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  O’Neill knew that he needed to make some sort of change in his life—he needed a way to make more money. In 1996, the opportunity arrived when he heard that there was an opening in Koch’s commodities trading division in Houston. He had zero trading experience outside of some amateur forays into the stock market; he belonged to an investment club with some friends who made stock picks to see if they could outperform the market. But he decided to apply anyway. He discovered that Koch didn’t care all that much about prior trading experience. For example, Kyle Vann, the former Exxon engineer, had risen to a senior position over Koch’s trading operations. The company wasn’t looking for Wall Street swagger; it was looking for analytical engineers who approached the market in the same way they approached complex problems inside Koch’s pipeline and refinery divisions. O’Neill was hired and moved his family to Houston, first renting a home and then buying a four-bedroom house in the suburbs.

  Trading wasn’t a path to instant riches. Koch hired former engineers, and it paid them like engineers—O’Neill started his new job at the same pay grade as before, about $60,000 a year. The bonuses got a little bigger, however, and the O’Neills were able to start digging themselves out of debt.

  That morning, as O’Neill sat at his desk in early 2000, upper-middle-class comfort seemed like it might be within his reach. Or maybe even something greater than that. O’Neill’s computer was now fully alive. He opened his e-mail program and began to scroll through messages and reports that came in overnight and in the early morning hours. This information was starting to coalesce into a picture in O’Neill’s mind. He was beginning to see a trade taking shape, and a very large trade at that. He saw a strategy, in fact, that might very well lift him out of the financial strain that had defined his life up until that moment. He looked over the numbers as they scrolled and blinked on his screen, and as the Houston morning progressed, he began making phone calls.

  Over the next year, O’Neill would execute a trade that was larger than any he’d ever done before. And it was a trade that was only possible, in all of its massive scope, because of the strange way that America’s financial markets had evolved over the previous decade, creating a small node within the economy that minted millionaires and billionaires.

  If O’Neill could pull off his trade as he imagined it, he could become one of them. If he had confidence that he could do it, it was because he had been trained by the best in the business.

  * * *

  Koch’s trading office in Houston was overseen by a man named Sam Soliman. Like O’Neill, Soliman had cut his teeth in Koch’s Corpus Christi refinery. He was a graduate of Texas A&M and an engineer by training. Before working for Koch, Soliman was an officer on a US Navy nuclear submarine, and even years later, when overseeing Koch’s trading floor, Soliman carried with him the bearing and ethos of someone in a military chain of command. It seems that spending extended periods of time submerged in the ocean, confined next to a nuclear reactor, had impressed upon Soliman certain habits of discipline and risk assessment. He was tall and thin, with a head of thick, dark hair, and spoke with exacting precision. Soliman was considered a “talent sifter,” meaning that he hired young and bright employees, put them in profoundly challenging positions, and fired the traders who couldn’t handle the challenge. This talent sifting was a vital part of Koch’s strategy to build a trading floor from scratch during the late 1990s and early 2000s. Engineers like O’Neill were given a crash course in trading and graded every day by their profits or losses.

  When describing the trading culture under Sam Soliman, trader Cris Franklin replied, simply: “No mistakes.” And Franklin was one of the traders on Soliman’s good side. “At any moment, you could get tapped on your shoulder and you’re leaving. It was extreme stress for most people,” Franklin said. “There are people I know today who say that when they drive by the building, their heart races. And they haven’t worked there in a decade.”

  On any given afternoon, the dozens of traders sitting in long rows outside of Soliman’s office were trafficking in wildly diverse classes of commodities and financial products. Koch operated desks that traded crude, natural gas, and derivatives contracts based on crude oil and natural gas. Other traders handled futures contracts in metals, soybeans, corn, and wheat. After mastering the markets in these products, Koch branched out into more obscure territory. Cris Franklin, for example, worked on a desk that traded short-term commercial bonds—the same products made famous in the 1980s by notoriously voracious traders at Wall Street firms like Salomon Brothers. Franklin’s team then started trading financial products like swaps and derivatives based on interest rates and currency values. Koch even created its own financial products to trade. It pioneered a class of futures contracts for obscure petrochemicals like propylene and ethylene, selling them to big companies that bought plastics in bulk and wanted to hedge their risk.

  Deep analysis was at the heart of Koch’s trading strategy. Franklin, for example, was hired into the trading unit after working in Koch’s pipeline division. He had impressed his bosses there by developing a software program that could help Koch run its hypercomplex network of pipelines and natural gas processing plants. Franklin’s program synthesized enormous amounts of data about pipeline flows and gauge pressures to simulate how the system could ship the most gas. When he started trading interest rate swaps, he used the same approach. Every trade began with research, which undergirded the trader’s view of how things worked in a certain market. Traders never executed a strategy based on hunches. Koch hired teams of analysts who worked alongside each trader to provide reams of data and analysis. The importance of this analysis was reflected in Koch’s pay structure—the company changed its payment structure so that profits were split between the trader and her supporting team of analysts. This put the analysts on equal footing with the traders. Melissa Beckett, who worked on several of Koch’s trading desks as both an analyst and trader, said Koch was unique in this regard. Other trading shops might consider analyst reports to be an afterthought; at Koch, those reports were the bedrock where a trade began.

  Traders on Koch’s floor considered the rest of the world to be a herd, and not a particularly smart herd at that. There was an overwhelming amount of activity in the markets, but seemingly very little insight. When Koch cautiously branched into a new market, the traders were often surprised at how easy it was to make money there with just a little bit of forethought. “We couldn’t believe how the incumbent counterparties couldn’t see the enormous profits that existed in those markets. Even though these were very established markets . . . dominated by the large banks, or large incumbent parties, like insurance companies, et cetera. But they just looked at it fundamentally very different,” one trader said.

  It turned out that most of the counterparties in the market were obsessed with the near-term horizon. On Wall Street, entire teams of traders were focused entirely on what was about to happen in the next three months. The investment culture had become trained to trade around the next set of corporate quarterly earnings; public reports that could cause major bounces for stocks or commodity prices. This near horizon was bombarded by millions of hours of attention and human brainpower, with investors jockeying to position themselves to benefit from a quick shift in the market. This left entire continents of the marketplace unexplored; terrain that Koch was quick to enter and dominate.

  For example, traders at Koch would never “short” the oil market, making a bet that oil prices would drop. Making a short bet was sloppy, and the kind of thing that anybody could do. Rather than make such simple bets, Koch relied on its mastery of the world’s complicated, opaque energy markets. Koch traders tended to make “basis trades” or “spread trades” that were based on complicated price relationships between different products at different locations around the world. Koch didn’t bet that the price of gas was going up, but that the price of gas in the Midwest was going to rise relative to the price along the Gulf Coast. To make these trades, Koch used
a set of tools that few other companies could use. If Koch thought there was going to be an oversupply of oil in the Gulf Coast region, for example, it might snap up leases on giant oil barges, knowing that when the oversupply hit, companies would be scrambling for extra storage space and willing to pay a premium for the leases that Koch bought on the cheap. This was a much safer way to execute the trade than simply shorting the price of oil—even if Koch was wrong about the supply glut, the downside was limited because Koch could still sell or use the barge leases and almost certainly break even.

  Koch maximized the advantage of having “inside” information gleaned from its refineries and other assets. Inside information helped traders like Melissa Beckett sharpen their trading strategies as she bought and sold futures contracts for oil at her desk in Houston. When Koch’s traders made assumptions about the oil market, they could test those assumptions against the real data that was emanating from Koch’s refineries. But Koch Supply & Trading did not rely exclusively on inside information. It aggressively gathered and analyzed huge amounts of data from outside sources. It used the publicly available data that all traders used—like the federal reports that tracked the volume of crude oil being stored in the United States. This data was good, but often stale, published weekly or monthly, and rarely drilled down into specifics. So Koch found other ways to learn about the market. The Customs Service, for example, kept databases of the manifests submitted by oil tankers entering US waters, data that revealed what kind of oil the tankers carried and for whom they were carrying it. By collecting and analyzing reams of this data, Koch could reverse engineer a picture of oil shipments and flows that was granular in its specificity. Koch could learn exactly what its competitors were refining, how much they were refining, and on what day they refined it.

  Koch also discovered that the National Parks Service published data showing the snow pack in the California mountains, data that Koch could analyze to determine how much water would be flowing in future months to generate power at California’s hydroelectric plants. This helped Koch predict with great accuracy the future supply of electricity and the resulting demand for natural gas.

  Because weather conditions had such a big impact on electricity and natural gas demand, Koch raided the newsrooms of places like the Weather Channel to hire their best meteorologists. The weather scientists were all too happy to leave their television gigs and multiply their earning power. The meteorologists arrived at work around four thirty or five o’clock in the morning and started running their computer models that analyzed several sources of weather data around the country. If they could deliver a forecast that was one or two degrees sharper than the forecast everyone else was using, it could give Koch’s traders an edge. The company’s proprietary weather report was circulated early in the morning and updated throughout the day. The Koch meteorologists watched the local weathercasters and scoffed. The B-team players had been left behind in the television studio to forecast for the public. “I can outforecast any of those guys on TV,” one former Koch meteorologist recalled.

  All of these information streams were centralized, analyzed, and then shared widely within Koch’s trading group. The purpose of gathering all of this information was to find “the gap,” as Koch’s traders called it: the gap between reality and what the market believed was reality. Koch gathered enough information to get a sharper picture of reality than its competitors. Then it placed bets that would make money when the market corrected itself, closing the gap, and came closer to the real-world conditions. When O’Neill was promoted from the oil refinery to the trading floor in late 1996, his job was to find gaps in the natural gas market. He was stunned to see how much money a person could make in this hidden niche of America’s energy industry.

  * * *

  On the first day he reported to work at 20 Greenway Plaza, O’Neill held the obscure job title of analyst on the Gulf Coast Basis desk. The moment he sat down at his desk, Sam Soliman’s talent sifter began to shake back and forth, testing O’Neill’s instincts. O’Neill was perpetually aware that at any moment the tap on the shoulder might come, and he’d be escorted out of a job.

  O’Neill did okay at first. He seemed to have an aptitude for the business. He was trading abstract natural gas financial contracts, but he quickly learned that even this abstract business was conducted according to the Koch way. The foundation of Koch’s natural gas trading business was a 9,600-mile-long collection of pipelines that ran along the Gulf Coast and snaked through several states in the Southeast. Koch purchased these pipelines and the company that owned them, United Gas Pipe Line Company, in 1992 in a deal worth at least $100 million. The timing of the deal was no coincidence. It occurred just one year after the George H. W. Bush administration revolutionized the gas business. The deregulation of America’s natural gas business was one of those historical episodes that garnered little attention but that created sweeping changes throughout the economy. These changes gave a handful of companies the chance to make a once-in-a-generation windfall of profits.

  Prior to the first Bush administration, the history of the natural gas industry wasn’t too different from the crude oil business—the government intervened in deep and distortive ways to encourage production while protecting consumers from high prices. Back in the New Deal era, Franklin Roosevelt created a legal regime, headed by the Federal Power Commission, that regulated the business from the wellhead to the kitchen gas burner. The federal government capped the price that gas drillers could charge for gas, which kept natural gas prices low for consumers. But there were toxic side effects from these price caps: by the 1970s, the price was so low that producers didn’t even bother to drill new gas wells. Predictably, new supplies dried up and gas shortages ensued. Customers turned the gas valve, and nothing came out. Even a New Deal–era government monolith like the Federal Power Commission couldn’t force producers to drill for gas if they didn’t want to.

  In 1978, President Jimmy Carter stripped away the price controls to unleash market forces that might encourage new supplies. But Carter’s “deregulation” was hardly a libertarian dream. It created a wildly complex set of rules and price controls that sought to let the wholesale price rise and fall while protecting consumers from the highest price spikes. This was a Faustian bargain that would play out repeatedly in US policy making from the 1980s on. Lawmakers repeatedly passed deregulation measures that only went halfway, stripping away some controls while trying to shield average people from the true volatility of the market. The ensuing market structures were usually defined by complexity and dysfunction, and the natural gas industry was no different.

  The Federal Power Commission was replaced by the Federal Energy Regulatory Commission, which held hours of hearings and collected reams of public comment to parse out the minutiae of when companies could raise prices and when they could not. The regulatory state could never get the porridge just right. High prices in the late 1970s were replaced by supply gluts and falling demand in the 1980s.

  George H. W. Bush tried to tear the system up and start over in 1991. The FERC issued a regulation, called Order No. 636, that broke apart the existing natural gas companies. This single order redrew one of the nation’s largest industries, and an energy system on which millions of people relied for heat and electricity.

  Under the new regulatory scheme, the natural gas industry was divided into three components:

  1) Gas drillers who sold natural gas

  2) Pipeline companies that transmitted the gas

  3) Consumers who bought the gas

  The pipeline companies that transmitted the gas became like railroads—they didn’t own gas like they did in the old days, they just shipped it. Anyone could book space in a pipeline to have gas shipped. This created a new market. Now there was feverish buying and selling of gas at every node of a pipeline. A new class of merchants arose to traffic in this market, chief among them being Koch Industries and its neighbor in Houston, the energy giant Enron.

  Senior manager
s at Koch Supply & Trading saw the potential profits to be made in the growing natural gas marketplace and rushed in to capture it. Koch followed the lead of Enron in cutting deals to manage the nation’s natural gas infrastructure on behalf of the gas consumers. The infrastructure had originally been built with a focus on reliability, ensuring that there was enough gas to meet demand. The big pipeline companies built underground domes in which to store gas—surplus supplies that they could then dole out in times of scarcity. In the age of deregulation, this infrastructure was used like a casino gaming table, every niche explored for ways in which it could turn a profit.

  In the old days, an underground gas dome might be filled up and emptied about once a year. Under Koch’s management, the domes were filled or emptied eight or nine times a year. Customers who bought the gas were promised that they would have supplies when they needed it, and Koch’s traders were free to buy and sell supplies from the underground domes in the meantime. Deals like this were called “origination” deals because they essentially originated new markets for gas. As was often the case at Koch, the company wasn’t just interested in the revenue from deals like this. It was more interested in the real-time window that origination deals could provide into the natural gas markets. Just as in the early days of the crude oil markets, information about prices was both scarce and incredibly valuable. There were not yet electronic exchanges that showed a visible price of natural gas, and government data on sales were irregular and relatively slow to come. Every origination deal provided fresh and precise information about prices, supply, and demand.