He was the “quietest kid in Camp Osceola,” recalls author Calvin Trillin, who shared a tent with Marc Rich in the Missouri Ozarks in 1949. Rich would later perfect the strategy of keeping a low profile and being discreet. Trillin (who unlike Rich has made it into the school’s Hall of Fame) was impressed that Rich spoke more languages than any other Boy Scout in the camp. Incidentally, the two tentmates did not discuss crude oil prices or arbitrage deals around the campfire. “If a reporter asked me whether Marc Rich ever cornered the market in any commodities at Osceola . . . , I would know that the only serious commodity at Camp Osceola was something called Chigger Rid, which sometimes stopped the itching of chigger bites, although not usually.”10
David Rich ran the Petty Gem Shop, a jewelry store he had opened in 1946. Instead of playing with other children, eleven-year-old Marc hung around and helped out in his father’s shop. “I did everything and anything. I put price tags on the jewelry and helped to clean and sell it.” The wheeling and dealing, the bargaining and selling appealed to him. It was there, in his father’s little shop on East Eleventh Street in Kansas City, that he started to develop an interest in business.
Business was good; indeed, it was so good that David Rich expanded into wholesale trading and set up Rich Merchandising. He was a typical trader, always full of ideas and always on the lookout for new business. René Trau, Marc Rich’s cousin in Antwerp, recalls when his uncle David came to visit shortly after the war. “He was full of business ideas; import toy cars, export cosmetics, open banks in Bolivia.” He sold precious stones, car parts, burlap bags, and tobacco. Through trading burlap bags he made contacts in South America, especially Bolivia, where the bags were used for packing tin concentrate, potatoes, or sugar. He frequently flew to La Paz, the capital of a country torn apart by inner conflicts, civil wars, and revolutions. David Rich joined with partners in setting up Sidec Overseas (which exported agricultural products to the United States), a travel agency, and, in the late 1950s, the American Bolivian Bank, the country’s leading private bank.
His Biggest Influence
“My father had a knack for success and an uncompromising work ethic,” says Marc Rich, and the admiration can still be heard in his voice. Thanks to his father’s increased income, they were able to move out of the cramped apartment and buy a redbrick house at 429 East Seventy-second Street in the late 1940s. It cost 18,000 at the time (approximately 160,000 in today’s money).11 David Rich soon received a call from Eric “Maxie” Korngold, a distant cousin from the Bronx. Aware of David’s experience dealing in burlap bags, he suggested that he should start working for the Melrose Bag & Burlap Company. The Rich family moved to Forest Hills in Queens, a neighborhood with a traditionally large Jewish population.
Within a few years the company had been transformed into a trading concern, and it later set up headquarters on Manhattan’s exclusive Sutton Place. Its main activity was importing Bengali jute to be used in the manufacture of burlap bags. David Rich once more demonstrated his perfect sense of timing, for the early 1950s was the best time to invest in jute: Troops from Communist North Korea crossed the 38th parallel into South Korea on June 25, 1950, thus marking the beginning of the Korean War. The United States and fifteen other foreign nations intervened with UN approval in order to repel the aggressors. The three-year war offered David Rich a stroke of luck. The army needed a large quantity of burlap for making sandbags, and demand outweighed supply. The Melrose Bag & Burlap Company hit the jackpot when it became a prime defense contractor.
Marc Rich worked in his father’s office before and after school. The booming burlap business taught the teenager two lessons: Products can be sold for a better price when there is a shortage, and crises and wars can also offer business opportunities. Rich says his father gave him security when he needed it most, whether he was fleeing from Europe, in the Moroccan internment camp, or in the new and unknown world of the United States. His father was to remain his lifelong role model. Marc would always emulate him. He wanted to prove that he had really made it, even when he had already earned hundreds of millions of dollars. The desire to make his father proud would always be one of the driving forces in Marc Rich’s life.
He also never forgot how his father achieved his success. He made contacts, established trust, worked hard, was reliable, and adjusted quickly to changing circumstances, and he had no qualms about seizing a business opportunity when he found one.
Thanks to the family’s increasing prosperity, Marc Rich was able to leave Forest Hills High School and attend a private school in Manhattan. He presided over the French club at the private Rhodes Preparatory School, located at 11 West Fifty-fourth Street—a school that was later attended by Dan Brown, James Caan, and Robert De Niro. Rich graduated early in 1952, having skipped a year. At the age of eighteen he made a note of his dream job in his high school yearbook: business. His 1952 report card describes him as “purposeful,” “actively creative,” “strongly controlling,” “deeply and generally concerned,” “assumes much responsibility,” and “exceptionally stable.”12
He enrolled at New York University in fall 1952 to study marketing but soon realized that he wanted practical experience rather than theoretical learning. A German Jewish acquaintance of his father’s secured him a job interview at Philipp Brothers, then the world’s largest trader in raw materials. Rich could not have known that Philipp Brothers would provide him with what very few people ever succeed in finding: his vocation.
The AMERICAN DREAM
M
arc Rich had mixed feelings when he walked into Philipp Brothers headquarters for the first time in spring 1954. The building was situated on Pine Street, which runs parallel to Wall Street in Manhattan’s financial district. It was the year in which the French would lose the pivotal battle of Dien Bien Phu in Vietnam, and President Dwight D. Eisenhower would announce his domino theory, warning against a Communist takeover of power in Southeast Asia. The Korean War had ended the previous July with the permanent partition of the country.
Rich had been reluctant to accept an apprenticeship at the world’s largest and most highly regarded commodities trading company. He had just turned nineteen when he began working in the mailroom for forty dollars per week. “I’m a postboy now. This is beneath my dignity,” he thought to himself when he was assigned the tedious task of sorting telex messages. “After all, I have a high school diploma, and I went to university.” He had no alternative. Anybody who wanted to work at Philipp Brothers began in the mailroom, regardless of whether he had only attended elementary school or had graduated from college. There was very little indication on that spring morning that Marc Rich would soon become one of the most successful university dropouts of all time.
The tried and tested German tradition of the apprenticeship has hardly changed since the Middle Ages. The Lehrling (apprentice) is taught the trade from scratch by his experienced Meister (master), and in return for this on-the-job training he works for a modest wage. In times gone by the apprentice was effectively a member of the master’s family, with the older man taking on the role of guardian or father figure for the younger.
“It’s a family business” was how one veteran trader explained the advantages of the traditional system to me. “Who gives a damn about diplomas? We all knew each other. The boss at the top knew the youngest apprentice. You quickly got to know who had particular strengths and weaknesses, and who had a talent for what. Your father or a family friend could get you in through the door, but then you had to prove that you were good, in fact even better than the others. There was no patronage system that would let a dud rise up through the ranks; it was all based on your own performance.”
Philipp Brothers functioned according to this principle. The company was founded by the German brothers Oscar and Julius Philipp, who began trading metals in Hamburg in 1901. Oscar Philipp set up a branch of the business in London in 1909, and in 1914 a cousin risked the move across the Atlantic to the United States. The company headqu
arters was later moved to New York in the wake of the world wars, and it was not long before Philipp Brothers became the largest commodities trading company in the world.
A Jewish Tradition
European Jews—particularly German Jews such as Oscar and Julius Philipp—had dominated the trade in metals since the nineteenth century. For centuries Jews in Europe had suffered from discrimination. They were unable to become farmers, as they were forbidden from owning land. As they were excluded from the craft guilds, they were unable to become craftsmen. The Catholic Lateran Council of 1215 stated that Jews were barred from taking on official functions. In other words, Jews were not allowed to carry out the most important economic activities of the time. They were, however, permitted to perform one function that was proscribed for medieval Christians: making loans with interest.
Thus the Jews became moneylenders and traders in the absence of any other options. “That is the malice of the anti-Semites,” a strictly devout commodities trader explained to me. “We were forced into trading, and now we are denounced as the greedy Jews, who only care about money.” Trading had one further, sad advantage for the Jews, the trader said. “If you don’t have land, a farm, or a fixed profession, you can pack quickly if someone comes along tomorrow to send you away, if they’ve really got it in for you.” If it starts again.
Gradually, those who were more successful started importing and exporting precious metals and stones, frequently over large distances. The demand for metals and other commodities from distant countries increased along with the growth of industrialization in the eighteenth and nineteenth centuries. This meant that the metal trading business was primarily in Jewish hands because Jews had the necessary know-how and international connections. Jews were also well represented in the important traditional mining regions, which were mainly situated in German-speaking Central Europe, in eastern Germany, Bohemia, Poland, Austria, and Hungary.
It is one of the ironies of history that the persecution and expulsion of the Jews is what made such an efficient trading community possible. King Edward I of England expelled the Jews in 1290, and the French monarchs Philip IV and Charles VI chased them from fourteenth-century France. The mass murder of Jews reached a high point with the pogroms in Germany and Central Europe between 1347 and 1353 at a time when the Black Death was raging across the Continent. Sephardic Jews were forced to leave Spain in 1492. By the onset of the modern era, the Jewish Diaspora was greater than that of any other people. The scattered Jews had a trading tradition that was second to none and sufficient confidence to enable trade over large distances and periods of time. It was a society that succeeded in continually renewing itself from within. Its members had known each other for eons, enjoyed family and religious ties, and shared the same values and work ethic. This degree of social control created a sense of loyalty and trust that a business deal would be conducted honestly and reliably.
Any economic network is largely dependent on trust if it is to function well. As economists put it, a high degree of trust lowers the costs of transactions and compensates for a lack of information. According to the American philosopher Francis Fukuyama, trust is a key prerequisite for prosperity.1 It will become apparent in chapter 7 that trust was to be one of Rich’s secrets to success.
When Rich joined the company in 1954, Philipp Brothers still essentially consisted of a tightly knit group of German-Jewish immigrants. The names of the major players who were active in the company provided an indication of their heritage: Ludwig Jesselson, Adolfo Blum, and Henry Rothschild. They were all pioneers of economic globalization who helped write trading history. These men became mentors to Rich, whose family was known in trading circles and whose father came from the tragedy that was Germany—just as they did. He had the best teachers in the business. Most important, Rich had the strength of will and the patience to listen, observe, and learn.
The First Trade
The mailroom may have initially appeared to be a dull place, but an ambitious, clever trainee was able to pick up a lot about trading there. Telex messages containing fascinating information arrived from all over the world. Who’s buying? Who’s selling? From where to where? At what price? What’s the margin? It was a crash course in pricing strategies. One metal trader from Rich’s early years at Philipp Brothers recalls that he “was just an amazingly fast student. You’d teach him something, and he’d learn it the first time—no questions asked.”2 Accustomed as the traders were to long working hours and weekends full of overtime, they were struck by the young man’s talent and commitment. The word was soon out that Rich was a hard worker, a reputation not easily acquired in such circles. “I was working hard and long hours,” remembers Rich, who only had one thing on his mind at that point: to get out of the mail-room and start trading. “My bosses took notice and gave me more challenging work. The real learning came after the mailroom, in the traffic.”
After a few months in the mailroom, the traffic department was the second stage for all apprentices in the learning-by-doing system at Philipp Brothers. Rich recalls how he started off by shadowing the traffic manager. He was later sent to the docks by himself to supervise the goods being unloaded, inspect the weight and quality, and check the invoices. He finally began to handle the trading transactions. “I handled shipments of merchandise and metals, covered insurance, and arranged for payments with letters of credit,” recalls Rich.
So Rich learned how to become a commodities trader from the ground up. After two years he became a junior trader, and Henry Rothschild soon took him under his wing. Rothschild, who was not a member of the banking family, was born in Bochum, Germany, entered the commodities business when he was sixteen, and had previously done business with Marc Rich’s father. He is described as a shy, taciturn, and quick-thinking analyst. The master and apprentice were kindred spirits when it came to their similar ways of thinking.
Rothschild was an extremely demanding boss who was responsible for the South American market at Philipp Brothers and for developing the firm’s expanding network in Europe. He increasingly delegated the day-to-day business to Rich, who effectively became his assistant. “I was fascinated by the size of the market,” explains Rich. “Take oil or aluminum. You can find those materials in almost any product you touch. The whole world needs them, from east to west and north to south.” It was a fascination that would remain. The first commodity he personally traded was Bolivian tin.
To Create a Market
Rich was soon being referred to as a wunderkind at Philipp Brothers. “From the beginning he was an astute and very knowledgeable trader,” says one eyewitness. There was one main reason for his success—he had specialized in a niche product, one that in the mid-1950s was only traded in minute quantities: mercury.
Talk to commodities traders and sooner or later you will hear an expression that is inevitably spoken in a tone of reverence: “to create a market.” It is a trader’s lifelong goal to match producer with consumer and find a buyer for a commodity that has previously only been traded very little. An exceptional commodities trader requires one skill above all else in order to create a new market for a commodity: the capacity to analyze a situation thoroughly and recognize trends quicker than the competition. Who is sitting on a commodity without recognizing its complete potential? How do technological developments or political events such as wars affect the demand for commodities? Crude oil, to take an example, was processed for lamp oil and tar for centuries before its monetary and strategic value was changed drastically by the invention of the gasoline engine in the late nineteenth century.
Many good commodities traders have never succeeded in creating a market, yet Rich managed to do so while he was still a junior trader. It was a coup he pulled off time and again, most resoundingly with crude oil. One of his greatest talents was seeing what others failed to see. “He is a visionary,” Rich’s friend and former employee Isaac Querub told me. In the opinion of one trader who worked with him in Africa, “Marc Rich was a man of genius.” Urs
ula Santo Domingo adds, “He sees things before others even begin to think about them.” “To see the opportunity is the most important thing as a trader,” Rich told me. We spoke about the importance of contacts in this business—access to the “man with the key,” as the decision makers are so quaintly called in Africa. Rich’s answer surprised me. “The analysis is more important than the relationships,” he said.
Rich first created a new market for a commodity in the mid-1950s. He began to develop an interest in mercury when he was still only twenty-one years old. At the time mercury was used predominantly in thermometers, batteries, and detonators; trading was consequently limited, and the prices were low. Rich searched for available mercury with a determination that impressed his colleagues. Having analyzed the global political situation, he had come to the conclusion that mercury would soon be in great demand, which meant that there was business to be made.
The cold war was on the verge of escalating in the mid-1950s. The Communists, led by Mao Tse-tung, had seized control in China in 1949. The Korean War had erupted in 1950 and continued until the summer of 1953. In June 1953 Soviet troops had crushed an uprising in East Germany. The year 1956 saw the Suez Crisis, when Gamal Abdel Nasser of Egypt nationalized the Suez Canal and was opposed by Great Britain, France, and Israel. The Soviet Red Army marched into Hungary in the same year to defeat the popular uprising against the Soviet-backed government.
When Rich started trading in mercury, all the indications were pointing to war. “He called any producer who had the slightest connection to mercury in order to buy the stuff,” remembers a colleague. He located his first source at the Spanish mining company Consejo de Administración de las Minas de Almadén y Arrayanes, which is known as Mayasa today. Before long he had established good relationships with producers and consumers and was regarded as an expert in the mercury trade.
The King of Oil: The Secret Lives of Marc Rich Page 5
