Metal Men: Marc Rich and the 10-Billion-Dollar Scam Read online

  Although the oil-producing nations were more than happy to increase their bank accounts by unloading their supplies to Rich, the fabulous size of the cargoes bowled over Philipp Brothers. The average crude tankers hauled anywhere between 30 million and 100 million gallons of oil, and if the trader didn’t have someone to purchase it, then Philipp Brothers was left to pay the storage, insurance, and freight. “Oil prices have always moved more slowly than metals and Philipp Brothers was used to seeing fluxing markets,” said a trader who has dealt oil for Rich and Green. “Philipp Brothers knew that to make real profit they’d have to trade huge quantities of oil and to do that they had to assume financial risk virtually impossible to hedge on.”

  Using Philipp Brothers’ bank lines, Rich and Green embarked on oil deals without informing New York of the details. There were no hard and fast rules to trading oil, so they made them up as they went along. The oil deals were framed the same as metal deals: They would purchase oil from the producer and then sell it to a refinery, presumably at a profit. Jesselson looked upon the new venture as yet another breakthrough for Philipp Brothers, particularly since Rich’s first deals were back to back: Any oil that he purchased was already lined up with a buyer, thus avoiding costly storage and any potential drop from the purchase price. But Jesselson was responsible to the board of directors, and they were none too pleased with the risk Rich was assuming on their behalf. The company’s annual reports during the late sixties and early seventies, in fact, neglected to even mention Philipp Brothers’ involvement in oil trading. The 1974 report’s letter to shareholders told of net earnings of $ 110,164,000, some 110 percent ahead of the previous year. The percentage of profits was ascribed to fertilizers, ores, precious metals, mining, refining, and marketing. Oil profits, which totaled in the millions, however, remained conspicuous by their absence. “The board was scared at the time. The oil business was too crazy and so rightly controlled by OPEC and the majors that many felt our positions could be wiped out overnight,” a Philipp Brothers trader explained. “The company was willing to speculate on commodities because we knew what we were doing. With oil we were the new kid on the block.”

  Jesselson’s faith in Rich and the potential of the new business at first won out over the grumbles of the Minerals & Chemicals board, who were, after all, not traders. Jesselson reasoned that if Philipp Brothers traded oil with the same judiciousness it applied to trading other commodities, the only losses would be posted by the competition. But oil was never a commodity that could be traded under a controlled situation, and many at Minerals & Chemicals were wondering privately if the oil companies would react to the new business in the same way Minerals & Chemicals would respond to an oil company becoming involved in trading metals against Philipp Brothers. Jesselson won all the early skirmishes, an executive said, because “he saw Rich making another market and let him go with it.” The oil deals pleased the other young traders, but Jesselson and the Minerals & Chemicals management were still stone-cold terrified. And in the spring of 1973 Rich used his authority as Madrid manager to conclude an oil deal that thinned the blood of New York board members. Rich contracted to scoop up large tracts of Iranian crude at $5 a barrel over the current spot price. The board finally freaked out. Not only had Rich committed some $150 million of Philipp Brothers’ money to a commodity not one of them understood, but he had purchased the oil above the spot price without first lining up a buyer. For businessmen trained to maximize the use of every dollar spent, the deal had the enervating unreality of science fiction commerce. “Management gagged,” a Philipp Brothers trader said. “Here was a trader in Madrid not one of them really knew betting the mortgage on a price rise in oil.”

  The executives in New York were filled with fear and foreboding, dead sure that Rich was positioned to wreak more havoc on Philipp Brothers than Sherman let loose on Atlanta. According to Philipp Brothers insiders, Jesselson phoned Rich in Madrid, nudging, cajoling, and finally ordering him to find a buyer and sell out before the market came tumbling down. Rich told Jesselson that the New York brass didn’t know what they were burbling about; the price of oil, he assured Jesselson, was going to zoom. “Philipp Brothers was a public corporation,” an executive there at the time said. “If the stockholders knew what Rich was up to, the board would have been hung out to dry.” The pressure from New York forced Rich reluctantly to find a buyer and get out of the position at a small profit. The head office’s timidity angered Rich and the other Philipp Brothers oil traders. Rich, who had become their leader in this daring new venture, had been rebuked sharply and was apparently shaken by the move, viewing it as an unwarranted tirade against his talent and sanity. The more he thought about it, the madder he got. He had planned to store the oil until the end of the year because he sensed that unseen market forces were about to blow the oil business apart. Rich had told his doubters that the Arabs would probably embargo oil in the autumn, but nobody believed him. When the Arabs did embargo oil that October, causing the spot price to explode to $13 a barrel, nobody in New York called to say he was right.

  “Oil scared the pants off Jesselson at first,” said Bill Spier, the former Philipp Brothers trader. “The money was just too big for him to handle. Jesselson always walked the office worrying that the oil deals were going to blow up in his face.”

  Rich was still doing tens of millions of dollars in safe back-to-back oil trades for Philipp Brothers, remaining the firm’s leading crude dealer. But no matter how many petrodollars gushed from his deals, Jesselson never let him enter the petroleum twilight zone — the intense upper level of trading — because oil was a business essentially controlled by forces that the company could never hope to contain. Rich — forever looking for fresh bait — decided that one of the best ways to lower the risk in dealing oil alongside the Sisters and OPEC was to go out and buy Philipp Brothers an oil tanker.

  Green thought financing an oil tanker to be an excellent idea full of tax advantages and one that would make it much easier for him to move oil from country to refinery with one less middleman to pay. In November 1973 the pair made a verbal agreement to purchase a Greek oil tanker, but the board got wind of it before they were about to close, and again asked Jesselson to intervene. It was one thing for a Philipp Brothers trader to go back and renegotiate an already existing contract or clarify a deal closed with a handshake, but when Rich returned to the tanker seller, he did something that many Philipp Brothers officials now believe may have been a first in the history of the company: He welched on a deal.

  The message was clear. “The world changed in 1973,” Jesselson said matter-of-factly. “The old ways of trust were gone. Everybody started breaking contracts. Prices were changing too quickly for people to keep their word. The value system I had built the business on changed. Trading has never been the same since then. Everybody got greedy.” The rugged individualism that Jesselson nurtured in his traders was being drastically curtailed when it came to oil because of the new economic backdrop. Profits in oil were nonetheless enormous and would eventually amount to a third to a half of the company’s trading revenue. But the early deals were back-to-back deals for the most part, and anything beyond that scope was considered too risky. Rich’s oil deal profits for 1973 alone were estimated in the $5 million range, a staggering sum for a trader who was relatively new to the game and who had to deal with having his hands slapped constantly by the board. Despite such gains, the “hot breath” of a public corporation was beginning to restrict the versatility and ingenuity a trader like Rich could call upon when dealing oil. And Rich, who thrived on the day-to-day hazards of big gamble trades, was badly stung by a bunch of well-behaved and faceless New York executives unable to accustom themselves to the peculiar craft of the modern-day trader. Other than Jesselson, who was also under new restraints, these men could never understand how far the gap was between managing and trading. None of them, Rich honestly believed, could ever comprehend the monumental chutzpah required to cut a deal. Rich was the brittle-eyed, col
d-blooded supertrader who had successfully navigated Philipp Brothers into the unexplored waters of oil trading. He knew the leaks, charted the angles, and never grew exhausted or unraveled by the fear that limited lesser businessmen. His attitude was one of trench warfare: Fix bayonets and charge. Rich’s feelings were sincere and strong: If Philipp Brothers intended methodically to veto his deals, forcing hasty abandonment of his well-plotted money-making schemes in favor of less exhilarating trading routines, then Marc Rich was going to weave his own web. But he could not timidly leave the company for a job at another trading house. No, he wanted to climb heights that Jesselson would not attempt even in his dreams. Yet one problem still gnawed at Rich: How could he handle Jesselson with enough nourish to come out on top? Rich needed to make a big noise, create some kind of grand triumph and hideous horror that Philipp Brothers and Jesselson would never forget. He soon hit upon a way.

  It was a time-honored tradition for Philipp Brothers traders to go and haggle for their yearly performance bonuses with Jesselson. Although Jesselson was a generous man, he turned into a Dickensian Scrooge when it came to actually paying his staff. Who the trader was mattered little; salaries were grudgingly doled out like allowances, and when it came time to negotiate bonuses or ask for raises, traders walked into Jesselson’s office like frightened children. When David Tendler was transferred to Japan with his entire family in tow in 1968, Jesselson authorized a mere $33,000-a-year salary, including bonuses and living expenses. “I could have used more,” Tendler recalled dazedly. “I didn’t have the guts to ask.” The traders emerged from these meetings bleach-faced and blurred, scampering back to their offices to lick their wounds, vowing to leave Philipp Brothers like children fantasizing running away from home.

  Alan Flacks, now chairman of Philipp Brothers, thought it might be clever to approach Jesselson for a raise while they were outside the office and in the Milan airport in 1965. “I was making around $18,000 a year,” Flacks, who was then in charge of the Milan office, recounted. “I wanted, no, I needed, $20,000 a year to make ends meet.”

  “We were in the waiting area to catch a plane and I thought the time was finally right to ask. I will always remember exactly what he said to me. ‘Alan, you’re asking for a mammoth increase.’ He knew what I was going to ask before I asked.”

  Jesselson’s tight fists infuriated Rich, who had always talked about branching out on his own under the protection of a private corporation that would not be responsible to stockholders or government scrutiny. “From the time we were thirty-three years old it was really all we talked about,” Bill Spier recalled. “It was our dream because we’d be on our own making more money than Jesselson would ever pay us. Jesselson never once gave us an equitable bonus, no matter how much money you made for the company.”

  Jesselson did this to remind his traders that he was still the chief monger even if the Philipp Brothers household was being managed by an inflation-conscious board of directors. And no matter what the circumstances, Jesselson scented when he was about to be hit on. He possessed a canny ability to tool up without notice. Jaw set, palms pressed firmly down on his desk, Jesselson turned frosty and objective whenever the subject turned to salary or bonus. And if a trader began begging for more — a frequent occurrence — Jesselson would first stare impenetrably, then scowl with the ferocity of an old crocodile being taunted.

  Philipp Brothers traders, who were being paid anywhere from $85,000 to $100,000 a year including bonuses by the early seventies, departed from these meetings feeling more like liveried servants than high-strutting international businessmen, their egos lying smashed and strewn around the office like Styrofoam coffee cups. Rich had long ago lost interest in wriggling through the yearly danse macabre with Jesselson. The smarmy “Son of Jesselson” routines, coupled with what Rich perceived to be the conservative bent of the New York board, had by the end of 1973 set the stage for his dramatic departure. Rich was a wilding, the one Philipp Brothers trader everybody could count on to bear a ruthless grudge longer than a Hell’s Angel. “Rich saw Jesselson constantly second-guessing him,” a trader said, trying to explain the visceral intensity of Rich’s trading character. “So Rich wanted to screw Jesselson.”

  “Why?”

  “There is one rule in this business,” he said. “When you’ve been fucked over by another trader you retaliate in kind.”

  By all accounts, Jesselson had no idea that Rich and Green were planning to bushwack him and, even if he had caught word of the pair’s plan, would not have believed it possible. Jesselson was a consummate trader and a fascinating boss to work for, but he was unable to understand the needs and desires of modern-day executives like Rich and Green, men who no matter the circumstances saw themselves climbing, crawling, inching their way up a corporate ladder with no reward in sight. The world had outgrown Jesselson’s style; too much money had caused the needs of his traders to rise faster than his clannish thermodynamic could contain. “The world,” Tendler said sadly, “became too ambitious for Jesselson.”

  Rich and Green began plotting what Philipp Brothers executives would come to refer to as “The Mutiny” around November 1973 in Madrid and Zug. Bravado was the key element because it was critical that their action stun the other in-house traders. Rich wanted to show Philipp Brothers that Ludwig Jesselson was not invincible. He hoped that this would prompt other traders to join his ranks, leaving Jesselson as little more than the shattered figurehead of a company time had passed by. After weeks of secret meetings, Rich and Green put their plan into motion in Zug in February 1975.

  Rich traveled from Madrid to Zug, where he met Green to prepare for a meeting of the company’s European management committee, a group of senior executives who managed the firm’s day-to-day activities in Europe and made recommendations to management in New York. Both men had decided to closet themselves with Jesselson and discuss their yearly bonuses a few hours before the committee was scheduled to meet that afternoon. The pair had created some $4 million in oil profits that year, a figure that would have made them due for the most fabulous of bonuses had they been trading anywhere else. But since Jesselson never based bonuses on any formula, Rich and Green knew that they would have to go in and punch it out with the old man. Rich and Green, however, had agreed that they would throw the fight by asking Jesselson for so much money that he would inevitably refuse and expect the two traders to head on back to their offices with a much lesser sum and no further lip.

  The meeting began smoothly. Rich outlined the profits he and Green had accumulated for the firm, and Jesselson listened patiently. “Then they dropped the bombshell,” a Philipp Brothers senior executive who was in Zug at the time said. “They wanted $400,000 each in bonuses. Jes probably didn’t move when he heard the figure. He loved Rich and I’m sure he thought it was kinda funny.”

  “Jes said no and Rich became arrogant. He apparently told Jes that he was so out of touch with reality … I don’t know the exact words used, but Rich attacked him, told Jes that he was no longer capable of running Philipp Brothers. A lot of people here felt that we should be getting more money and knew that Jes was set against the idea. Nobody liked the policy, and we all kept trying to change it. Rich went in there and ripped Jes apart over it. Right or wrong, I don’t know.”

  “The traders at the other houses were all getting a percentage of the profits at the time,” Ben Bollag, then a Philipp Brothers vice president, said. “Jesselson felt that if he gave in to Rich he would have to give in to all of his traders. Jesselson’s biggest problem was never being able to adjust to the possibility that other people besides him could make fortunes. He always told traders that their success came from having Philipp Brothers behind them.”

  “The lecture was ‘If it weren’t for the power of the company which I [Jesselson] built, then nobody would be making any money, and you should be extremely happy with what you are now getting.’ Everybody bent over backward not to antagonize Jesselson. Marc was the first one to do it because he wante
d to become wealthier than Jesselson. If there was any hatred, as has been said, then it was directed at Jesselson for holding him back and not at Philipp Brothers as a company.”

  By the time Rich and Green left Jesselson’s office that February morning, every gossip in Zug buzzed that the Philipp Brothers “odd couple” was gearing up to start their own trading firm. Oddly, many traders both in and out of the company hoped the story was false. Ralph Meyer, who had outraged Jesselson when he left Philipp Brothers in the mid-sixties, tried desperately to talk Rich out of the plan. “Ralph told Marc to stick it out because the company needed him more than Jesselson’s old ways,” a friend of Meyer’s explained. “He told him to let Jesselson roll off his back.”

  “They were part of the Philipp Brothers family and did a lot of good for the company,” a former Zug trader explained. He added quickly: “But we didn’t know what happened in that meeting or what he had done to Jesselson. All we heard were rumors, and we felt that Jesselson should do everything to keep them here.”

  “Rich warned Jesselson that he would leave if his demands weren’t met,” said Bollag. “Jesselson’s arrogance would not allow him to believe it to be true.”

  “Rich knew before he went in there that Jesselson would never agree to the bonus,” argued a Philipp Brothers director. “It was a premeditated plan to hurt Jesselson and sway other traders to leave the company with him.”

  Any thoughts of keeping Rich and Green were dashed by the start of the management committee meeting that afternoon. “There were two empty chairs in the room,” an executive who attended that meeting described. “Marc and Pinky didn’t show up. They stayed in their own offices, cleaning them out, I think. The mood was quite tense. Jesselson didn’t say anything. Then someone broke the ice by asking if [Jesselson] had made every effort to keep Rich and Green with the company.”