we want to be done and this, you know what this is at. This point we were probably only doing like one or two transactions, a week where we could find a price that they thought was acceptable, and. There were probably. Hundreds, of really, esoteric options, still left right and we were we were okay you know we by, this point we were kind of moved on to other business for the most part and we'd every, couple of days we'd, somebody. Would call us and be like hey is that option so yeah yeah what do you want to do okay, yeah I'm to 18 and said okay we'll go back to them we'll let you know and. Marjorie, yes largers, process, and eventually, they came to us about six months after the, beginning and just said we want to be done and, that. Was it you know we made him a price and then that, was the end and they you, know I'll, finish up the story, by. Another. Very memorable. And quite emotional, the, the, gentleman at Sumi that had run the process was this guy named Bob Takei who I still talk to today. And you. Know there's a very Japanese. Of a lot of honor about, their work, and, I. Think, they, felt like this this, this episode, had brought a lot of dishonor on Sumitomo, and they were anxious to clear. Their name so to speak and so, you know we we. Did what we thought was a good job and Bob invited, us over to Tokyo. Myself, Gary Chris a few other guys and he. Won he hosted us in his house for a dinner you. Know so you go in and you. Take your shoes off that's all very formal, and you. Know bob has this family come out you. Know his kids and they're all very differential. And his wife and his, wife thanks. Us for bringing honor to the family and oh, we, can't thank you enough that, this, could have you know this could have brought such shame on us but you, know this has been it's, been such a great experience, to work with you and our, families, and we want to thank you and I was on verge of tears because. It was so heartfelt and, so personal, you, just you, can never even imagine Eric Cohen crying no, he wasn't crying. Man. That's amazing I mean what an amazing piece of your trading history to have on your belt and.

What's, Cool is that you were still just getting started, at Goldman Sachs through, all of that and now making a. Year. Only so yeah that's 26, 27 years old yeah and you know the the whole world at, that point seemed, like you, could do anything because the. Firm had so much confidence in young. People, to be capable. Of. Incredible. Amounts of responsibility, yes exactly. I want to fast forward a little bit then because this experience, is obviously what prepared you so well for 2015. When. You had to go in front of a largely Democratic. Controlled, Congress, and explain. To them that you were not manipulating. The aluminum, markets through your ownership of the. Aluminum warehouse called Metro yeah could you tell us that story yeah in five seconds. So. I have to back up a little to County even set the background of how we got to that point you, know post-crisis, the. The, trading, business changed, so much and so much of what had differentiated. Goldman which was essentially, risk-taking, for the sake of risk-taking yeah, we were just traders for the sake of trading, yeah, well essentially. That became illegal you know dodd-frank really, said, you couldn't really take a position if, you weren't able to connect it to a client trade either kind of like a pre trade or a post trade and there, were a lot of statistics, that Goldman. And regulators followed, to try to basically follow, a lifeline, of it of a trade so you could demonstrate that one of those conditions existed, mhm, and trying, to adjust to that in. 2010/2011. One, of the switches that we really decided we want to pivot towards was, from. Becoming, you know Goldman, J Aaron started as a physical commodity, house but the the, onset, of the derivative, and futures market it grew so fast we. Sort of really forgot our physical roots and by 2000, we really weren't doing any physical well. We came full circle after, the crisis and. Largely. Through the success of firms, like Glencore and Trafigura. Mccurry. A-- they. Had really really done well and even though, their credit position was stressed, during the crisis they came out of the crisis and looked. Like they were even gonna be stronger and, a, lot of it seemed to be the synergies, of the physical and the derivative, trading they. Seemed to be very very, very. Very good and then the part, for us that was super attractive, was there, was not a lot of overlap and clients, of derivative, and physical and since, we needed clients, to justify, trading. Enhancing. Our client universe would enhance trading opportunities, because it would bring us more clients and, you know all through Goldman it, was about build the client universe make it bigger bigger bigger and the more we had clients we have the more trading we'll be able to do it was very simple and.

The. Biggest hurdle. When you're number one, and was, well, we can't get any more clients and derivatives we're the number one derivatives house far and away we're making, 25. 30 % more revenue than the number 2 guy we're, making a hundred and fifty percent more revenue than the number four guy so. There. You know we have 30 40 percent market share there's. Nowhere to go but down right and this is what this is when the fik division is printing several billion dollars of P&L quarter roughly right. Now how thick was praying way more than that so, tens of billions yeah. Yeah, okay. Sarin, are you now how did how did it come about that you wound up in front, of Congress so. In in in deciding, we wanted to expand, our client, universe and get into the physical how, do you do that right well the, great thing about being at Goldman is you can think big you know we don't have to go out and basically. Try to get. A client one at a time you know I mean that's basically what the small for I do like so what we decided is we were gonna pick a few, opportunistic. Acquisition, targets and buy some companies, that, came with huge client lists so it's kind of like a money manager, that just buys a book yeah so we, made two big acquisitions, one is we bought a utility, in Canada that obviously, traded, physical. Gas and physical power with not, only lots of people in Canada but lots of people in the northern United States through the Great Lakes and New, England a very, large system it, had 80 employees, it. Had five or 600 clients of, which. Like two-thirds were unique to us I. Think, at the time we had something like six seven hundred clients so adding 400 unique clients was was a huge add yeah and, then. In metals, we, bought Metro and which. Was an aluminum warehouse it was either, the biggest or the second-biggest there was one other they kind of went back and forth and again, it was you know it had some some, clients like canned companies, that. We, were already doing business with but I had lots of clients that we weren't doing business with lots, of guys and kind of like what we would call the mid market of metals you, know rolling sheet companies, wire, rod companies, okay this is companies that frankly, would be hard for us to go inquire one by one because they're small but, if we could buy 250. Of them kind of in one fell swoop then. It's, worthwhile to acquire them so, we we buy both of these businesses, and once, we own the metro business we, realize hey this is a pretty good business you know we didn't quite realize all this when we bought it but, the market structure the, rules that the LME have put in place they're. Pretty favorable, to, the warehouses it actually creates. A lot of incentives, for producers, to, sell to warehouses, rather than to sell to consumers okay. Now. Part of that reason was the l-m-u themselves, were. Skimming. Fees, from the warehouses, and they earn anything when, a, producer-consumer, traded happened direct so they, offered incentives to producers, to sell through warehouses, and we were the beneficiaries, of that and so, we kind of egged on that behavior by offering our own incentives, and, as, a result a lot, of material, wound up in warehouses.

Not Just ours but everybody's, and the. Inventory, in aluminum swell two very very large rates and as. A result it. Became the premium, that is the real physical premium, in the market started. To get. Larger, now, our contention, always was listen. When you talk about premium, you mean the difference between a future, and a physical okay. We, agree the, spread has gotten larger your. Contention, is that the, physical has gotten more expensive our, contention, is the future has gotten less expensive, we, we agree that it's gotten wider everyone. Can observe that but, the rest of the reason why our, contention, is the, future is not worth very much now because, the only thing it entitles, you to is, delivery. At a warehouse, that nobody wants to be at in a location nobody, wants metal and then, you have to wait in a line to get it and then pay a lot of shipping to get it to a place where someone wants to get it to so, the future isn't worth very much anymore and the physical which is on demand on location, is worth. A lot so yeah they traded a big difference well. This became a very big, this. Was a debate that it first happened you, know between producer, and consumer plater. Between producer, consumer and ourselves. Subsequently. Ad regulators. To that and then, finally, you, know the major beverage, companies, really, really felt, like something, that, wasn't on the up-and-up was happening, not, just at our warehouses, but at all warehouses, but, ours at the time was the largest warehouse, and so, they. After, not getting the outcome they wanted, when, the CFTC. And everyone, else came in and did, an investigation and, said nothing's. Going on here because the rules allow, them to do everything they're doing. Your. Complaint really is with the London medal is exchanged you, should have them change the rules like and if, you don't like the London Metal Exchange don't, trade there they, said well that's not really practical for us it's the biggest exchange we. Don't have any other outlet for our material, they did what they knew would be most effective which is they complain to politicians, which, they know Goldman and all the other firms would be sensitive to and. So ultimately this, reached a high enough level the, cacophony reached a high enough level that. Unfortunately. A very. Serious, committee in Congress at. The time Carl. Levin ran this committee called the permanent subcommittee of investigation, it was it, was considered one of the most powerful committees, because it. Had no purview, it could investigate, anybody, for anything and Levin was probably, one, of the most senior.

Democrats. In Congress, and kind of seen as he, was 25, plus years, Michigan. From Michigan and kind. Of seen as the watchdog, of Congress and he was a legendary, interrogator, and people, did not like going in front of this committee like, Lloyd had to go in front of this committee during the crisis for mortgages and you. Know it, was very very, tough interview for Lloyd I watched it many many many times in practice and I said to myself I hope mine goes better and. So I you know I went in fearing. The worst but Coleman. Did an incredible job on. Preparation. And you. Know ultimately we, were involved in by the fact that we, really felt like we weren't even that close to the line we, understood, their complaint but. We didn't feel like we had done anything, that. We, we, knew that the market had done something that they didn't like but, we're like that happens all the time right, sometimes. You're, bullish and it goes down you know I mean like I didn't. Like the explanation, yeah exactly, but you you guys want you, want the you, know the reason, to be us we, see it as hey this is just what happened because of the, warehouse structure that the LME allows. And yeah. Frankly you guys we set to the better to the beverage guys you. Guys should change, it Lobby to change the rules like you you're very powerful, yeah if you change the rules will follow them obviously I mean but we're. Gonna profit maximize, while we're allowed to do this I mean and we're, not doing. Anything this isn't like Enron. Power. Crisis, 2001. You, know where you're following, the letter of the law and not the spirit we're like this, kind of is what the LM you want the enemy wants to move material, through the warehousing space because they make money from it yeah so if. You don't like the fact that they're making money, you should have NASA to change the rules, and. So you. Know the the hearing itself was was, very nerve-wracking, I'll tell you one funny story, um. They, you, have to get your own lawyer for something like this because. I mean in the worst case and we. Were hoping this was a very very slim possibility if. The hearing was to go very poorly they make a recommendation to the Department of Justice to issue to, issue like an arrest warrant and tonight you won so you. Know that's probably only like a 10 percent possibility. But 10 percent is pretty much - yeah there emerged so, you. Know the the head of Goldman legal, Greg palm and, Floyd's. Chief of staff John Rogers say hey we want you to interview a bunch of lawyers we're gonna make, sure we get you the best guys will pay for it don't worry, and. So I interview three guys and. You. Know I we, fly, down to DC because they're all kind of like lawyers but lobbyists, because you. Need a lawyer but you also need a lobbyist, to kind of get in the ear of the people who are on the committee and try to soften the questions, a little and you, really want them to kind of like tamp down the, fervor. And sodi yeah you know and so, I choose. This guy Abbe Lowell and I say, hey, I don't know I didn't research any of these guys but like what's. This guy done oh he's really really, respected, he's been in the Supreme Court but, probably is like you know his most famous cases he, was the guy that represented.

Bill Clinton in the impeachment hearing and, I just looked at Rogers, and I said I'm in that much trouble. No. No no you know he's the best though we want you to have this guy. And you, know it was it was incredible having somebody, with that kind of experience on the team, yeah. And who, could say hey, like. We're gonna go see this guy this guy's, not gonna see us but it's okay and we, need to butter up the staff and this, would be asked a question yeah. Like, let's answer these questions but not answer those you know we're not beholden to them he, really. Knew kind of like where, we could push buttons and make, progress and I think, in terms of also managing, the hearing itself it's I don't know if you just watch the ball our hearing but I tend to watch a lot of these now because I'm experienced. In going through one right and you, know I don't think he was that well prepared you know I mean I I I, feel, like he. Struggled on a lot of questions that I thought would have been obvious that they would have asked and, that, really kind of feeds into the committee. Steamroll. Yeah, you. Kind of want to be in, a position to always. Refute. Like. What Abby would say is you know, the, first thing out of your mouth every time is he's, gonna start a question, he's never gonna ask you a question he's only gonna make a statement he's, gonna say isn't it true that you write, and you're, always gonna say no, senator, that's not. He's. Left so he's like he's never gonna ask you a question and you're never gonna give him an answer and he's like that sounds insane for something that's gonna last eight hours but I'm telling you like this is the way it has to happen like you know you can't, let him get. A freebie in where he makes a statement about your, behavior and you, don't refute it because he'll always, say something that is incriminating, right and. You always have, to refute that you, did it yeah and so, it was very interesting in terms of just the, the amount of preparation they did for me was fantastic, in the end it turned out fine okay, it. Really kind of actually soured me a bit on the whole Washington, process because it, was the only time in my career I've gotten a chance to see the inside baseball of how very. Senior, level there's a senatorial, committee. You, know there's 15 senators, on it so you. You get a chance to meet I met everybody on the committee at least once yeah and, you. Know some, of them were impressed, they ask good questions they, seem genuinely, interested, in trying, to understand the topic other, ones were you, know they really were just checking. The box slaves to the politics, of the situation they'd. Say hey I don't. Really care what happens here but I'm, I'm, I'm and I'm a Democrat that's anti Bank so of course I'm going to try to kill you I don't, really understand.

What's Happening here but that doesn't matter to me because I'm. Seen as somebody that must be harsh on you so I'm going to be you, don't even need to spend your time educating. Me yeah I I won't need any of this I'm here for the optics yeah okay. It's, kind of like wow I mean, but, why go through all the process then I mean don't even sit in the committee if you're gonna go to the committee yeah, try to understand, the topics I think seriously, alright let's let's get off the government topic, then I want to ask you one thirty thousand foot up question because since I've left the. Firm, it looks, like there are three clear, iterations, of goldman sachs right there, was the 90s through 2000 iteration, that was very much masters. Of the universe if we can use the wall street phrase where. We got all the rope we needed to hang ourselves and, you could take as much risk as your manager, would sign off on and. Then you had this sort of 2000 through the crisis, phase that you were at the firm for and now, we've got the David Solomon phase well to me looks like a completely, different version of Goldman Sachs with, your experience, just can you wrap that up in a bow for me yeah well I might actually yeah it's it's three but maybe three with the 3a because I think the Solomon era will be a 3a to the, post-crisis. Era sure I would probably say you know when when you were there was, really what I would call the growth phase it was it, was when especially fixed income markets, were starting to become equivalent. To equity markets and size and opportunity, and Goldman. Was investing, a lot in becoming relevant, in the markets by. The time we got to then I would say 2000, a 2008, was really maturation, you know we were that, was really masters in the universe time we, were pretty much the biggest and all fake markets, and the. Firm had pretty, much unlimited appetite. And we. We. Weren't having a lot of bad things and. Mostly. On the right side of trades right and. Then you kind of had post crisis which. Was just it's a most tremendous kryb. It. Won't will understate, that how dramatic, the shift was in the, underlying nature, of everything. That you, know you came, to know about Goldman, and I don't you know was nothing about manage, Lloyd or management it was simply what was required right, and there, were just so many changes that dodd-frank, and Volcker. Brought about in terms of the nature of the way that we had to do business the. Massive, amount of new regulatory, reporting, that, us becoming a bank caused, we, had to build you, know hundreds. Of millions of dollars a system, we had to hire thousands. Of new regulatory. Operations. Account. You know people to monitor and, greet, and do all this reporting, and, then you know it really, changed, the incentives, for the front office. You know you there wasn't the same. Motivation. To go out there and purely, be, profit, driven because purely, profit driven was, only. Okay if it was in the service of a client if. You had a great idea but. Your the, biggest thing that became, the hurdle was finding a client, so you'd say hey I think gas is going up great let's find a hedge fund that wants to buy it you. Know you think that's going up find a producer that needs a sell there's, lots of different, ways to find the iteration, to get the trade on that you want to do right but, it wasn't as simple as just go buy futures right and. So like you know what I was saying about physical, that entailed us a very, big shift in terms of how. Important the clients were and most importantly, how, big and diverse not. Just commodity, clients but really the entire Securities, Division client, base had to expand, massively, so, that we could source direct. From clients, right for a much higher proportion, of our trades you really didn't want to be going in the market for much stuff if you could and.

So. That was kind of you know that the. 2010. 11 -. When lloyd left now I'm, speculating, because I've been there but, from my observations, and a little bit from what I know from the guys that who still are there that I talk to I think this is going to be a really interesting and. As a shareholder it's, gonna be a healthy shift but. It's probably if I was a Security, Division employee, and not-so-healthy mm-hmm, you know securities division is still a very big earner it's a 15 out of 35, billion, but. The growth is probably the slowest in the security division of all the major, revenue. Divisions, and it's. Going to be hard now. Part of that is because you. Know we're especially, in equities we're already high up on the table but, part of that is because the markets not growing and when the market doesn't grow it's it's, not easy to get share nowadays, and Goldman. In the securities business I think faces, a lot of pretty. Challenging hurdles, you know we're not the biggest balance, sheet so lending. Has become a much bigger proportion of clients. One and the portfolio services. Like a bank, offers and it's, hard for going to compete with JPMorgan, and Citi balance sheets we. Don't have a footprint as big as JP, or especially city globally, cities like everywhere, so when, we show up at you, know like an African gold miner cities, got a local office, and yeah, they've been already been doing loans and in currency, and you, know we're probably don't even have a banking license in that country right and so you know we might be able to do paid for advice but we can't even make them alone and so. It, you, know I think the, Securities, Division itself, faces, a lot of challenges if, it wants to grow in. This climate but, the rest the good, news for Goldman is we're, actually in, the opposite placings things like consumer banking services, yeah, things like Marcus, this new credit initiative that they have you, know we're tiny and it, can grow fast and it can actually go from being you, know not that significant, to something really significant, and what I think David's, trying to do and again. Is why I say from a shareholder perspective, I think it's super exciting and probably. Quite bullish for the stock is he's, trying to diversify the firm away from a very security, centric, revenue. Base and become. A little bit more competitive and, in all these things that Goldman's, pretty small in relative to competition, and. Hopefully. Get, Goldman to a place where even if securities doesn't grow we can still grow right because up to this point that's been a challenge that's been very hard for us to meet yeah you you look at you, know you you, look at things like M&A right and you say oh it's, such a big part of Goldman I mean M&A it's super important and it's very prestigious but. It only earns fees that are third, to a quarter of the, Securities Division right, I mean so when M&A grows five percent or eight percent because. They're number one how much more market share can they get that's. Hard to, add to a thirty, five billion dollar revenue line you. Know we're Harvey, when he was CFO said, we want to try to grow revenue. 5%. A year you, find a billion and a half dollars, that's, hard to do yeah I'm sure it is Wow, okay, so the firm's taking a lot of sort. Of uh I know, I look at it as like a financial, technology, direction, a little bit you know and going toward lending, and going more consumer-friendly and, the whole especially markets, is so I don't know if you yeah you know it offers like the highest savings rate my son just signed up for an account it's the highest savings rate in the country right now it's, got a great online platform. So, it's actually pretty exciting, it's kind of cool you know you go up there and it's like a demand, account that offers like 240, interest rate you're, like whoa and it's got Goldman, brand behind it it's got a great online platform, and so, I look at that and say hey it, looks super exciting, poised for a lot of growth it's still small on the overall revenue. Stack, of Goldman but I think super exciting, that we've decided to try to venture out of our kind, of stronghold, you. Know I think Lloyd started, us by getting, us into the money, management business and investment, management over, a trillion dollars in assets we've. Gone from like nobody to somebody yeah and we. Still we, still don't, compete it like the Blackrock fidelity, type, level but we're a good guy in the upper-middle kind. Of punching in the upper middleweight division yeah and, now we're kind of trying some of these other things and I mean. I'm I think the shares have have a lot of upside for all those reasons now if I was sitting as a.

Predominantly. Thick biased, senior. Guy in securities, I'd say man. You know where's the growth gonna be how am I gonna pay my gosh yeah, where am I gonna offer the next exciting job. To you know the superstar, VP, so you know he has a shot at MD and eventually partner it's. Gonna be harder to do yeah you know we used to always talk about that. You. Know Isabel myself, she, was the manager and commodities before and eventually became division head him one, of my bosses it. Was so hard to be a manager, 11, through 17, because. The business generally shrunk and, I mean once in a while we would have an extraordinary. Year, and revenue, would grow a little but, for the most part her resources shrank, so, our risk our balance sheet our comps rank and our. Revenue shrank and so, you, could never really promise, you know those Oh, double. Odo 708. You. Could promise anyone anything and there. Were so much growth your. Worst case was you deliver six months late but you, are always. High, so it, was hard to believe you could say I don't worry Tony the. Next great job is yours and there was, gonna be a next great job and it was going to come fast, whereas. The the the reality, of, post-crisis. Goldman was more like you had five good people for every three or four great jobs and there, was always the musical chairs of there's, one person that we really, want to keep but we don't know whether we have the. Job that really is going to allow their career to grow the way that they wanted to and that they deserve right, and so we would be fighting constantly, you know to you. Say executive, committee to move people around and be like this this, guy or this this, woman they're, so talented we can't, squander this like we have to find them a job I know. They don't know anything about credit, but you're taking her Wow and we're doing it and you know and that was one of the the, great things about being on exec comm was you, know you could really facilitate, stuff and you'd, say I, I'll stake my career that this, person's not going to let you guys form right yeah that's interesting I want to move on to a little bit more direct commodity, talk right now okay. Because I know that the market wants this and the people that are watching be interested, in hear this I'll, start with my favorite I've, been, an oil.

Bull, Off the bottom alright in, both collapses, from 2015, yeah, and then in the most recent one which was a direct result but, you early on this one too yep exactly exactly. A little bit early that it's the same thing but we had the reason when, we had you know it's a typical sort of a trade or thought process when you have the reason for the sell-off which. In my opinion was, the Saturday is getting rid of Jamal khashoggi into a market, that was excessively. Long right. When you know the reason for the sell-off and you, see the commodity, tumble toward the price of production guys like us start salivating, yeah right so, at this price we've rallied now up to the mid-60s, technically. Speaking I've given up a lot of my length but. Posture, wise I, am sort of no less bearish, than I was at $50, right I feel like if anything the risk is that crude oil does. A relocation, up to 75, in a market that's the sort of pretty strong economy, but OPEX got a good handle on production cuts and they need it higher that's, my perspective what's, yours so you, know the demand I think has probably surprised the market it's been better than what people expected and I think that's a big reason the mark it's gone, where, it's gone, the. OPEX always gonna throttle production. I feel. Like the US growth in production which kind of it went crazy from like 8 million to 10 million then, we peaked at 10 million it came all the way back to just over 9 and now, it's like rocketed, back from 9 up to like a lot and change and so. But. I feel like these you know we so to speak got the easy barrels, I think, the next million barrels will be a lot harder than the last million barrels I think that point there's a good there's I, think at $17 TI it's you will get another million barrels but, it'll take longer and, it. Won't be $48. Barrel maybe a $55. Barrel, and. We'll continue after them that's a new pipe which is a big, big constraint, in the u.s. right now is not, just can we find you, know Bakken, crude or, can we find, Permian. Crude it's, can we find Permian crude and get it to the Gulf you know or yet it's Chicago if we can't get it to anywhere to, market it then it's just not worth very much so I, feel. Like crude. Probably. The next five to ten is up but I'm not a hundred dollar crude guy okay I I'm a 50 75. And you know we're probably closer to the highs it still feels and things still feel pretty good yeah, so I think the next five probably up but yeah okay the next twenty I think is probably down that's a great answer that's a great answer and I want to keep it rapid-fire, on the commodity front I'm. Gonna jump to gold, I got bullish gold when, Jerome. Powell walked, into, the, Federal, Reserve chair with, his chin up as a staunch hawk saying that he was not gonna be responsible for, more asset bubbles so.

I Figured rates we're gonna go higher and that would be a positive thing for gold in his, total. 180. Degree, I call, it an exorcism too full, dove right. What. Has gone on is, the metal markets have sort of backed off and. I've given up on my long position, in gold do you have a view on gold here at roughly 1250. $1300. So here's the thing when I left Goldman Gold was like 1310 and then, I didn't look at it for like six months and it was like 1330. And then I didn't look at it for six months and it was 1310. You, know and I mean I can't. Figure out whether because, certainly, even, 15, years ago Gold's. Place and. Economy. Seemed to be a pretty. Big deal yeah, now I can't figure out whether it's the advent, of crypto. Or, simply. The diversity, of financial, assets has gotten so great that the importance, of gold is diminished, but. It just doesn't feel like people see, gold you, know there's there's some of the guys that I would consider the outliers, that, still feel, like we're gonna have $7,000, gold but, to me it doesn't feel like the. General market at large, feels. Like gold is as big a barometer, as it used to be yeah that's a good way of putting it and when you look at the chart the chart tells you the same thing like posts that 2011, trip up to $2,000. It's. Been in the tightest range and it literally it feels like central banks have taken the volatility, right out of it yeah so so. It's not as exciting a trade is when you and I were bashing it around from, 250, or 500 and, some right and the business for especially for banks has really become leasing, and. Balance sheet intensive, and how do i facilitate, central banks on high. Volume but low margin leasing business much, level much more of that then where's. Your bid on 5 lakhs kind of stuff yeah right into your specialty, on the last one let's talk about do you think that copper is gonna do anything exciting I've been, a bull seeing. That the global economy sort of slows down but it holds a level copper, hangs in there the, trend is generally higher, broadly, speaking I want, to go with that but I'm not convinced, do you have any view. On car I feel like copper, and ESPYs. Are very very correlated. Really, yeah because I think copper, is it's vulnerable, to a melt up which is what I think we're kind of having now you, know everyone, talks about the Goldilocks, economy and we. Seem to be in another phase like that yeah, and I've. I've tried to call the the, top a couple times and we know from trading it's. Bad, trading, strategy to try to call tops and you're much better off just trading with momentum, and I've, kicked myself a few times for not doing that in in, SPS, and I feel, like copper will for the most part fall ass and peas because I think SPS will follow growth. At large if we have you. Know modest inflation and, modest growth I actually think that's pretty bullish for both copper, yeah and the SP yeah, like people I think the one thing that I'm rest, with and I'm not sure I don't think if one and a half percent growth is what we get but we also only have one and a half percent inflation I actually think the stock market could rally pretty strongly into that yeah. Because. I think the biggest risk to the stock market is we, actually get the kind of growth that Trump thinks he wants but then the Fed has no choice but it has to hike three or four or five times and then we're definitely going down yeah I agree. I agree that's why I feel like we're setting up where everybody, is looking the other way and saying we, can't even score, any inflation, inflation has, been the challenge I feel like this set this setting is right for all of a sudden we, start seeing headline inflation the, bond market dislocates, because it's going to start pricing that in and the, feds hands are tied because as soon as they know they talk about a tightening cycle Down, Goes the S&P yeah I think I think that December move took them by surprise I don't think they.

Expected That severe. Reaction. Considering. You, know we're coming from zero rates you know we can't stay at zero forever we've, actually telegraphed. For, a while that we think normal, rates are higher than here and we want to get to normal rates mm-hmm, we, are having the strongest. GDP, growth we've, had in a long time, we are at the highs in the market it would seem like about as good a time as any to try to raise at least a few times that's, what I said right exactly, the, market has so little patience, for this now yeah, and I, was I was actually quite surprised, because. You, know although the market came off a lot, it has, anybody who's lived through 2009. It didn't feel that scary like, I wasn't scared and when equities, I was, like okay yeah probably, it'll come off maybe you might even come off to 2100. But it's not going down like a thousand, right so. Because. There was no crisis, right I just was basically like it was an or shoot. So. You, know I was surprised, the Fed felt the need to you, know to turn as hard as they had now. It, kind of feels like they're gonna try to find the middle again I thought this last statement this week was more of a we. Don't think there's any persistent, inflation. But, something's. Going on yeah but maybe there's something in, that's temporary, that is that's. Distorting. The figures and I think they they, certainly you could see in the way that, the fixed income price that went in from li

2019-06-01 17:16

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