“The problem with trading is that success breeds the ability to reach out for more and more,” a Philipp Brothers director said of the trading power the company bestowed on Rich at a very early age. “Marc’s attitude was do anything and worry about it later. Jes was the only one who could stop him.” Jesselson, however, never shackled his princeling. On those rare occasions when he did intervene, it was paternal scolding, like a father telling his overeager adolescent that it’s a fifteen-yard penalty for clipping and not to do it again. Jesselson assumed that Rich, having been chastised, would never foul again. Such lessons were Jesselson’s way of teaching scruples to his hot-blooded traders. But, unknown to Jesselson, Rich had the blood of a rogue.
Although trading became the absolute for Marc Rich, it evolved slowly, unsuspectedly, like a dormant genetic trait that only time can percolate to the surface. To some, the profession was a balls-out plunge through mayhem for money; to others, it was a nine-to-five grind that put the kids through college and bought the condo in Miami Beach. But Rich was part of a small group of elite traders trained to perceive the business as a higher level of consciousness and Philipp Brothers as their private temple. The stakes were high, often sharp, and produced a mental state heavily tempered with trouble and worry; there was no real serenity, no Zen tranquility when deals turned sour and cash ran short. “The trading world is very fragile,” Jesselson would remind his dauphin. “Lots of gossip always going around, so it’s better to keep our business close to our chest. That’s why our customers rely on us.” To survive it was necessary for Rich to handle life like an open auction. Traders described the intensity of a deal in temperature; Philipp Brothers executives often said that Rich’s deals were “hot” and spoke of him as if he were cursed by trading: He had to deal, had to transact, constantly, inexorably. On a good trading day — one when a customer wants to purchase material a trader has an ample supply of and at a high price — Rich’s eyes sparkled like a kid swapping baseball cards with friends on the back porch. When times were bad, Rich slunk into the gloom of a boy who just lost two Mickey Mantles nipping for one Roberto Clemente.
Rich was a budding genius when he became manager of the Philipp Brothers office in Madrid in 1967. Although Philipp Brothers overseas managers were known as the “lost sons,” the Madrid posting was Rich’s reward for the years he spent buccaneering between North and South America, Africa, and Europe. Rich was now an expert in areas that others only heard about over after-work cocktails. Copper was king at the time, and Rich was one of the metal’s crown princes. He had clambered down into Chile’s El Teniente, the most productive underground copper mine in the world, making sure that Philipp Brothers got a piece of the 1.3 million metric tons of copper refined from its thousand miles of tunnels. He crossed the Atacama Desert to Chuquicamata, an enormous open-pit copper mine, where he talked production with the American managers. He went on to learn tungsten under the direction of Henry Rothschild and Steven Dale, a former British commando who was the tungsten expert for Derby. “If you want to become a trader, then learning the business from a tungsten expert is a great way to get started,” a London metal dealer explained. “Tungsten is so strategic that it’s used in every type of armament from a bullet to a tank, and it’s the only item openly brokered between Russia and China. The power, the politics, the money is all there in that little piece of rock.”
Rich had a lot of youthful energy and talent he could have imparted to his colleagues in the Madrid office, but the first thing he did was antagonize everybody there. The European economy was bubbling at the time, and Rich wanted to ensure that Jesselson and the Philipp Brothers board knew that it was Marc Rich who was stirring the brew. Alone. Rich used Madrid as a base, traveling through West Africa and the Mideast, trying to add his two cents to every Philipp Brothers deal in the area. The position of office manager and his seat on the company’s European management committee gave him the singular advantage of observing all trades conducted in the European theater and a direct line into the Philipp Brothers European nerve center in Zug, Switzerland. “He’d study the deals we’d make and figure how to use the information to set up his own side action,” a Philipp Brothers trader familiar with Rich said angrily.
Since Rich did not possess a valid driver’s license, he would usually walk to the office at #18 Fortury. Madrid weather seemed never to bother him; he would canter through the greasy smoke of winter and drizzling smog of summer like a bay gelding rushing to the track for a big race. When he walked with others, the talk was always small; his eyes stared straight ahead, pinched with intensity. Although only in his thirties, Rich appeared elderly, his prematurely thinning hair flapping like twine in the wind, squamous facial lines as though slit by a knife. Rich was oblivious to the calles and cathouses of Franco’s Madrid, and if he was curious about the riots or sordid details of the streets, he never discussed them with anyone at the office. A London trader in Madrid during those years recalled seeing Rich walking out of the office one gray winter afternoon. “Rich was alone, and a beggar approached him,” the trader said. “He gave him a few pesetas. It surprised me because it was not a gesture from the Marc Rich I knew.”
“He was so damned cold,” a Philipp Brothers trader remembered. “He’d walk into a room and people froze. You knew he was always on the lookout to score points with New York, and if someone fucked up, he’d crawl up walls.” It was during this time that Rich began to drink heavily. He drank only scotch; the preferred brand was Johnnie Walker Red splashed over a few ice cubes. He constantly attended three-course business lunches and threw dinners that were more like Roman banquets. Weight became a serious problem; Rich battled his bulge with capsules of easily obtained Spanish amphetamines washed down with more Red Johnnie. “He was not a drunk,” said a trader who worked with him and described his drinking as a “social anesthetic.” “He liked to eat and drink. Food and liquor relaxed him, and the speed put him on edge.”
Rich wanted to score big and knew that Jesselson considered Madrid the litmus test. If he could overcome the ferocious job tension and make a lasting imprint on the Philipp Brothers high command, then it was a ninety-minute Iberia flight to the position of European manager in Zug and then eventually Jesselson’s job as head of the Philipp Brothers traders. Engelhard Minerals & Chemicals was the company name on paper only. The merger had sliced the business into three corporate divisions: Engelhard Industries, Minerals & Chemicals, and Philipp Brothers. Each division was controlled by its own slate of presidents, executive vice presidents, group vice presidents, regular vice presidents, and comptrollers. Although Jesselson was chairman and president of the Philipp Brothers division, titles had historically counted for little in any corporate structure involving Philipp Brothers, a fact evidenced in corporate photographs, which never failed to depict Jesselson center stage with the management of each division. There were around fifty-three men running Philipp Brothers at the time, and it was the traders who held all the cards. Since both Engelhard Industries and Minerals & Chemicals needed Philipp Brothers to supply them with the metals and chemicals used in manufacturing, Jesselson’s power in this structure was virtually papal: His people scrounged the material, and he called the shots. But by 1969, the relative corporate calm of the manufacturing industry slowly began to shatter around Philipp Brothers.
“Everything started to fall apart when all the manufacturing plants developed by the major industrial nations in the mid-to late sixties started to come on line,” explained David Tendler. “All of a sudden there was no consumption and you had these expensive factories sitting there doing nothing. There was too much material and no place for it to go.”
Matters worsened when the dollar was cut free from gold in 1971. Philipp Brothers was rich and famous because it was the biggest metals and commodities buyer and seller on Earth; it had become so in part because, until 1971, a buyer always knew how much of his own currency he would eventually need when he first bought material using dollars. Floating dollar prices,
however, created a maelstrom for both buyers and sellers, causing clients to slip out of their contracts with alarming frequency when dollar prices became too expensive for alien money. “It became increasingly difficult for anybody to continue saying that their word was their bond under those circumstances,” Tendler said morosely.
Philipp Brothers had the financial gear to successfully weather dollar breakdowns and limited industrial capacity, but then all hell broke loose in December 1973. It was in that month that the Organization of Petroleum Exporting Countries (OPEC) was formed, a group whose smallest hiccup engendered panic throughout the entire industrial community. It was a trader’s worst nightmare: too many goods, no one to buy them. Even if a buyer did show up, the cost would seesaw because of oil price increases and unstable currency markets. But it was a chaos tailor-made for Rich, who, no matter what the circumstances, was always prepared to take that one step beyond. “Marc had a blind spot to what was permissible at Philipp Brothers,” a corporate director said. “The industrial slowdown that started in the late sixties and early seventies was a situation he could really run with.”
Particularly if he ran with oil.
Jesselson’s traders had never been in oil, and the company thought it was a business best left to the oil companies. But early on the young traders were viewing oil through a different lens; they saw it as a commodity and figured it was smart business to trade black gold outside the structures created by the Seven Oil Sisters (Exxon, Gulf, Texaco, Mobil, Standard Oil of California, British Petroleum, and Royal Dutch Shell) and the nations who were planning to become OPEC. In 1969, Philipp Brothers unwittingly created the so-called spot oil market — a place where anyone could go to purchase oil without having to deal with oil companies and oil sheiks — when Milan office manager Alan Flacks found himself on the Tunis waterfront. The Philipp Brothers contact in Tunisia had fallen upon 25,000 tons of Iranian crude up for sale and informed Flacks thereof. “It looked like any other commodity,” Flacks said. “I found a refiner in Spain who needed oil, then went out and bought the Iranian crude. It was a back-to-back deal, very safe because there was no storage involved and the money was right up front.” Jesselson liked the $65,000 profit and encouraged his traders to slowly create oil situations whenever they spotted similar opportunities.
Marc Rich was also concerning himself with oil. Around the same time that Flacks was concluding the company’s first oil swap, Rich became chummy with the Iranian chrome dealers whose metal — destined to become, among other things, automobile bumpers — he sold. One of these men was Ali Rezai, an Iranian landowner who walked unannounced into the Philipp Brothers New York office in 1955 holding a lump of chrome ore in his hand. “He demanded to see Jesselson,” said a Philipp Brothers trader. “So Jesselson comes out, Rezai puts the chrome in his hand and asks for $10,000 to develop his mines. Rezai sat around New York for two days waiting to get the money.”
Rezai returned to Iran with the money and developed some of the country’s richest and most productive mines. He became a powerful broker of Iranian intrigues through his friendship with Shah Mohammad Reza Pahlavi and would be “elected” to a senatorial seat in the Iranian Majlis. It was through Rezai that Rich developed intimate associations with a number of highly placed Persian ministers and businessmen, among them, members of the Pahlavi family. The Iranian royal family controlled all of the country’s oil; a trader who worked at Philipp Brothers at the time claims that Rich, by virtue of privileged information he was receiving from the Pahlavi family, knew that a new oil structure was in the works. “I think that’s what first made him leap into oil,” the trader confided.
With these few murky grains of knowledge, Rich sowed a deal with the Iranian National Oil Company and began brokering Iranian crude oil to Spain. The insider information and the outsider contact set the stage for Rich’s purchasing cargoes of Middle Eastern and later West African heavyweight for hungry Spanish refineries. The moving of oil, however, was a lot different from ferrying container ships of rocks around the world. Oil transport is much more complex and expensive than moving metal, and constitutes the difference between fun and trouble for a trader of Rich’s caliber. There were new worries like leakage, evaporation, and finding the right kind of vessel. They were problems that could be solved only by a master mover, someone who knew shipping like Joe Namath knew passing. Although Flacks got involved in the early deals, the two men never really got along, prompting Rich to find someone more of his mold. He found that man in Pinky Green, the salt-and-pepper-haired Philipp Brothers trader that everybody called “The Admiral.”
At first glance Pincus (“Call me Pinky”) Green was not the kind of guy you’d nickname The Admiral. Green, a Brooklyn Jew who lived kosher even when he was the Philipp Brothers man in Istanbul, prided himself on being able to transform wherever he was stationed into a little bit of Flatbush. “If you want to find kosher salami in Saudi Arabia, go ask Pinky,” traders who worked with Green in Zug would say. Although Green could always fly first-class, he opted for coach, stand-by if possible, reasoning cheerfully: “Why pay more? It’s the same plane.” His friendly smile became his trademark at Philipp Brothers offices around the world.
“You had to watch Pinky,” a former Philipp Brothers traffic manager warned. “He was real nasty behind that smile. If you disagreed with him on a deal, he would call Jes and try to ruin you. Pinky always sold material he didn’t have and had no idea where to find. His risk was always too high. You’d tell Jes and he’d never believe you because Pinky was one of the fair-haired boys who could never do anything wrong.”
Nothing ever flustered Pinky Green. The story goes that his wife was ready to deliver the couple’s first child on a Saturday, the Jewish Sabbath, a day when Orthodox Jews are forbidden to ride in cars. Green helped her into a taxi and shooed the driver to the hospital, where he would follow on foot. “Pinky would not get into that car with her,” a friend said. “So he walks two miles to the hospital like nothing is happening and misses the birth of his first child.”
Pinky Green didn’t miss much else. Clicking like a computer, his mind had instant recall of freight rates, financing costs, and shipping routes, talents that he used to make money by swapping identical cargoes on the high seas, pulling down his profit from a difference of a few cents in a charter price. A Philipp Brothers director boasted that The Admiral could tell you where any container ship was at any given moment without first consulting the daily Lloyd’s Registry. “He was by far the smartest trader in all of Philipp Brothers,” Flacks said.
Green was also a seasoned hatchet man who relished disciplining those who he felt had done him wrong. Friends claim Green’s professional character was sculpted by an event that took place in Texas while Green was in the service. Green had refused a work detail on the Sabbath and a redneck officer had him thrown into the guardhouse. The post chaplain arrived to get Green out, but the officer in charge refused to release him and evidently began shouting anti-Semitic remarks. Green had to stay in the guardhouse for days until a Jesuit priest managed to get the chaplain general’s office at the Pentagon to intervene on his behalf. It was a sad and ugly story that left its imprint on Green’s life. “He always told the story, and it made him angry,” said a friend. “The event made Pinky more urbane. He saw what the world was really like and he began to respond in kind.”
Together Rich and Green were the original Philipp Brothers odd couple and they wrote the rule book for dealing in spot oil, a crazy-quilt trading business built on leverage, depreciation, cash flow, and pure spleen. When the first tanker of “Marc and Pinky” oil left Iran for Spain in 1968, the oil-trading industry as it is known today did not exist. Oil-rich countries like Saudi Arabia, Nigeria, and Iran sold their entire supplies to one of the Seven Sisters, who in turn traded the oil among themselves and a few independent outfits. Rich knew as early as 1967 that over 60 percent of the Western world’s processed crude was locked into British Petroleum, Exxon, Mobil, Gulf, Royal Dutch Shell,
Standard Oil of California, and Texaco. The remaining 40 percent was also controlled by the Sisters and their client nations but processed by others.
During the twenty years before the Arab-Israeli War of 1973, oil prices and production levels were determined by the Sisters, but as the Arab countries and later OPEC upped the ante in the oil pot, pressure to change the system caused a problem. Led by Iran, the other oil nations badgered the major oil companies into increasing oil output to generate higher revenues at the pump in spite of the world market being supplied adequately. Rich, who had been trading for the mineral wealth of oil-producing nations at the time and was privy to insider information, knew that this glut would lead eventually to an oil apocalypse of sorts and that a smart trader could create a profitable situation from the ashes.
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Chapter 7
“Not being always able to follow orders exactly, nor attain to the excellence of those he imitates, a prudent man should always follow in the path trodden by great men and imitate those who are most excellent, so that if he does not attain to their greatness, at any rate he will get some tinge of it.”
— Niccolò Machiavelli
THERE WERE PEOPLE who at the time thought Rich mad; the idea of an oil being traced on-spot or as a futures commodity was considered extraordinary, if not bizarre, especially since there was so much oil around. “The oil companies were still awash with cash at the time,” a Philipp Brothers oil observer explained. “During the fifties and sixties the oil companies were paying out about 15 cents per barrel and realizing $1 per barrel.” But when OPEC expropriated the oil production facilities controlled by the majors, the Sisters found themselves to be deficit suppliers; that is, they did not have enough oil to meet demand. By 1972 the seven majors shared some 82 percent of OPEC oil exports, a percentage that would continue to drop as OPEC established government-to-government deals with individual countries as well as with independent traders selling large quantities of oil to small refining firms outside the majors’ sphere of influence. The demand for oil remained high, and Rich, having Philipp Brothers’ unlimited bankroll behind him, was in a position to fulfill that demand at whatever price the market would bear.
Metal Men: Marc Rich and the 10-Billion-Dollar Scam Page 9