The Evolution of Commodities Trading
Featuring Greg Agran
Published on: May 16th, 2019 • Duration: 72 minutesGreg Agran, former global head of commodities trading and partner at Goldman Sachs, retired in 2017. In this interview with Tony Greer of TG Macro, he explains how the modern commodities trading environment has evolved over time. Agran also gives his view on global markets, and relates an inside view of both the legendary Sumitomo Scandal and the Aluminum Warehouse Conspiracy. Filmed on May 2, 2019 in New York.
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 crazy swaptions on physical. I feel like crude probably the next five to 10 is up but I'm not $100 crude guy. 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. 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.
TONY GREER: Hi, this is Tony Greer of TG Macro. I am really excited for my conversation today with Greg Agran 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 a 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 Agran, who's 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'm looking forward to getting started.
GREG AGRAN: Well, thanks for having me.
TONY GREER: 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?
GREG AGRAN: I think we came from similar backgrounds. I grew up in 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 to Harvard. And he was really passionate about me trying to lift my goals a little bit. And he convinced me to apply there. And I had a great trip. There were a lot more what I would call normal guys than my impression was what a place like Harvard would have. I stayed with this awesome guy from Melrose, Massachusetts. It was just like salt of the earth, Bostonian type. And once I came back from that trip, I'm like, I'm going to Harvard. It's what you know. Great opportunity. Great guys.
TONY GREER: Yeah. Are you still involved with the network today?
GREG AGRAN: Oh, yeah. Like I'm pretty involved with the Friends of Harvard Baseball, which is alumni group that helps try to keep raising money so that 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 the Harvard community at large. I have a couple scholarships outstanding there and a few cool things. It was a really big formative part of the early years for me.
TONY GREER: That got you punching above your weight class at a young age.
GREG AGRAN: Yeah, like you say, what did it mean to me? I don't necessarily think when you go to these schools, you learn any more you would be 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 I got there and said, man, I'm probably barely going to 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, I'm okay here. 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 place myself in terms of all right, now, I can compete with the best and I wasn't intimidated about what would come after because I felt like I had proven myself a little already.
TONY GREER: Yeah, very interesting. Very interesting. So, after a cup of coffee at UBS, you joined Goldman Sachs. But 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.
GREG AGRAN: Yeah, this is 1990. So, it's a very different era for finance. And I think in terms of the mix of what people were interested in doing, plus what was available, things like technology didn't really exist yet. And hedge funds didn't really exist yet. So, if you were in finance, you're either going to sell side, which was pretty prestigious in 1990, or you're going to go to buy side. But buy side was more like go to Fidelity or mostly passive money managers, there really wasn't any very exclusive active managers yet. And in terms of more broadly going to Wall Street, I guess for me, it was two things.
One, I was always interested in- even when I was in high school, I would ask my mom or dad questions about like, why is this stock worth more than this stock? And I remember one question I asked my mom is, well, this stock is worth 50. That one's worth 40. Why is this one trade more? And she said, oh, well, it's worth more and I go, oh, no, what about the share count? One might have more shares. And even she, she was like, okay, well, you're already over my head.
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, finance was so exciting. It was growing so fast. And 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 the Gekko era. And everybody was like, go, go for equities. So, equities was what everyone want to do. And you took a fixed income type job if you couldn't get into equities, which was my case. So, that it just seemed like at that time, it was the most exciting place you could be.
TONY GREER: Yeah, it was literally Bud Fox. Gordon Gekko.
GREG AGRAN: Yeah. We were in college when that when that came out. So, it was still pretty- Michael Milken was around, Boesky, like some legends that obviously went to high highs and then low lows. But some of these guys were still on high highs.
TONY GREER: Yeah. We didn't even have Steve Cohen yet.
GREG AGRAN: Yeah. Exactly. Yeah.
TONY GREER: Right. Just to really put timing on it. So, 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 felt like I had joined the Yankees of commodity trading.
GREG AGRAN: Yeah. And what year did you come? '93?
TONY GREER: '93. Exactly. So, you were running base metals in London.
GREG AGRAN: I was probably- '93, I'm only 25 years old.
TONY GREER: Yeah, exactly.
GREG AGRAN: This just tells you what Wall Street we walked into. We're a 25-year-old. It's growing so fast. Things are changing so quickly, that even a smart and semi-motivated 25-year-old can get a big opportunity like that.
TONY GREER: 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 of 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 currency trader that's pivoting, just beginning to pivot to become a commodity trader. And you were the one that highlighted it 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 managing base metals and all of the market structure and things that were on your mind at that time?
GREG AGRAN: Well, I think one of the first things that really impressed me upon coming to J. Aaron and Goldman was it was really a time in the industry where spot trading had dominated commodity trading from ever until the late '80s. And a lot of these contracts, option contracts only came listed in the late '80s. So, these were pretty new things still. And there were a lot of older guys that were really, really accomplished spot 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 they were already in their 40s and pretty wealthy so they were like, I don't want to have to learn how to do that from scratch.
And so, I was always this guy that got the job that at the time, nobody else really wanted. 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. Not really because you would be the best guy to do it or I'm not smart enough to do it. It's simply was the- it rolls downhill. Yeah, 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 inquiries 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 became my stamp and that's- and so when base metals came around, that was pretty new. Goldman wasn't doing base metals. J. Aaron was a precious metals shop, coffee and cocoa. That was the history of J. Aaron in the '80s when Goldman bought them and even pretty much through the late '80s.
When I got there, they got interested in base metal, wound up hiring Gary Cohn to focus. He was in the silver pit at the time, but they said, hey, come on, and let's try to start this new business in base metals. And since I had already developed a little bit of a reputation as somebody that could do new things, Gary was like, hey, I want to try that guy. He seems smart and motivated and not intimidated to try different things. And I still have a super great memory of my first real serious meeting with him. We went to Rios and Soho and I just had never sat in front of somebody as charismatic. And I could just see from the dinner, I'm like, this guy's going places.
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.
TONY GREER: Yeah. Yeah. We knew there was something to know about them for sure.
GREG AGRAN: Yeah. I just looked at Gary and said, I can learn a lot from this guy. That if that's all that happens, it's a good trade for me. Yeah. So, he gave me the opportunity to move to London in typical J. Aaron style. I had about two weeks to pack my bags and sort my life out. And plop down in London as a 24-year-old guy that I'd only been to Canada as my only other trip outside the US. So, it was a really big deal to go to London and move there.
TONY GREER: Passport and everything.
GREG AGRAN: Yeah. It was crazy. So, it was a very exciting and intimidating time. But it was a great time to be at Goldman in London in base metals because the market was growing. And we actually came into that market with a real axe to grind, because we were the first big balance sheet. And that really, really mattered. Because remember, right, when you came in, Russia was 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. We have these tiny equivalent of trade houses, 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 carry is simply less than their full carry. It doesn't have to be any more. 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 and invest in the business and see if there's other angles that we can develop.
And ultimately, over time, I think we became- and a very important role for us was we really brought hedge funds to the market. At that time, you had producers, you had consumers, you 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 who didn't really know the European houses and wanted to deal with a more traditional US bank.
So, that was the second thing that we brought. And then we brought the rest of 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 equivalency of block trading. And just say, hey, I want to sell 5000 lots of aluminum and-
TONY GREER: Not a calendar spread-
GREG AGRAN: Yeah, the guy. Yeah. A normal guy on the floor would say, okay, I'll work that for the next week and let you know what- I'll come back to you when I'm done. And we'd be like, here's your price. And we were one of the first guys I think to offer a service like that.
TONY GREER: Yeah, that was completely enlightening. The first time I came over there from having quoted precious metals here in New York, you predominantly quoted 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 that you're in- jammed between Tokyo and New York. And that was a real trial by fire for me just being in that time zone and learning from you.
GREG AGRAN: It's a brutal day. The LME market didn't open 'til 11:55 London time. Technically, that's when the first floor happened. But you were basically active from the time- yeah, you were active from eight in the morning and then all the real work would happen when the market was closed because then, New York, where a lot of the management, hey, I need you to do this. Talk to this client. Do this. We were working long, long days. It was pretty common for us to be in the office at 7:30 in the morning 'til nine or 10 at night, which by today's standards seems pretty crazy. But we're 25 and super- it was busy and exciting. So, we're happy to do it.
TONY GREER: I remember coming over there and figuring out that I was going to maybe go to the gym or something like that after the work and after work, it was eight o'clock. It was no- we go to the pub after work. There's no gym after work. So, let's go to in 1995, Nick Leeson at Barings Bank loses a billion dollars. And we're all sitting around the desk going, oh my God.
GREG AGRAN: Which turned out to be a big boon for Goldman because an early partner, another Harvard graduate friend of mine named Dave Heller was on the other side of Leeson trade. So, that really credentialized Goldman in equity options.
TONY GREER: Right. So, that's one side of that trade that you just went into. Then I want to go into September of 1996 when Sumitomo announced that they lost $1.8 billion.
GREG AGRAN: Yeah, in something nobody even really traded.
TONY GREER: Right, from copper trade. Right. And so, Sumitomo was then an investor in Goldman Sachs and one of our counterparties in the metals markets.
GREG AGRAN: At that time, I think it might have been the only private outside of the partners, I think it was the only private investor.
TONY GREER: I think that's correct. 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. So, from there-
GREG AGRAN: I'm not sure they really- I came to know they really didn't know how much they had lost.
TONY GREER: Right. That's what we figured. But till we get there, at that point, Yasuo Hamanaka goes to jail for eight years and Greg Agran gets the unwind of his position, right?
GREG AGRAN: Yeah. With others, but yeah.
TONY GREER: With others. But can you tell me a little bit about number one, I'd love to hear what he was hiding from the markets and how he's manipulating. And what was it to unwind a rogue trader that had to be somewhat hairy?
GREG AGRAN: Well, first, the start of the story is such a great start, which is how I even came to know that we were going to be involved. We were not a marquee LME house then. We were probably something like a B or maybe at best, a B plus player. But there were lots of- you got to remember the LME even in 1996 still had over 100 years of history, and there were houses that existed for most of those. So, we're a relative newcomer. But definitely, Gary, Jim Riley, the other in leadership in commodity. They saw this, and they knew about the senior relationship at the Sumi level from the ownership stake in Goldman, and they saw this. Hey, maybe this is an opportunity to credentialize yourselves. But they had to also be thinking can we actually do this? Right?
And so, 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, I was, this is I think the greatest part of