Desert Storm - Boss, Mission Complete
On the morning of July 3, 1990, as soon as Yoo Jae-won arrived at the office, welcome news arrived from Vincent Greenhill.
“Oh! Already?”
The mission assigned to Vincent Greenhill had been simple: use all of ID Investment’s capital to purchase WTI futures and call options on the New York Mercantile Exchange (NYMEX). In the twenty-first century NYMEX would become the world’s premier futures exchange, but at present it ranked third, behind Chicago and London. Even so, daily trading volume of WTI (West Texas Intermediate) on NYMEX exceeded 150 million barrels. At the prevailing price of seventeen dollars per barrel, that translated into a daily turnover of 2.5 billion dollars.
Curiously, actual daily WTI production stood at only 500,000 barrels. Trading volume therefore ran three hundred times higher than physical output, a grotesque distortion, yet the market absorbed the imbalance without difficulty; investors simply bought and sold the same contracts over and over. Futures, after all, were bets on future value, and rolling contracts naturally inflated volume.
A market that turned over 2.5 billion dollars a day could comfortably absorb ID Investment’s 100-million-dollar purchase. Vincent nevertheless judged that dumping the entire sum at once risked distorting price discovery.
- ID Investment’s WTI futures position is as follows. 106.2 million dollars have been deployed into September WTI futures at an average price of 17.04 dollars. Full leverage available on NYMEX was utilized; the margin requirement of 6.7 percent yields roughly fifteen times leverage.
- My apologies, Boss. I waited for a further decline, but shifting Middle East conditions pushed prices higher, forcing an earlier purchase roughly one dollar above target.
In investing, buying cheap was always preferable; waiting too long and missing the trade entirely was the greater sin. Vincent had struck a prudent balance between his own principles and Yoo Jae-won’s orders.
“Direct computer trading from one’s desk is still years away. That margin of error is well within expectations.”
Home-trading systems lay far in the future; anyone wishing to trade on NYMEX still had to appear on the floor in person. Fifteen-times leverage meant that a mere 7 percent drop in WTI would wipe out the entire 106.2 million dollars. Conversely, every 7 percent rise would generate another 106.2 million in profit—an enormous position indeed.
“Aren’t you still at the office? Go home already.”
With the time difference, 9 a.m. in Korea meant 7 p.m. in New York.
- Heh, I’m already home.
Home. That was a relief. Vincent was old enough to be addressed as an elder; the thought of keeping him at his desk into the night weighed on Yoo Jae-won.
- Technological progress is astonishing. From my living room I can now report in real time to a boss on the opposite side of the planet. And to belong to the very company driving that progress fills me with pride.
Yoo Jae-won felt a flush of embarrassment, yet he was far from satisfied. If this WTI futures bet—widely dismissed as reckless—succeeded, it would ignite a technological revolution far more powerful than anything seen so far.
A month passed. For Yoo Jae-won, who had committed a hundred million dollars to NYMEX, July was a month of quiet torment. He knew the eventual outcome, yet with so much capital at risk he lived and breathed every tick of the oil price. Dark circles appeared beneath eyes that had once been carefully maintained; his parents, alarmed, prepared herbal tonics they had never offered before.
Their concern was understandable. After the position was established at seventeen dollars in early July, prices fell to 15.80. Yoo Jae-won’s memory placed the July 1990 low at 16.54; the additional seventy-cent drop nearly unhinged him. He wondered whether ID Investment’s massive entry had somehow distorted market signals or whether history itself was diverging from the path he remembered. Losses mounted. Another small decline would trigger a margin call and automatic liquidation; additional margin had to be posted. Fortunately, ID Technology’s software sales remained steady, and the reserve fund kept the company afloat.
He could never adequately thank Chief of Staff Choi Kang-wook. Had Yoo Jae-won ignored his counsel and poured every available won into the trade like some spirit bomb, the outcome would have been catastrophic. Unable to meet the margin call, the position would have been liquidated at once and the entire venture branded a failure.
Oil prices mercifully held above 15.80. By mid-July, Iraq revealed its true intentions. On the eighteenth, military tensions flared along the northern border between Iraq and Kuwait—the very region where Kuwait had long operated producing oil fields. Iraq accused Kuwait of theft, claiming the fields were Iraqi property.
The charge was not entirely fabricated. The vast underground reservoir straddled the border; Iraq had discovered it first. While Iraq fought Iran, however, Kuwait began extraction. Having gained little from that war yet facing mounting Western bills for arms and equipment, Iraq’s leaders turned to dangerous imaginings.
- As of August 1 the spot price stands at 19.38 dollars—13.73 percent above our average entry of 17.04. Unrealized profit now totals 196 percent.
“I feel as though I died and came back to life.”
Yoo Jae-won savored the dramatic reversal. Vincent’s report had never tasted sweeter.
- Whew. You’re telling me. I really thought we were finished.
Yoo Jae-won’s relief paled beside Vincent’s. The older man, who had executed the trades on the NYMEX floor, had tasted hell when prices touched 15.80. He had agonized over every additional margin dollar; a few million short and a hundred-million-dollar contract would vanish. He had even sworn never to invest again, only to broker. The guilt of failing to dissuade Yoo Jae-won—and thereby endangering a promising company—had been crushing. When brokers who once gaped at his 100-million-dollar orders now sneered as they passed, he had wished himself elsewhere. Rising prices after mid-July turned those memories into distant anecdotes.
- The floor is asking when we intend to liquidate.
Liquidate? The campaign had barely begun. July prices had fallen further than Yoo Jae-won remembered, yet the geopolitical situation remained unchanged.
“Liquidate? We’re only getting started. Maintain the position until I issue a sell signal.”
Yoo Jae-won longed to commit the additional margin as well, but the bitter lesson of July’s unexpected moves had made him cautious.
- Understood. I’ll report again tomorrow.
“Yes. Good work today.”
Yoo Jae-won ended the ID Talk. The following morning, however, no report arrived.
- Iraqi armored forces crossed the Kuwaiti border at dawn. Three hundred fifty tanks belonging to an Iraqi armored division are reported advancing on Kuwait City, according to Western diplomats.
In the predawn hours of August 1, Iraqi troops breached the frontier. CNN, with its global reach, broadcast the first images; Korean networks quickly followed. Live footage from Kuwait City showed a reporter hurriedly donning a gas mask; the atmosphere of war was unmistakable. In the darkness only muzzle flashes and the crack of gunfire were visible.
The futures market reacted first. WTI, at nineteen dollars on August 1, surged to twenty-four. ID Investment’s position generated one hundred million dollars in profit for every 1.19-dollar rise; eight hundred million dollars had already been booked. Yet this was merely the opening act.
- Iraq has completed the conquest of Kuwait. Iraqi forces have seized Kuwait City and dissolved the parliament. The entire operation took five hours. More than two hundred died in the fighting at the royal palace; numerous members of the Kuwaiti royal family are missing. Emir Sheikh Jaber Al-Ahmad Al-Sabah is reported to have fled by helicopter to Saudi Arabia. The Iraqi-installed Kuwaiti Free Interim Government has announced his deposition over radio and imposed an indefinite curfew beginning the third, sealing all ports and airports.
On August 3 detailed accounts finally reached the public. KBS and MBC competed to air the Iraq-Kuwait war; every major network worldwide did the same. Memories of the second oil shock remained vivid; another Middle Eastern conflict promised skyrocketing prices. Oil’s importance had only grown since the 1970s. The world braced itself.
President Bush condemned the invasion in the strongest terms, declaring Iraq’s annexation unacceptable and demanding immediate, unconditional withdrawal. Six U.S. naval task forces in the region were placed on high alert; the carrier USS Independence and five escorts were ordered into the Persian Gulf.
Iraq had evidently believed a lightning seizure of Kuwait would end the matter. Its plan had called for armored columns to race to the capital and the royal palace; afterward Baghdad even announced a planned withdrawal. The war, however, would not end so neatly. America’s response was instantaneous. Carrier battle groups surged forward, and at the United Nations the United States began assembling a multinational coalition.