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

by A. Craig Copetas

  “The merger was done to safeguard the firm,” Jesselson insisted. “There were a bunch of old men running the place, and it would have been detrimental if they passed away without a solid structure to keep Philipp Brothers alive.”

  The public offering made Philipp Brothers the new darling of Wall Street, and Marc Rich became the in-house wunderkind who cooked deals in his head while tooling around Manhattan in a red MG-TD roadster. Impressing Jesselson with the slick style he used to close deals in metals ranging from arsenic to tungsten, Rich was the trader Jesselson could always count on to “make a market.” But Rich became more than one of the men dubbed to lead Philipp Brothers into the future. “Jes considered Marc to be his son,” a Philipp Brothers director said. “Marc always used that to his advantage.”

  Rich also played the intimate dinner parties Jesselson gave the traders at his Riverdale home. He would arrive at the door with the most expensive of gifts, a Tiffany crystal bowl here, the latest Polaroid camera there. “He always brought the most fantastic gifts,” a former Philipp Brothers trader said. “Even then, Rich was different from the others.”

  “This is going to sound like bad blood,” a trader who knew Rich said in a chilly voice, “but all of us knew that Rich was truckling up to Jes whenever the opportunity presented itself. You just knew Rich was setting him up for something. Why Jes never sensed it, I don’t know.”

  Back in the office, Jesselson constantly referred to Rich as a son, the trader to whom he would impart all the secrets, all the knowledge necessary to carry the Philipp Brothers banner to glory in the second Industrial Revolution. “Jes’s kids never gave him any nachas,” a friend explained, using the Yiddish word for “joy.” “Marc gave him nachas and Jes saw him as the kind of man he wished his own sons could be.”

  Rich, decided Jesselson in 1958, would be sent abroad to continue his education and develop his contacts at the company’s global outposts. The first stop was Havana, where Philipp Brothers needed a troubleshooter to go in and assist Ramon Villegas and Ernest Frank in dealing with the collapse of the Batista government and the new regime of Fidel Castro. “Marc cut his teeth in Havana, and the experience shaped his character because it taught him that being illegal was okay under certain conditions,” said a former traffic manager who dealt with Rich while he was in Havana.

  Cuba had been a theme park for bribery and payoff under Batista, and little would change during the opening days of the Castro Revolution. Most of the Cuban metal deals involved copper concentrate, manganese ore, and nickel, and were conducted across the bars of the El Presidente and the Nacional hotels. Traders swarmed Cuba, arriving with portable typewriters on which they drew up and signed contracts on the spot. “It was the Paris of the Western Hemisphere,” a metal trader who did business in Cuba remembered. “We all thought it would be more of the same with Castro in charge. By March of 1959 we were all eating our words.”

  Havana’s streets were sweltering with revolution when Rich landed, and Castro’s cadres were directing their heat at American businesses friendly to Batista. Rich spent the latter part of 1958 and most of 1959 shuttling between New York and Havana and worked the docks, filling the pockets of ship captains to get Philipp Brothers’ nickel and copper out of the country. Chase Manhattan was the big American bank in Havana, and Rich was a frequent visitor. “Money always had a way of solving problems in Cuba,” the traffic manager said. “It was the way to do business in Cuba. Rich was told to get our material out any way he could. In that situation it was necessary.”

  Cuba was an environment totally removed from anything Marc Rich had ever experienced, and it smacked of just the kind of exploitation necessary to conduct business in the Third World. “Cuba was Marc’s first taste of the illegal,” a friend of Rich said. “He saw the potential.” The mystique of Havana, an infatuating blend of opulent corruption and romantic revolution, was a fertile business opportunity for traders who understood that money clips were more important than passports when it came to crossing borders.

  “Marc always saw Cuba as a place where the rules didn’t apply and he came back to New York with what he learned,” Bill Spier said.

  Jesselson’s next assignment for Rich was La Paz, the site of Philipp Brothers’ first foreign office. Rich traveled South America and made the occasional hop across the Atlantic to Amsterdam and Madrid. And no one was happier than Ludwig Jesselson when Marc Rich came back to America to marry Denise Joy Eisenberg in Temple Emanuel in Worcester, Massachusetts, on October 30, 1966. It was the perfect match for the future head of the Philipp Brothers household. Denise was ten years younger than Marc, a striking, dark-haired woman whose family had also fled Europe to escape the Nazis in 1941. Denise’s father, Emil Eisenberg, was the prosperous chairman of Desco Incorporated, one of the largest shoe manufacturers in America. Their wedding appeared more of a merger than a marriage. The couple had been introduced by their parents, and Rich’s ushers were all Philipp Brothers traders. The best man was a cousin of the bride and not a close friend of Rich. “The wedding was like a Philipp Brothers board meeting,” a trader who attended the ceremony said. “Everybody talked business.” Jesselson, however, was extremely pleased. Marc and Denise, he commanded, would travel the world for Philipp Brothers as a double act.

  As the Marc Rich show hit the road, Philipp Brothers was about to close on a deal that would finally secure the dream that Oscar and Julius Philipp shared nearly a century before. Jesselson, through Meyer, merged Minerals & Chemicals Philipp Corporation with Engelhard Industries, the world’s largest refiner and fabricator of precious metals. Charlie Engelhard was the inspiration for Ian Fleming’s Goldfinger and, more important to Philipp Brothers, was in a position to continue nudging open the door for Philipp Brothers to middleman the mineral wealth of South Africa through his corporate connections with Anglo-American, the company owned by Harry Oppenheimer.

  “The merger was made to create a little romance on the stock market,” Jesselson said modestly of the deal. But what happened was more like a gang-bang. The new company was named Engelhard Minerals & Chemicals, with Anglo-American as a substantial 22 percent shareholder. Although Jesselson would say that Anglo-American was “just a shareholder like anyone else,” the merger allowed Philipp Brothers to slam-dunk South African metal into any world market. Oppenheimer, through his mines, controlled 25 percent of the non-Communist world’s gold. His companies also mined rich veins of platinum, vanadium, uranium, coal, and nonferrous metals. Added altogether, Oppenheimer accounted for almost half of the total of South Africa’s exports and half the value of shares traded on the Johannesburg Stock Exchange.

  Through a Bermuda post office box holding company called MINORCO, Anglo-American was able to move its money out of South Africa and become the largest foreign investor in the United States, with an estimated $800 million worth of investments in Appalachian coal, Arizona copper, Iowa fertilizer, California gold, and Wall Street investment banking through Salomon Brothers. In 1979, for example, MINORCO relied on Engelhard Minerals & Chemicals for some three-quarters of its income. The revenues of Engelhard Minerals & Chemicals posted the score: They grew from $1.4 billion in 1967 to $10.2 billion a decade later. And 90 percent of that money was churned out by Ludwig Jesselson’s lehrlings, trading, trading, trading.

  It was into this burgeoning corporate empire that Marc Rich, then thirty-three years old, was privately designated dauphin to Ludwig Jesselson. The possibilities whirled through his mind like a billion spinning tops.

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  Chapter 6

  “Money is your best tool. Men love money more than country, wife, mistress, perversion, reputation, or in some cases, life itself. We can always find clean money to do dirty work. But a warning: He who handles and disburses such money often develops the delusion that it belongs to him. This statement can be broadened, as follows: Power sometimes fills purses, often empties heads.”

  — John Hersey, THE CONSPIRACY

  “SECRETIVE
” is the one word that everybody uses to describe Marc Rich. Bellhops to brokers all agree that Rich was harder to twist open than a frozen doorknob. “Marc gave paranoia a bad name,” a trader who worked alongside him at Philipp Brothers said. “This was not a man who used urinals.” Traditionally, a trader likes to share his thrill of victory/agony of defeat hell-broth with fellow dealers because the highs and lows of bucking big odds are surprisingly similar mandatory emotions that need to be shared, unless a trader wishes to toy with being sucked into insanity. That Rich could operate on such an amazingly intense level without any “pals” to go out and get razzled with was an incredible feat.

  “There are maybe three people in the world who know Marc Rich intimately,” heckled Felix Posen, the pompous manager of Rich’s London operation and a major shareholder in Rich’s global trading companies. “All three people know different things.”

  Ludwig Jesselson, however, thought he knew everything about Marc Rich and accepted his nature as a simple quirk because, as a Philipp Brothers director said, “he was a member of the family.” But Rich’s fellow traders saw him cutting a different cloth. Even Pinky Green, the Philipp Brothers trader who would become the closest thing Rich ever had to a sidekick, told friends that “Marc plays his cards too close to the vest, and it will someday get him into trouble.” Rich was aware, of course, that trading was a profession cemented together with silence. If a competitor discovered the inside story of a deal Philipp Brothers was delicately piecing together, then he could effectively use the information to steal the deal away from Philipp Brothers. But Rich had overcranked into a parody of paranoia the idea that the more attention you get the more vulnerable you become. Philipp Brothers executives recounted stories of Rich storming out of informal meetings between traders if they asked a question about or offered to help out one of his deals. David Tendler, the former chief executive officer, recalled one afternoon in 1961 when Rich phoned him in the traffic department, hollering about a problem he was having with an ore shipment. “I had just arrived in traffic and I had no idea what this guy was yelling about,” he said. “I didn’t need this guy’s shit, but I checked and nobody in traffic had any idea what Rich was on about.”

  Rich insisted upon fast answers and frequently ripped into underlings with savage sarcasm if they were not furnished immediately. That he often neglected to tell subordinates what was going on did not enter into his anger. Rich knew that the reputation of an individual trader was more important to him in the long run than the company he worked for. And those who worked under him were not going to methodically peel away his power by being made privy to deals linking copper producers in Chile to copper refiners in Colorado. No matter where in the world a Philipp Brothers office was located, Rich — sporting a wide and colorful necktie — would rush in before seven A.M. with a pallor of fear over his dour and sleepless face. “Marc was always scared that someone might have outdone him while he was home in bed,” a trader said. His work pace was relentless and he did not possess a sense of humor. On those rare occasions when he did find something funny, his laugh was one of a man gagging on ill-flavored water. His life was trading, a low-margin, high-volume existence that was only dependent on his capacity to swallow the risk necessary to conduct business in a dozen countries simultaneously.

  “A good trader needs imagination and an analytical mind,” said Ben Bollag, a metal man who worked the world commodity markets with Rich at Philipp Brothers. “Rich was the undisputed protégé of Jesselson, and Jesselson knew that Rich’s genius was his great imagination. Marc’s almost childlike imagination was his consummate genius.”

  Rich’s imagination was fueled by Jesselson, particularly in the construction of the huge bank lines traders need to assume risk. Many top traders like Bollag and Rothschild believe that the ability to trade material is a natural talent people are born with, much in the same way a seven-foot-tall Irishman would make a good center for Notre Dame. But traders and basketball players alike must learn to shoot, and to score thirty points a game in trading, you have to be able to deal with the banks.

  There is no love lost between bankers and traders, and they consider their unique relationship to one another to be little more than a lusty marriage of financial convenience. Bankers do like that traders need to borrow lots of money to leverage their deals, but a bank will usually not lend a trader money unless he wants to borrow at least $5 million. The big American commodity banks, Chase Manhattan and Manufacturers Hanover Trust, borrow the money they lend traders at around 8 percent interest. Then after a lunch of rare steak and double Jacks, they lend it to the trader at 11 percent interest. The gross profit to the bank on this $5 million transaction is $550,000 a year. The bank then pays $400,000 to their own lender, leaving the bank a tidy sum of $150,000.

  The banks leverage lending cash between two and five times the amount of money a company is worth. This line of credit allows traders to make deals with invisible money, on which, if they do not use it, they are still charged a basic fee by the bank. The credit commission revolves around one-half of 1 percent. When Marc Rich started trading metal, he would usually work a credit line in the $50 million neighborhood, providing at least $250,000 a year to the bank even if he failed to tap the cash pipeline. Since worldwide trades are conducted in a multitude of currencies and not solely American greenbacks, the trader will also establish credit lines with foreign banks. He must be constantly wary to avoid any material losses due to fluctuation in foreign exchange rates and hedge any substantial currency imbalances. This legerdemain is done on the hope that the money, other than the fee he pays to the bank for the service, stays invisible. And that is dependent on the metal man taking a profit from the deal he has used the evanescent cash to construct. If he fails to close the deal, the bank coughs up the cash, a figure that could be in the hundreds of millions of dollars.

  Over the years, Jesselson had skillfully accelerated the relationship between the banks and Philipp Brothers so that by the time of the Engelhard merger the bankers were lined up in the lobby like satyrs waiting to get in on an orgy. Jesselson taught Rich how to tame the banks, pull their interest rates down a quarter of a percent on one deal if they wanted to increase their interest a tenth of a percent on bankrolling another deal with their money. Henry Rothschild, who concocted virtually every letter of credit Philipp Brothers ever signed, because “bankers don’t know how to write letters of credit,” coached Rich in the wiles of beating the bankers at their own game. “Letters of credit were another trading situation,” Rothschild would say. “Someday the bankers will learn how to write them.”

  Jesselson painstakingly endowed Rich with the ken to use the letters of credit as a magic carpet to soar above the differences between the governments of nations. South Africa, Russia, China, the geopolitics mattered little to Marc Rich because he had been trained to cope deftly with wars and revolutions. Rich was always the buyer and the seller and, in the process, became a kind of insurance man for droughts, floods, and coups d’etat. At the office, he was haunting and brooding, but there was no one more incomparably sweet than Marc Rich when it came to dealing with a customer. The alfresco lunches he threw for European clients were bigger and better than the competition’s, the Christmas gifts he sent to his Italian clients were only outdone by the treasure chests of hard-to-get Western goods he wooed Soviet magnesium producers with at the New Year. Jesselson insisted that Philipp Brothers never offer a bribe to secure supply, but traders who knew Rich during his days abroad state privately that it was Rich, more than any other Philipp Brothers trader, who stretched the fine line between graft and gift. “We heard stories, always stories,” a Philipp Brothers trader said, not wanting to believe rumors decorated with wisps of truth. “There was no way to really know, this business moves too fast to operate under total scrutiny. If he did go beyond the limits, I’m sure Jes never knew. Philipp Brothers extending bribes would have killed him.” Rich’s grand handling of Malaysian tin magnates and Iranian chrome kings, h
owever, kept Jesselson happy because his cardinal rule of dealing was to always treat the customer right.

  The trading community admired Rich because he was able to dismantle the sticky web of mercantile regulations and restrictions that hobble the wealth of nations and their corporations. Like the old junk dealers who left no garbage heap unturned in their search for discarded lead batteries, zinc cathodes, or copper pipes, Rich explored and took quiet advantage of every opportunity that would add to his power, influence, and prosperity. “Rich had a photographic mind,” said Cees Van Den Hout, a Dutch trader who knew Rich. “He never made any noise, he looked, listened, and remembered.” Rich traded alone and silent, a process no individual or government could contain. Life was a series of deals and situations to take risks on. Although nobody at Philipp Brothers other than Jesselson liked his style, he was a force to be reckoned with because he delivered. Rich knew that Philipp Brothers was his vehicle and also understood that it was his steam that made it move.