Metal Men: Marc Rich and the 10-Billion-Dollar Scam
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The science of economics has a principle called the Law of Diminishing Marginal Utility, a high-priced translation of the old street maxim “Too much of anything will end up killing you real dead.” Diminishing marginal utility has a way of popping up in times of great commercial prosperity. In good times, people have a tendency to overspeculate on what the market has to offer. They take exaggerated chances, do everything possible to be in on a quick-kill scheme — and metal dealing is guerrilla economics of the highest order: behind-the-lines business, in and out. Fast.
Rich did the unexpected for the sheer joy of seeing if he could get away undetected. He played by his own rules because the standard rules did not give him access to the deal-making power he craved. He went to great pains to look the part of a boilerplated corporate executive, but beneath the handmade shirts and finely woven silk ties pumped the blood of a wildcat. Behind the computer-key-locked doors of his expensively decorated offices in Manhattan, Zug, and forty other locations around the world resided a stable of rowdy businessmen, handpicked by Rich because he knew the money they could generate if none of the usual rules applied. Rich’s style drilled holes through whatever ethical constraints and business disciplines girdled the competition. “The commodity business is the business of risk,” said a Rich trader to explain why his boss became the target of the largest tax-evasion case in United States history. “Marc can be the prince of fucking darkness. He got caught because he took more risk than any other trader in the world.”
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Chapter 2
“Pay no attention to the man behind the curtain.”
— The Wizard of Oz (TO DOROTHY AFTER TOTO PULLED BACK THE DRAPE AND EXPOSED THE WIZARD’S SCAM)
RONALD REAGAN was dead. The stationary aneurysmatic bubble wedged into the president’s middle cerebral artery since birth violently exploded without warning on St. Valentine’s Day, 1984. The pressurized mixture of blood and water blew a hole in his brain while he was discussing a solution to the Lebanese crisis with Egyptian President Hosni Mubarak at 11 A.M. EST.
The snippets of the rumor of Reagan’s death that had trickled over telephone and telex lines by 4 P.M. GMT hit the London trading houses with the impact of a hollow-point bullet. The story had apparently leaked from a high official on the Securities and Exchange Commission to a yet unidentified New Commodity Exchange (COMEX) floor trader within minutes of the president’s death at 11 A.M. EST. For the next thirty minutes the prices of gold, silver, and platinum would bounce higher than a Wham-O super ball. By 4:15 P.M. GMT, the price of gold skyrocketed $12 an ounce. The fluctuation made Robbins nervous. He was trying to get his hands on all the gold possible, but nobody was selling. “I’m short gold and in some minor trouble,” Robbins confided in an uncharacteristically nervous tone from Unicoal’s London office in the shadow of Marylebone Station. “I’ve been selling gold that I don’t have possession of all morning, and the last gold I got my hands on was $5 an ounce more than I’m contracted to sell it for.”
Robbins was convinced that President Mubarak had furiously splashed Reagan’s face with ice water from a chrome pitcher on the Oval Office desk as the White House physician sprang into the room with a contingent of Secret Service agents pushing an intensive-care unit crash cart. The water did not help; herniation was swift. The turgid balloon spumed blood throughout Reagan’s skull, and the viscid matter was pushed down into the brain stem with a pulsating force. Before the physician could make it to Reagan’s side, the president’s body jerked up from behind the desk and quivered like an autumn cornstalk in an Iowa twister before slumping to the floor.
The commodity tactician and master metal trader of the giant raw materials outfit, Unicoal was certain of his information. Like dozens of other metal merchants who had heard the death knell in London and New York, Robbins gripped his telephone with a sweaty palm and punched out numbers, trying to scoop up gold, silver, and platinum; there was no official confirmation yet from the White House press office, but New York metal traders kept insisting that the presidential corpse was already cold. That was all Robbins needed to know. One report from the floor of COMEX in New York (the largest gold-buying and -selling supermarket in the world) claimed that the White House physician had lifted Reagan’s eyelids to discover a deposit of yeasty shards scattered throughout the optic membrane. Another trader for Shearson Lehman American Express reassured his London colleagues that Vice President George Bush was in the process of being called back from the funeral of Yuri Andropov in Moscow, and that an umbrella of United States fighter planes from Mannheim air base was waiting to provide air cover for Bush’s plane once it had penetrated West German airspace. Another broker at Amalgamated Metal Trading in New York verified the AmEx trader’s news account and added that the White House had embargoed the report until Bush had made it safely across the Iron Curtain. Benedicat te Omnipotens Deus … Almighty God bless you.
Robbins straightened up in his chair, opened his eyes wide, and ground the butt of a Silk Cut low-tar cigarette in a stained coffee cup carpeted with gray ash. He cast a glance at the other metal traders around the room drumming their knuckles together in anticipation. No one returned his anxious gaze, a silent indication that Robbins was still short gold. He slouched back down into his chair, lit another Silk Cut, and tried to formulate a solution to the same problem that confronted his colleague Fred C. Dobbs in Treasure of the Sierra Madre: “How can I get some gold right now?”
The Unicoal office was arranged like most trading offices around the world. Desks pushed together to form one large work area, numerous phones convenient to the hand, and charts gauging the ebb and flow of metal prices adhering to the four walls. There is very little silence in a trading room. Whatever calm does exist is pierced by the Gatling-gun rattle of the telex machine. A trader’s eyes glow like a Maine lighthouse when he hears the bell signifying an incoming message. Some traders go to great pains to customize their telexes like souped-up hot rods. Colorful banners are often hung from the telex’s base, making the machine look like a steel soldier carrying the corporate standard into battle. In the world of high trade, to possess a telex is to belong to the fraternity. Those who play the market without benefit of the noisy metal machine are foolish neophytes, traders will explain.
Some 43 million Americans dream of striking it rich by playing some kind of financial market, but less than a thimbleful manage to knock the markets into making major returns on their investments. The metal traders, those men who wrangle vast fortunes in precious, strategic, and fuel minerals, demolish markets for profits daily. It is the natural instinct of the metal trader to smash, kick, and throttle the competition. And within minutes of Reagan’s stroke, a fight for the control of world resources began over jammed telex lines between London and New York. Any fleeting thought these men might harbor for the public good vanished; friendships that existed between them moments before were buried. Sportsmanship is never tolerated. Skirmishes for the control of a commodity often become messy: Lies are elevated to the level of truth. Through it all, small investors — the Carolina farmer and the Seattle schoolteacher — make up the needed armies of pawns. Depending on a trader’s position in the metal markets that day, the death of Ronald Reagan was either a macabre way to lose money or a ghoulish plot to reap some quick profits.
Unicoal was a multinational corporation that understood how to knead unstable markets to make big dough. The company was formed in the mid-1970s, when American coalmines were posting profits of 20 cents a ton. A group of slick geologists had banded together eight families who operated nonunion mines in Tennessee, Virginia, and West Virginia. The families had been unwittingly digging bituminous coal from the same geological reef, and the geologists knew that the price of that coal could rise if the families worked the market together. The new confederation, Unicoal, pumped up its coal profits nearly $100 a ton, making overnight millionaires out of hard-scrabble mining men who still nursed large blue bruises on their foreheads, a brutal by-pro
duct of spending too many years bumping their heads against mine ceilings. The small town of Grundy, West Virginia, became Unicoal’s world headquarters, transforming a once depressed valley into an Appalachian Beverly Hills.
The good life that Grundy’s burghers had grown accustomed to almost disappeared when Jimmy Carter was elected president in 1976. Carter created regulations requiring any coal mining company that sold its product to a federal utility to abide by expensive mining safety standards. Unicoal, a nonunion operation that employed unskilled labor, viewed the guidelines as damaging to their profits and decided to stop selling to federal utilities. Many in the company considered the decision capricious, but it turned out to be a brilliant stroke. Unicoal began flogging American coal to fuel the hungry steel mills and power plants of Germany, England, Japan, France, and Spain. And as the oil crisis drew to a close in the United States, the price of domestic coal collapsed with a thud. But Unicoal’s profits soared from the sale of its unregulated coal abroad. The Appalachian miners had effectively parlayed laws that would have crippled the company domestically into loopholes that regenerated Unicoal into an internationally powerful outfit of strategic metal traders who used coal cash to bankroll Robbins’s metal market speculations.
By 4:15 P.M. GMT, Robbins began to believe that a gruesomely clever market hustle was being masterminded by a small clique of COMEX gold traders. There were New York gold traders twisted enough to instigate across-the-board hoaxes, but for one of their lot to declare Reagan dead would be simply criminal. And one thing continued to gnaw at his doubts about Reagan’s death being little more than a vile hoax: The story was being confirmed by virtually every trader he spoke to in America, and when a lie is confirmed in the metal business, the savvy trader accepts it as fact. There is always money to be made, even in lies.
“If Reagan is alive then why doesn’t he take one of his Hollywood walks out on a White House balcony and wave to some bloody tourists,” Robbins moaned to a business associate at the London headquarters of Billiton, the multinational metal-trading arm of Shell Oil. “I heard that some asshole came out of the White House press office around 4:15 and said that he had seen Reagan thirty minutes before and that he looked all right. It sure stinks fish to me, and I’m not going to be caught short by Reagan dying.”
Reagan’s stroke had finally gutted the tenacious bear gold market. Since February 1983, bullion had taken a disastrous plunge from a high of over $510 an ounce to a low of $365 in January 1984. The petered-out price represented a drop of 28 percent, and the experts said it reflected Reagan’s efforts to decelerate the inflation rate, as well as high United States interest rates, a strong dollar, drastic cuts in OPEC oil prices, and overly adequate world gold reserves. The economists even had a complex mathematical formula to spell out the process. Economic equations, however, have a nasty habit of falling apart in times of crisis. Theoretically, there should have been enough gold to fill the short positions of dealers who had futures contracts due that day, but not even the average daily turnover of 100,000 ounces on the London gold market was enough to supply the demand. The instantaneous lack of gold came as no surprise to Robbins. “In eight thousand years of gold mining,” he said, “we have only managed to recover about 88,000 tons.” It wasn’t much gold, hardly enough to fill the display cases of cosmetics on the ground floor of Bloomingdale’s.
The search for gold had become desperate at 4:25 P.M. GMT. Switzerland’s famed banking gnomes, who control the Zurich gold market like a family of trolls, were reluctant to part with any of their horde. Samuel Montague, Johnson Matthey, N. M. Rothschild, Mocatta and Goldsmid and Sharps Pixley — members of London’s exclusive club of gold-price fixers — also had no metal for immediate delivery. Gold brokers on the Chicago Mercantile Exchange echoed the sentiments of COMEX. Hong Kong bullion brokers were just going to bed.
The dollar began to post a drop against all major foreign currencies, creating a situation that frazzled metal merchants, for they were committed to converting bushels of American greenbacks into the foreign currencies with which they had contracted to purchase their freighters and warehouses of industrial minerals. Brokers in New York were now reporting that videotapes of Mubarak chatting with a living Reagan in the Oval Office had been released to the networks. But the time of the taping was not released. The omission fueled more fear. Robbins grabbed his phone and began ringing friends at the Financial Times, Reuters, the White House newsroom, and the brother of someone he once knew who now worked for Business Week in Washington. All London calls to COMEX were answered by shaky-voiced floor traders who incessantly reconfirmed that Reagan was absolutely dead and, more important for the moment, that there was no gold to be found outside of what South African Harry Oppenheimer had yet to dig out of Namibia. The question still being asked at 4:27 P.M. GMT by every trader short the yellow nugget was “Can you get me some gold?” The answer continued to ring a hollow “No.”
Word spread.
“I heard it on the floor at around eleven A.M.,” the voice of AmEx vice president Peter Grote crackled over a transatlantic phone line from lower Manhattan. “Yeah, yeah, I’m telling you, it sounds awful possible. I’m sitting here in my office, and it comes over the loudspeaker intercom we have hooked up to our traders over on the COMEX floor. The White House denied the whole thing, but it sparked a rally in gold and silver the likes of which we haven’t seen in a long, long time.”
“The dollar is going to collapse,” hectored the German metal trader in a harshly clipped voice during a hastily arranged conference call with his associates in New York, Düsseldorf, and London. “Buy whatever gold and silver you can find to cover our short positions, but get our hands on some long dollars against the mark. If Reagan isn’t dead, then we’ll make the money back on the cheap dollars.”
“Listen, I’m telling you, all the voice said was that Reagan was dead,” London commodity broker Nigel Watts bellowed to Robbins. “We have a direct communication link with COMEX, and our chaps tell us the man is dead.”
The life or death of Ronald Reagan was inconsequential by 4:30 P.M. GMT. The market was precious and strategic metals had gone delirious. Robbins had been in the metal trade for over a decade. He had risen to superstar status by the age of thirty-two because of his canny ability to read and dissect market movements quicker and more accurately than the competition. Robbins had given closed-door intelligence briefings to United States congressmen on world metal stockpiles and had been the confidant of mineral-rich Third World despots. But right now all his years of training and contacts added up to a hill of beans. He knew that no information, no market, could remain fully consistent. By nature, markets involve balancing competing buyers and sellers in a frustrating and explosive world. Inconsistency and a lack of cohesiveness are the cornerstones of the trading fraternity. Robbins understood that this strange economic architecture compelled traders never to do anything halfway, and people who deal in such absolutes are destined to cause trouble, particularly on exchanges where political upheavals further distort already manipulative situations.
And it was trouble that was percolating on the floor of the London Metal Exchange, the small arena in the City of London, where forty pugnacious dealers from the world’s major metal brokerage houses pounded out the world prices for silver, lead, zinc, aluminum, tin, copper, and nickel. LME brokers buy and sell metal in a series of five-minute trading rings. Haggard men, they slump on soft red leather chairs around a brass plate resembling a cheap tray from the Tangiers souk. Individual brokers bark out what they have to buy or sell, and at what cost, in between the coded gasps, sneezes, and screams from assistants who are in constant contact with the trading offices through a bank of phones situated a few feet behind each dealer’s seat. Any trader who wants in on the action attempts to outholler the competition, and if anyone disagrees with which trader the buyer or seller chooses, a referee decides who first opened his mouth. “England outlawed pit bull–baiting in 1835 and legalized the LME in 1837,” e
xplained a hoarse ringmaster from Johnson Matthey. “On a slow day it’s maniacal; on a heavy day you’re fortunate to walk off the floor alive.”
The acoustics of this tiny pit had become so wretched that the LME board of directors had decided to suspend huge panels of white-painted plywood from the ceiling with industrial-strength chains, the kind used to lash down ships during a full hurricane. The wood was supposed to dampen the noise, but it only ricocheted off the three-inch ply as the brokers fought to buy silver contracts during the market’s closing five-minute silver ring, beginning at 4:35 P.M. The pit was jammed with perspiring bodies and strained faces seeking out phone clerks for more possible information on Reagan’s death. A phone receiver was accidentally ripped from the wall by an overeager assistant trying to relay information to his partner. Ring referees were uselessly pleading with brokers to remain calm. By 4:39 P.M. the brokers’ howling pleas for silver ingots sounded like prayers from invalids begging to be cured at Lourdes. It was quickly turning into one of those days when a trader would be lucky to get out alive, let alone be blessed. All the pit lacked was a pendulum.
Doug Lee, the managing director of Intertech Resources, sat behind mounds of blue-tinted telex messages piled atop his desk, looked at the afternoon LME prices, and began to snigger at what was taking place on the world metal markets. The editors of the influential trade publication Metal Bulletin, the TV Guide of the multibillion-dollar metal-trading business, referred to the thirty-five-year-old market whiz as “Dapper Doug” in their biweekly “Hotline” gossip column. Lee’s two trademarks were his eclectic tastes in clothing and his unusual ability to turn around failing companies — specifically, the smooth sophistication he used to turn badly beaten metal-trading firms into heavyweight contenders for a piece of the crowded international marketplace. By the time he was twenty-nine years old, Dapper Doug’s magic had transformed the floundering metal-trading firm of Derek Raphael from a $35-million-a-year backdoor operation in 1977 into a $200-million-a-year powerhouse with solid trading partners in Eastern European capitals, behind the forbidden walls of Beijing, and at the dining tables of the Kremlin. He left Raphael with a fat bonus in 1982 to regenerate the mom-and-pop trading group at Cambridge Metals into the most successful small strategic-metal sales outfit in Europe and America. Now at the helm of his own trading company, Doug Lee was having a good belly laugh at the concentrated weirdness displayed by his metal-trading colleagues.