Rothschild had become a lehrling in Cologne, Germany, at the age of ten and had no problem encouraging Rich to sacrifice a college education to become a trader at Philipp Brothers. The company, in fact, preferred to educate their people in-house, the traditional European approach and the Philipp Brothers’ way of doing business. Lehrlings were trained to trade every commodity known to man. The company was run like a large family. Department heads such as Rothschild acted like stern fathers, not executive vice presidents. And in Marc Rich, Rothschild sensed something special.
“Marc wanted to learn the business and he came from a family that understood trading,” said Rothschild, who knew David Rich as the salesman who provided burlap bags to sack the company’s Bolivian ore. “It was a good hire. Marc had the patience to learn.”
“You didn’t have to pay lehrlings a lot of money. It wasn’t like today,” Rothschild recalled. “I taught Marc how to make calculations in his head, trained him in the finer points of the metal business and commodity trading. What I taught him was traditional knowledge of the profession.”
Marc Rich first entered Philipp Brothers’ Pine Street office in the spring of 1954; at the federal courthouse a few blocks to the north. Judge John McGohey was in the process of sentencing crime boss Frank Costello to five years in prison for evading $51,095 in taxes. Walking past the newsstand in the lobby, Rich probably never noticed headline stories describing Costello as a businessman who “spent a lifetime making money on the shady side.” There was no need. Marc Rich was about to be trained by a clannish group of German-Jewish traders who held no interest in such matters. It was an ignorance that many of them would live to regret.
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Chapter 4
“When you want something from a person, think first what you can give in return. Let him think that it’s he who is coming off best. But all the time make sure that it is you in the end.”
— Sir Ernest Oppenheimer
THE LOBBY OF THE McGraw-Hill Building is dappled with majestic slabs of brown marble. Loitering is forbidden, and crisply uniformed guards will drive along the unwary if they spend too much time poring over the quotes from Plato and John Kennedy on the wall on flattened ingots of bronze. A business address at the McGraw-Hill Building is an impressive pedigree, and the service elevator operator is quick to inform the uninitiated that despite the name of the building it’s Philipp Brothers who are the top dog in the Rockefeller Center skyscraper. The awesome scope of the metal and commodity trading conducted on 152,075 square feet of space comprising five entire floors is best seen by glancing at the directory of businesses choreographed from the twenty-fourth floor: Phibro Asia, Phibro Development and Management, Phibro Distributors, Phibro Energy International, Phibro Exploration, Phibro Export Sales, Phibro L.P. Gas, Phibro Mineral Enterprises, Phibro Oil, Phibro Oil and Gas, Phibro Resources, Phibro-Salomon, Philipp Brothers, Philipp Brothers China, Philipp Brothers Commodities, Philipp Brothers Corporation, Philipp Brothers Grain, Philipp Brothers Holdings, Philipp Brothers Korea, Philipp Brothers Trading Center, Philipp Midwest Metal.
The twenty-fourth floor’s corporate roster is the inheritance from an Old World dream shared and nurtured by two hardworking German brothers who began peddling scrap and brokering small deals on the Hamburg Metal Exchange in the 1890s. The brothers Philipp parlayed their contacts in Europe’s old-boy Jewish trading network to emerge as one of the major suppliers of metal to European industry during the prosperous years before World War I. Julius Philipp was the front man, an intoxicating broker with the charm to convince nineteenth-century mining companies that he should sell their ore once it left the Earth. Oscar “Opie” Philipp was the desk jockey, a short and rotund whip-song dealer who, it is said, could sell metal back to the mine his brother bought it from, and at a profit.
Philipp Brothers was a family operation that could just as easily have been run out of a kitchen as it was from an office. And as the company expanded, Oscar and Julius ensured that it remained that way. When they opened their first foreign office in London in 1908, it was cousin Siegfried Bendheim who was sent to pave the way for dealing on the London Metal Exchange and selling mineral additives directly to Britain’s booming steel industry. Oscar followed a few years later and became outraged immediately over the height of the people he had to do business with in his new environment. Not a trader to be outdone on any of life’s commodities, Oscar dispatched his London lehrlings to find and bargain for the largest desk in the British Empire from which he could rule his empire with equal stature.
What Oscar lacked in height, however, was more than made up for with the cunning resourcefulness he used to keep the German metal-trading firm alive in Britain during World War I. Britain had a law requiring that all corporate letterheads list the nationalities of directors at the bottom of the page, and Oscar knew that the disclosure would destroy the efforts of Philipp Brothers to establish itself as a trading power in Britain. Oscar once again turned to his apprentice traders, calling upon them to scour the libraries and bring back any scrap of information that he could use to hedge the fact that Philipp Brothers was a German firm. Cousin Siegfried’s Germanic roots had already forced him to avoid being interred in a British detention camp by escaping to America where, of course, Oscar told him to set up Philipp Brothers Trading New York.
A glitch in the law was found quickly. It turned out that if a business in Britain was over a hundred years old, it did not need to list the nationalities of its directors on the letterhead. Oscar unearthed Britain’s corporate rolls and found a small eighteenth-century brimstone company called Derby. He purchased Derby for a song and made the company the new owner of Philipp Brothers in the United Kingdom. Like the huge wooden desk that is still in the London office as a monument to the elfin might of Oscar Philipp, Derby remains one of the operating names for Philipp Brothers in England.
But the most important decision that would ever be made at Philipp Brothers took place an ocean away, inside the Woolworth Building during the final days of the American Depression. It was in those grim hours before the outbreak of World War II that Siegfried Ullmann, who followed Bendheim to America to run the brothers’ New World operation, sent a cable telling distant cousin Ludwig Jesselson in Berlin to catch the next boat to New York City. Jesselson was twenty-seven years old, a hot product of Aaron Hirsch and Son, a century-old metal-trading firm where he first cut his gums as a lehrling messenger at the age of sixteen.
Ludwig Jesselson’s life made him the Everyman candidate for the American dream. His father was a poor farmer and a part-time rag-and-bone man from a small village a few miles beyond the smokestacks of Heidelberg. The future that Philipp Brothers could offer first caught his attention while he was still a trader for Hirsch in Hamburg and Amsterdam during the depths of the Great Depression. And Philipp Brothers was well aware of the talents of Ludwig Jesselson. By the time Jesselson was twenty-five years old, he was a trading genius, one of those rare men with a talent to coalesce ingenuity and determination into every deal he made. He calculated the most difficult of figures without the aid of a pencil, rolled off the mineral requirements of obscure factories with unsettling accuracy, directed company assets into new trading ventures with the alacrity of a field marshal deploying troops, and developed the deepest of heartfelt friendships with everyone he touched. Ludwig Jesselson had the fiber to become a one-man trading machine, and Philipp Brothers wanted him in their powerhouse.
Jesselson had acquired an American visa in 1927, but the American consulate in Berlin told him that it would be better to sit tight until the Depression was over. At the time, it was difficult for Jews to get the necessary documents to come to America, and Jesselson sensed that the Depression was just an excuse to make matters more difficult. But the persistence (often pigheaded) that he would soon use to help reconstruct Philipp Brothers was turned on the American consul. He virtually lived at the consulate, cajoling, reminding, and charming. Jesselson received the necessary papers. Wh
en Ullmann finally offered him an office in the Woolworth Building, Jesselson caught the first boat to New York City.
The American system of free enterprise pollinated the trading genius of Ludwig Jesselson. Along with Ullmann, Jesselson seized the mandate to foster the presence of Philipp Brothers on the industrial scene and sculpted the company into an omnipresent trading force throughout the world. When Jesselson started to crank up Philipp Brothers in America, the company’s foreign presence was limited to small excursions to deal for metals in Canada and Bolivia. But within fifteen years, he would spin an international web of producers and consumers dependent upon Philipp Brothers to serve as their middleman in times of feast and famine. “We thought nothing of working twenty hours a day,” Jesselson said. “I knew how to make money, but that never meant anything to me. It was the people and the trust and friendships we shared. If I made a deal, I honored it like the Holy Bible, even if it meant losing money.”
The strength Ullmann and Jesselson brought to Philipp Brothers was the ability to mold solid long-term contracts with dozens of international metal producers. Their game plan was to purchase the rights to a mine before the first rock was out and then handle every aspect of the physical movement — shipping, warehousing, insuring, and sampling. The credo was simple: Philipp Brothers would always deliver. This gave the company the singular advantage of promising industry a continuous supply of raw materials far beyond their own current needs, allowing them to plan for the future with greater financial accuracy. The metal contracts Jesselson made permitted cost-conscious manufacturers to sleep easy because Philipp Brothers always delivered material at the price originally agreed upon, even if the free-market spot price had skyrocketed at the time of delivery. But the flip side of such nimble transactions was a customer paying more if the spot price dropped well below what he was contracted to purchase it for from Philipp Brothers. Ullmann had an almost foolproof gambit for those instances when customers would trundle into his office to hector about variations in price. Sitting behind his desk like a kind priest taking confession, Ullmann would at first sympathize with his customer’s financial plight, a posture guaranteed to catch the visitor off-guard. When the upset buyer was done complaining, Ullmann’s character changed to one of kingly detachment. He produced a massive gold pocket watch from his vest, snapped it open with a firm click, and stared blankly into the crystal.
“Do I get the impression that you want to cancel?” Ullman roared, his eyes glued to the pocket watch and no more sympathetic than those of a wounded lion.
Buyers became unnerved. On cue, they would begin to mutter a rambling answer. Ullmann cut them off immediately.
“I’ll give you one minute to decide,” he commanded, his eyes not budging from the watch. “If you want to cancel, it must be now.”
The customer, now totally uncertain where his best interests lay, never weaseled out of the deal, deciding it safer to pay the higher agreed-upon price than to return to his office to find the spot price twice as much as it was before he incurred the wrath of Ullmann, a man who would throw fits if he discovered an upside-down postage stamp on a Philipp Brothers letter. “Genius,” Jesselson said of Ullmann, “is very fragile.” Ullmann was tough and fear-inspiring, but he also had a motherlode share of Philipp Brothers compassion: In the mid-thirties, a trader needed a few thousand dollars to make ends meet and took an unauthorized cash advance. Ullmann found out about it and tore into the trader like a buzz saw. Calming down a bit, Ullmann finally inquired why the trader didn’t come to him for the money. The trader shook his head back and forth. Ullmann took out his personal checkbook and asked the trader how much he needed, no questions asked. Whatever side of the trade a dealer was on, life at Philipp Brothers was a long-term contract not easily broken.
Philipp Brothers’ compacts with the miners in South America, Africa, and Asia also captivated the banks, who saw the company’s alliance with producers as the perfect collateral for issuing large loans and astronomic letters of credit. Jesselson and his traders traveled the world like silent diplomats, using their gold-plated portfolios as potent weapons in convincing the Third World that it would be good business to be allied with Philipp Brothers. Not only would Philipp Brothers offer the best price for their material, they told the mineral producers, but if their mine ran into financial or political difficulty, Philipp Brothers would be there to help bail them out. It was, of course, good business. But to Jesselson and the German-Jewish traders at Philipp Brothers, it was a heartfelt extension of the family ideals taught by their fathers. Old World Jews such as Jesselson knew painfully well that trading was once the only game offered the Jews and that it stemmed from the dislocation and poverty of the Jewish community. The family had kept them together through the rough times, and it was natural for Jesselson to use those same hardscrabble values to ensure that they would never again be forced to push rag-and-bone barrows like common tramps.
Nowhere did the company’s kitchen-table style of business prove itself better than Bolivia, where Philipp Brothers remains the major conduit for the troubled Andean nation’s outpouring of tin, tungsten, and antimony. The association between Philipp Brothers and Bolivia began in 1927, when Arturo Gruenebaum opened the company’s first La Paz office, and has transcended the 356 assorted coups, elections, military upheavals, and states of emergency that have rocked the country ever since. One of the men who went there was Henry Rothschild, whom Philipp Brothers had lured away from Associated Metals in 1946. By the time Rothschild had arrived at Philipp Brothers, Jesselson had become the firm’s top trade negotiator. Rothschild, who would eventually run the trading arm of Philipp Brothers alongside Jesselson, quickly assumed the role of troubleshooter. “I got the fireworks and Jes lit the fuse,” Rothschild says. “We were the perfect team.” Rothschild was no simple high-road executive who traveled the world just to negotiate for minerals. He was the personification of the Philipp Brothers trader. Rothschild crawled down into Bolivian mines, picked away at veins of tungsten ore alongside coca leaf-chewing miners, and had the bejesus scared out of him on more than one occasion when the decomposed corpses of five-hundred-year-old Indian miners fell out of ancient underground holes and buried him in pitch black tunnels three hundred feet beneath the Altiplano. Such feats, however, were part of the job description for all Philipp Brothers traders.
But it was back in the conference rooms at La Paz where Jesselson’s trading teams really polished themselves in the compulsory exercises of international business, which others found so difficult to shine in. Philipp Brothers became a trading behemoth because they applied the theory that money advanced on purchase of metal will be returned long before money advanced on paper. The whole international banking system is predicated on a leap of faith that Philipp Brothers never accepted. The banks continued lending, and the borrowing nations kept repaying the interest so that, although the principal might be rolled over for individual nations, the money remained in circulation. But as a United States Senate report on international banking pointed out, “The biggest threat to the system lies in the possibility that one of the passengers on this merry-go-round will decide to get off — that one of the larger debtors finally decides to repudiate its debt, or one of the lenders says ‘no more’ and calls in the chits.” Bankers, Rothschild said, never questioned the promises of sovereign nations to repay their debts. Philipp Brothers did.
“The banks never knew what they were doing lending money to the Third World,” Rothschild said, citing the $98 billion Brazil, $93 billion Mexico, $35 billion Venezuela, and $45 billion Argentina currently owe American banks. “Even back then we understood that these countries were heading for trouble. We lent Bolivia money, still do. But their collateral is their mineral wealth, something that there is always a market for. If the bankers had gone into these countries like traders and dealt instead of just give, give, give, then you wouldn’t have all these nations lining up to default and blackmailing the banks into giving them more. We’ve been telling the bank
ers this for years, and they never listen because their situation is motivated by politics.”
“Philipp Brothers always tried to never be political,” Jesselson said. “We look at developing nations as if they were bicycle makers. Bicycle makers are just not equipped to market bicycles, so they go to someone else to take that risk. Philipp Brothers exists to assume a producer’s risk. To accomplish this a trader must be a worldly man. He must be versatile and able to trade for anything. He must be honest and open and love to deal. It has always been my belief that international traders can do more than anyone else to foster peace, friendship, and stable economics among nations.”
Philipp Brothers thrived and grew rich off the crises that disrupted trade during World War II. Ullmann and Jesselson created trading commando units to crack neutral states such as Spain and Portugal and outbid the German Reich for strategic metals needed for the American war effort. “I spent three days flying to Brazil on a DC-3 in 1942,” Jesselson said. “Our man in Rio and I went into the jungle with some natives carrying hand shovels. All I remember is the diarrhea.” Two months later Jesselson emerged from the jungle with critical loads of Amazonian minerals needed to manufacture military smoke bombs.
The clandestine trading teams worked closely with the Office of Strategic Services throughout the war. “Whenever we saw Germans buying some metal, we bought even more,” Jesselson recalled. During the height of the war, Jesselson found himself in Portugal, where his network told him the Germans were about to purchase an ore he was not familiar with. It didn’t matter, Jesselson reasoned. If the Germans wanted the ore, it must be important. Jesselson outbid the Nazi traders and snatched away a shipload of uranium ore-bearing rocks that were warehoused and later given to the Atomic Energy Commission.
Metal Men: Marc Rich and the 10-Billion-Dollar Scam Page 6