“Our business is the sharp end of what’s taking place in the capitalist system,” Trader Robbins added, removing his glasses and pushing four fingers through his curly black hair. “The public forgets that every industry in the world is metal-oriented. We control the metal. There are even a few traders who could make a go at controlling the world.”
There are ten commodity markets in the United States, dozens more overseas. They are places where dealings in a particular item are made and recorded on a national or international scale. Historically, London has long been the home of most commodity exchanges even though, in modern times, the transactions are no longer in the physical goods themselves, but in paper dealings for possession of title. The process is facilitated by grading systems that save the trouble of personal inspection. Commodities like metal can be bought, shipped, and sold without the person effecting the transaction ever setting eyes on the material. Dealings can be spot — at the current price — or future — at an agreed price that will not be affected by movements in the spot price prior to the date on which the future transaction is scheduled to be completed. London’s geographical position is advantageous to this process because it allows traders to conduct arbitrage deals, heavy-mannered gambles where a trader scoops metal in one market and then sells and ships it into another market where the price of the same material is higher. Arbitragers sense and swoop. It is said they are born with a sixth sense for market distortions. Time differences grace London’s arbitragers, permitting them, for example, to buy something from a Far Eastern market for a dollar in the morning and then turn around and sell it to a North American customer or exchange for two dollars, while the Far East is getting ready for bed.
Every exchange broker requires a special license to deal within the pit, but metal traders need no official stamp of approval. And it is within this theater, far above the bloodcurdling spasms of the world’s commodity brokerage pits, light-years removed from Madison Avenue commercials extolling the virtues of municipal bond portfolios, that the heavy money is made, the real power executed. But ask any twenty metal traders what a commodity is and you’ll be waist-deep in economic rhetoric. Even seasoned trading executives have a difficult time defining what it is they do. Amplify the problem these traders have in agreeing on a job description and it becomes much easier to understand why the majority of the public gets burned when they start to play the commodity markets with hedged promises of big returns on small investments. “Commodity trading,” warned a senior executive at the multinational metal-trading firm Bomar Resources, “was made to seem extremely special and complicated to protect the interests of the people involved. To play these markets you had better be extremely smart, stupid, or wealthy.”
“We sell the ingredients necessary for industry,” stressed metal man Frank Wolstencroft, president of Cambridge Metals, a London–New York trading firm that specializes in nickel for steel, rhodium for catalytic converters in automobiles, and tungsten for light-bulb filaments. “We can also sell greed. Greed can be just as profitable.”
Metal traders are the undisputed high priests of the commodity world, and their liturgy is one of unadulterated risk. Unlike the commodity dealer from a brokerage house who spends his days exercising the financial whims of others, the metal trader forges his own markets in whatever the Earth has to offer. He will furnish metal to be brokered on an exchange, but he also reserves the ability to shatter an exchange by the uncontrolled application or retention of his wares to the controlled market. Many traders have the bankroll to maintain personal floor brokers who can, on occasion, bewitch a commodity market by prudently juggling their wares between exchanges and wealthy freelance punters. Most metals, however, aren’t even traded on exchanges but move through smooth private transactions among a clique of old-line dealers. “You’re under the protection of no rules or regulations when dealing with many metals,” said E. F. Andrews, a vice president of Allegheny International. “You’re on the fringe of the market at best.”
Breaking the metal bank is not easy, and most would find it simpler to beat the house at a chemin de fer table in Monte Carlo. There is a winner and a loser in every trade. It is a mean game, a zero-sum game, and the metal man is always the winner because, unlike the private investor, he controls the market he plays. He plays both sides: He’s a buyer when he thinks the market will go up; a seller when he thinks the market will go down.
This independence and virtual freedom from regulation have made metal traders an oppressively clandestine group of individuals who generate trillions of dollars by quietly controlling the buying and selling of the Earth’s crust. Metal traders will joke that on a slow day they relieve boredom by “common exchange gambling” on grain and pig bellies; nevertheless their profit and power come from the influence they wield buying, selling, and supplying the Earth’s geology to industry and individuals. The drama of their lives is directed by the cost and the availability of metals like copper, tin, and tantalum, and by ocean ships stuffed with fossil fuels and strange-sounding lumps of earth called ferro molybdenum, wolfram trioxide, and chambishi cobalt. Their edge on life is a canny understanding and utilization of the labyrinthine complexities of tax loopholes and exotic financial havens in places such as Panama, Liberia, and Switzerland.
Of the eighty naturally occurring metals buried in the Earth, forty are of critical industrial importance. Only nine of these metals — which the metal men supply uniquely — are openly brokered and monitored on exchanges; the rest are dealt under the absolute control of the metal-trading community. The majority of these metals come from politically volatile countries like South Africa, Zambia, and Zaire, sparking fears among American politicians that the Soviet Union — which is self-sufficient in minerals — has a policy of tempting these nations to sever their supply lines to American industry.
The metal trader, however, perceives these rocks as casino chips of varying costs to be gambled immediately or tucked away in a warehouse to gather dust until the odds are stacked in his favor. Like a major corporation that might direct a division to purchase a piece of an Atlantic City casino, an investment outfit like Merrill-Lynch, Shearson Lehman American Express, or Smith Barney directs its subsidiaries to deal in various metal markets on behalf of their clients. But metal trading is a virtuoso business where an individual trader, like a pit boss, can easily exert more power than the company that employs him. And every metal trader has an electric streak of outlaw in him. It comes with the territory. Outlaw bravado is a by-product of the tense thrill these men experience from making and losing millions of dollars in a matter of moments; any metal man who has experienced the wired sensation of a million-dollar profit from one phone call would quickly agree that making such big money in so short a time is turbocharged with larcenous excitement. “It is a business for independent souls,” said William May, a member of the board of Phibro-Salomon, the holding company that owns Philipp Brothers, the world’s largest and most powerful metal-trading juggernaut. “Metal traders have a built-in talent to sense opportunities that other businessmen cannot see. Traders are a bunch of cowboys, highly individualistic and generally adding little to an organization as a whole.”
The esoteric nature of the metal business makes it an industry open to all kinds of prostitution. In 1981, for example, United States agents busted the Wall Street headquarters of Mineral Resources Incorporated, a boiler-room operation huckstering tantalum, a strategic and precious metal used to make sophisticated electronic equipment. Over thirty traders were indicted on fraud and grand larceny charges of ripping off some $1.3 million from 144 unwary investors.
The scam was geared for greed: Mineral Resources was selling tantalum to the public for $400 a pound when the free-market price was little more than $90 a pound. The traders, nonetheless, promised returns of 300 and 400 percent, while neglecting to inform their clients that their tantalum scrap was too inferior to be used industrially. Although Mineral Resources was a phone-bank operation playing on the unsophisticated i
nvestor, the eminent pursuit of industrial trading is just as open to brigandage. It all depends on the trader.
Individuality in corporate life may be cultivated in public, as economist John Kenneth Galbraith once pointed out, but should an executive reach the inner sanctums of corporate power and accept an invitation to appear in a video bite with Dan Rather, the individualistic leader will transform himself into another cog in the organization. With rare exception, the personalities of these executives, Galbraith believes, are lost, sometimes without notice, for the overall good of the corporation.
Metal trading is the exception to the rule. Metal traders are loners, and their personalities are involved intimately with every aspect of their professional life. Nearly all of their trading offices are decorated with blowups of the periodic table of the elements. They will smirk and tell you that such art eclipses their business activities; one look reminds most visitors of tedious hours spent staring at high school chemistry class walls, memorizing atomic structure and molecular weight. The metal men use the table as a high technology tote board. They shoot as high as any professional gambler can. They win more often than they lose. Their vigorish comes from one part experience to nine parts pugnacity, and their ability to trade is entirely automatic. As a group, they are formidable. Their ranks reward old pros and hot-shot kids with equal shares; they grapple for kaleidoscopic power in an arena that they alone control, bellicose gamesters who anywhere else would have been banned from the casino.
Marc Rich was one of those who took a shot at controlling the game. He was much more than a commodity trader; he was the Metal Man, the grand dragon of a daring and tightly knit lodge of two thousand men described bravely as “barbarians” by London Metal Exchange Chairman Michael Brown. Rich was the most successful, intimidating, and, says the United States government, corrupt member of this international fraternity, the man called El Matador because of his refined talent and enthusiasm in killing bull markets when they did not suit the designs of his global empire. “Ruthless tycoon,” “vengeful businessman,” and “scheming marketeer” were a few of the ways colleagues described his towering personality. Those traders who have found themselves on the short end of a Rich deal have called him greedy, wicked, amoral, and a mutineer. Traders who worked alongside Rich say he was an egotistical genius, a beautifully sinister executive who could frame deals with the artistry of a pool shark. The metal men were awed by Marc Rich, the man who took pleasure in being billed as the lonely and deserted trader who never made it through college, the autocrat who hired outcasts, yet wandered corporate corridors to steal the competition’s cream and transform them ultimately into the Los Angeles Raiders of professional trading.
Marc Rich was the apotheosis of a blood-and-guts trader, a financial gladiator whose interest rested in the spoils of battle. Within seven short years, Rich masterminded a $15-billion-a-year trading business by specializing in metal, inventing spot oil, dabbling in grain, sugar, and weapons. In the process, he assumed 50 percent ownership of Twentieth Century–Fox and bought an oil refinery in Guam that sold Iranian petroleum to fuel the United States Seventh Fleet. He enjoyed eating, so he built one of Switzerland’s most expensive and glittery restaurants across the street from his Zug headquarters. He gobbled up real estate like so many after-dinner mints. He bullied the currency markets, pitting the price of today’s dollar against what it might be three months, or three hours, hence.
Marc Rich — the man whom secretaries called the “Rudolph Valentino” of the commodity industry — had the jazz, the ability to create and exploit what commodity dealers called “the profitable commodity situation.” He remained the most secretive of all metal merchants, preferring to exile himself and his family to Switzerland and pay over sixteen months’ worth of contempt of court fines at a daily rate of $50,000 rather than relinquish corporate records that could send him to jail for over three hundred years.
He has spent his entire life cutting deals, speculating on nearly any item with a price tag on the world market. Sly-booting metals like the Artful Dodger, he risked billions to seize control of large caches of strategic commodities. Marc Rich understood the madness of crowds and how to choreograph their delusions to enrich his empire. Nothing was sacred in the Marc Rich organization; that was a cliché elevated to corporate scripture.
Rich was what the French called rastaquouère, a member of a nobility born from fat wallets, not blood. It was a royalty of monetary might, and Rich was its undisputed king. His court was treated well. He would pay twenty-five-year-old traders $85,000 a year, with huge performance bonuses snuggled safely away from the taxman’s grasp in offshore accounts. He was the executive who never fired an employee, deducing it better to cast off the unwanted with quarterly cash payments to ensure their silence on the inner workings of his business. But above the measures of money paid to Rich’s finely tuned staff, risky business was encouraged, individuality generously rewarded. “Rich rarely complained when his traders lost money,” said one of his metal men, “because he knew that was the best way to train traders how to make massive amounts of money.”
Marc Rich’s brand of business was not offered in the Harvard Business School prospectus, and he disdained the prospect of holding himself accountable to the seven-o’clock news or the editorial page of the Wall Street Journal. It was a commerce conducted in shadows, its characters motivated by heady drives that could, at any moment, careen out of control. The high was everlasting in the corporate suites of Marc Rich, but the metabolization of such power sometimes ended in death for traders ordered to exceed the limits of their own avaricious personalities.
Rich knew about the velocity of money, about keeping cash in a state of perpetual motion in the world’s financial markets in order to generate more money. He knew that no government would have an easy time nailing down his billions when the money was telegraphed into bank accounts for as little as twenty-four hours to take advantage of a one-quarter percent interest hike before being transferred to another financial institution that offered his billions a better deal. Those who know Rich joke that lists of the world’s wealthiest men exclude his name because they have no formula with which to gauge his total worth. And even if the government had a treasure map to his domestic fortune, there would be no way to design taxes or laws to totally muzzle his operations in Southeast Asia, the Caribbean, the Middle East, Latin America, the Soviet Union, Europe, China. Marc Rich, say those who know him, would make a pact with the devil if he could become a cartel.
A trader’s profits are supposed to be the result of a quality of things in relation to the desires and needs of men. But more often than not, the creation of a market is little more than psychical image-making, a conjuring technique that actually dates back to 1559, when Konrad Gesner, a wandering European merchant, stumbled across a garden of blooming tulips in Germany and sparked tulipomania. The tulip did absolutely nothing, served no industrial or medical purpose, and held no imagined magical properties. It was, in fact, a totally expendable item. But tulipomania ran through Europe faster than a fourteenth-century rat carried plague because merchants convinced themselves and the public that tulips were worthwhile investments.
By 1636, the tulip situation had grown out of control. Tulip stock markets were established throughout Europe, with the most influential of them situated in the Netherlands port towns where consignments were offloaded and warehoused. But before calm could be restored, the speculators set off fluctuations in tulip futures that sent the cost of a single well-formed bulb upward of $100,000. The public started betting on what the price and quality of next week’s tulip shipments would be, and shiploads of tulips were kept floating offshore until traders forced up their price.
A baffling code of tulip trading laws was drawn up, and professional tulip investigators were empowered to enforce them throughout Europe. The tulip police were, by an accident of history, the world’s first Securities and Exchange Commission, complete with a complicated bureaucracy of red tape to monitor t
he way in which shady dealers brokered tulip futures. The lawmakers failed miserably; nothing could contain the economic fury associated with the tulip, and tulipomania soon became a gross caricature of the economic system.
The dynamics of tulipomania were, of course, little more than mental tricks that catered to a public still in the throes of establishing the intricacies of a sophisticated market structure. But when the dust settled, no dealer knew exactly how many tulips there were and no government had any idea of how to regulate this new breed of trader. Today the business of international trade is computerized, clarified, and often classified, yet the techniques behind the creation of tulipomania are still used to shatter entire marketplaces in one devastating burst of free enterprise.
Commodities, metals or otherwise, are more than items necessary for everyday life — they are a condition, a state of mind. And what metal traders do is sympathetically create manicured images around simple objects of trade. The public impression of a commodity is, by and large, more important in determining the item’s price than is its real industrial value. Incalculable profit is the upside and financial disaster the downside of such manipulative knowledge for the world’s two thousand metal men. Magnates can be made, or criminals can be packed off to jail. Where a metal man ends up hinges largely on how much risk he decides to take, how much bilious panic he wishes to create. The lessons to the modern trader are: On the one hand, consider any trick to control a commodity and, on the other hand, make sure you can get away with it.
Metal Men: Marc Rich and the 10-Billion-Dollar Scam Page 3