This willingness to take on risk was a big advantage in the years following the great oil shock. Rich won a lot of deals because he was ready to pay the oil-producing nations more for their oil than the competition. He enticed them with contracts that provided his company with stable supplies for several years into the future. Rich had analyzed the situation and had decided that the situation in the Middle East would remain insecure. According to Rich’s theory, oil prices would continue to rise. “The world market was changing. The world was changing. The prices were going up,” he explains. He was sure that these rising prices would more than compensate for the higher prices he was paying for the oil. “The most important thing as a trader,” Rich says, “is to see the opportunity. The others didn’t see what I saw.”
In order to carry out his plans, Rich needed the right people. Rich knew exactly what he was looking for when he chose his four partners. Each was responsible for a different part of the world. Rich traded mainly in oil from Iran and selected the employees. Jacques Hachuel was responsible for the new markets in Africa and South America. John Trafford saw to North Africa and France. Finally, Alec Hackel was a specialist in metals and minerals who knew his way around Eastern Europe. Hackel would become one of the few people Rich would unquestioningly trust. “He is a wise man,” Rich says, “and he always had the right answers—or questions.”
The Invention of the Spot Market
Then there was the man without whom Rich could never have succeeded—Pinky Green, “the Admiral.” Green was mainly responsible for transport and financing. “Each charter is a separate bargain,” Rich explains. “He always knew everything—not only the prices but the technicalities, the condition of the charter, what is acceptable or unacceptable, and the best routes.” One of the best-known experts in the field told me, “In the old days the traders looked down upon the charterers. Ever since Pincus Green came along they have enjoyed a much better reputation and are treated with a great deal of respect.” A Swiss banker who regularly financed deals for Marc Rich + Co. told me, “Green was a logistics genius who could squeeze a profit from the smallest of price differences due to delays or distances.”
The following is a poignant example from the company’s later years that illustrates how Green was able to utilize such price differences. In the 1980s the Soviet Union supported Cuba, its “socialist brother nation,” with cheap oil. Instead of transporting this oil over long distances from Russia to Cuba, the state trading company Cuba Metales traded a portion of this oil with Marc Rich + Co. Rich’s company then delivered the same amount of oil to Cuba, obtained from nearby Venezuela. Rich was able to buy the Russian oil meant for Cuba at its reduced price and sell it for a profit on the global market.
Green developed the tanker trade, which had previously never existed outside of the Seven Sisters’ supply network. Without this it would never have been possible to develop a competitive spot market for oil. Thanks to the spot market, consumers were no longer dependent on a single company controlling a value-creation chain that began at the oil wells and ended at the gas pump. Now buyers could purchase oil whenever and from whomever they wished. A large number of offers would soon develop, and a buyer could look for the cheapest barrel on the spot market. From an economic point of view, the spot market was much more efficient than the Seven Sisters’ oligopoly. On the lookout for profit, companies attempted to find a niche at some stage of the process and remain as competitive as possible.
The development of freer markets was particularly advantageous for emerging African nations that possessed oil reserves but were unable to extract the oil and bring it to market themselves. “The spot oil market allowed and made it interesting for all the countries to explore, drill for, and export their own resources—their oil,” an oil trader told me. The result was that from the mid-1970s onward, oil was traded more freely, more efficiently, and at more transparent prices than ever before. Tankers and refineries—the fixed costs—could be used more efficiently than under the multinational oil companies and governments thanks to independent oil traders like Marc Rich. Rich was able to achieve what the Seven Sisters could not manage because of competitive pressures and cost structures. For example, Rich could sell one half of a tanker full of oil to a buyer in Spain and the other half to the same buyer’s competitor in the United States. Both buyers enjoyed the benefits of cheaper bulk transport that they never could have afforded or utilized to full capacity on their own. Buyers for any possible surpluses could be found much more quickly, and supply gaps were easier to fill. In short, supply and demand could be balanced much more efficiently. The spot market brought with it an increase in productivity that helped to turn the entire industry inside out. Oil was now precisely what Rich had predicted only a few years before: just another commodity. “Marc Rich invented the concept of the independent oil trade. That’s why he is such an important person in the history of trade,” an expert who helped me understand the technical details of the oil trade told me.
Rich and his partners put the very same theory into practice that economists have expounded for years. Skillful traders do well when the risk is high and the supply is threatened by crisis. Only then can they use their competitive advantage to the best effect. “Trading companies reduce search, negotiation, and transaction costs and seem likely to be employed at least initially when the risks of international trade are high,” says Geoffrey Jones, a professor of business history at Harvard Business School, who is a specialist in trading companies.6 Traders can help their customers by compensating for a lack of information and trust.
Anyone who has ever haggled over the price of spices or carpets in an Arabian bazaar knows what it means to try to purchase goods without a reference price. To put it simply, experienced commodities traders know where and with whom they have to trade—particularly in areas where it is difficult to establish a contract. “We feel that the trader has a physical role to play: that of managing the flow of commodities both in time and in space in a universe characterized by instability. It is this very instability which in the final analysis provides the raison d’être of trade,” says the French economics professor Philippe Chalmin, an expert in commodities markets with practical experience in the field.7
This ability to deal with instability and in turn secure a stable flow of oil was, ironically, also of use to the U.S. Department of Defense, which hired Marc Rich + Co. as a defense contractor. In July 1978 the DoD bought 45.6 million worth of oil from Marc Rich + Co. for the Strategic Petroleum Reserve, established after the oil shock of 1973, in order to guarantee the nation’s energy security. That was followed by a further 46.7 million worth of oil in August. Altogether these purchases amounted to approximately 7.1 million barrels of oil (1 million metric tons).
The Secret of Trust
The employees at Marc Rich + Co. soon enjoyed a reputation as young, aggressive traders. Rich cultivated a distinct meritocracy. In this respect he stuck to the tried-and-true tradition he had learned at Philipp Brothers. Rich did not put much stock in university education but instead entrusted employees with as much freedom and responsibility as they could bear. “We throw young people into the swimming pool. Either they sink or they learn to swim,” Rich once said. “Marc Rich bought me my freedom,” a trader told me rather dramatically. “He allowed me to be what I am.”
“When he trusts someone, he really trusts,” says Avner Azulay, who has worked for Rich for over twenty-five years. “He lets you do it the way you see best. It allows you to put your whole heart into it without any limitations. He leaves you to decide using your best judgment.” Trust is one of Rich’s secrets of success, and trust also presents an economic advantage. In his acclaimed book Trust, the political economist Francis Fukuyama illustrates how the degree of trust in a society—and indeed in a company—can be decisive for both its prosperity and its ability to compete.8 In “low-trust” societies such as China, France, or Italy, you cannot assume that everyone is following the rules. Members of these societie
s must always renegotiate these rules and often even have to go to court to do so. In “high-trust” societies such as Germany or Japan, however, businesspeople are more willing to trust that everyone holds to the same values, whereby deception is not accepted. A high degree of reciprocal trust substantially lowers the cost of business. It is much easier for large and successful private enterprises to blossom in societies with a high degree of social trust.
The distinguished economist and Nobel Prize winner Kenneth J. Arrow characterizes trust as “an important lubricant of a social system. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people’s word. . . . Trust and similar values, loyalty and truth-telling, are examples of what the economist would call ‘externalities.’ They are goods, they are commodities; they have real, practical, economic value; they increase the efficiency of the system.”9
I experienced Rich’s trust firsthand. It took several years before Rich agreed to meet with me. However, when he decided that he would make himself available for this book, he gave me free rein. I did not have to grapple with his lawyers as I had expected. He did not insist on the right to revise my manuscript. On the contrary, he accepted my desire to independently research and write the book. He guaranteed my complete control of its contents.
Dictum meum pactum—“My word is my bond.” Traders have used this Latin phrase ever since the sixteenth century when carrying out business over long distances in situations where written contracts were impractical. Dictum meum pactum has been the motto of the London Stock Exchange since 1923. Rich identifies with this centuries-old merchant tradition. When I asked him about his most important leadership principle, Rich answered, “My principle is to perform what I say I’ll do. Performance.”
When I asked Robert Fink, who has served as Rich’s lawyer for many years, about his client’s strengths, he simply looked at me for some time without saying a word. It seemed as if he were contemplating whether I would believe his answer. He then said, “Rich is a man of his word. Being reliable, keeping your word, being honest—these are the reasons he is successful.” Trust and dependability were decisive factors in the commodities trade in the 1970s. At that time the markets were much less transparent than they are today. There was no Internet, and there were no mobile phones; there was no constant flow of business data from news service agencies such as Bloomberg and Thomson Reuters. It was not as easy to compare prices as it is today. Whoever had access to trustworthy business contacts was at a great competitive advantage.
“Don’t Let Them Eat Your Soul”
Rich’s people repaid their employer with a high degree of loyalty and an above-average willingness to perform. They were “short on diplomas and long on work ethic.”10 It was not unusual for employees to work fifteen or sixteen hours a day. “I enjoyed my duty,” a trader explained when talking about his work at the company. “I was in the office at a quarter to eight in the morning. I left at 1:00 A.M. I went Saturday and Sunday. I was in the office on December twenty-fifth or on January first. All the other traders were there as well.” He then confided that he was later treated for work addiction.
One of the few women in the business admitted to me during a ride in a taxi, “We commodities traders are addicts.” She gave up the job many years ago, but she still follows the daily price of bauxite and knows if workers are on strike in Guinea, one of the main producers of the ore. It seems that this addiction can be kept under control, but it can never be cured. I spoke with several traders who continued to carry a list of their most important contacts’ telephone numbers or names of refineries and their production output in their wallets for years after they had gotten out of the business. A former Rich employee told me one of the wives of the five founders warned him, “Don’t let them eat your soul.”
Rich’s traders could sometimes achieve celebrity status within their industry, and if they were successful they could earn even more money than an investment banker. The company is proud of the fact that it has created more millionaires than any other company in Switzerland. Rich’s employees were encouraged to become shareholders in the company from its inception—quite a revolutionary step in those days. “I wanted my people to work for ‘their’ company and profit from its success,” Rich explains. Even the secretaries received company stock.
“The person has to have a fire burning,” Rich said when I asked him about his hiring criteria. “He or she has to have a passion for business. They have to be willing to work hard and long hours. They have to be able to insist and insist.” One of his top managers says that the flat hierarchy and the open-door policy set the tone. “Marc’s conduct toward his staff creates a family feeling, and people are proud to work for him,” he says.
Pioneer of Globalization
“Marc Rich was a pioneer. He understood that globalization was going to arrive sooner or later. One of the keys to globalization was oil. It was a product that everyone needed.” The trader who told me this had been a part of the oil trade from its very beginnings. I met him in Madrid, where he now runs his own trading company. His office consists of two small rooms. Three telephones, a secretary, a computer, and the contacts he has established over the years are all he needs to close solid business deals. He spoke with enthusiasm about the 1970s when he was still young and bold. “Oil was the glamour of the time. We, the oil traders, were the prima donnas, the stars of the time. This was completely new. It was a new commodity.”
I have heard similar stories from various traders who have worked for Rich over the years. They all described discovering and developing new markets as the most fascinating and exciting times of their lives. “It’s the most satisfactory thing when you arrive in a virgin country and you start investigating,” said a trader who had sought out business opportunities in those African countries that had achieved independence in the 1960s and 1970s. “Who are the key players? How do you get access to them? What business is there for you? And you have a company behind you like Marc Rich + Co. that does not tremble when you negotiate a trade worth a hundred million bucks. This feeling in your body is spectacular.”
“We were discovering new worlds,” an oil trader who was with the company at the beginning enthusiastically said. It really was a new world. The 1960s and 1970s marked the onset of a wave of globalization that had not been seen since the “First Era of Globalization”—a period of global trade spanning the nineteenth century that ended early in the twentieth with the outbreak of the First World War. This second era had a lasting effect on the global economy. At the end of the 1960s, only 5 percent of the world’s crude oil was traded outside of the Seven Sisters oligopoly. A mere ten years later, more than half of all crude was sold on the spot market or traded at prices that were tied to the market price.11
No one knew how to profit more from these developments than Marc Rich, and within five years he had transformed his company into a trading empire. Marc Rich + Co. AG was the first newcomer in many years that had managed to establish itself in the industry—and not as a mere niche vendor but as a global powerhouse capable of pressuring the established powers. By the end of the 1970s, the company had thirty offices around the globe. The five partners divided themselves among New York (Rich and Green), London (John Trafford), Madrid (Jacques Hachuel), and Zug (Alec Hackel).
Then, suddenly, the international oil market was again struck by a wave of insecurity—the essential fuel of every commodities trader. On Tuesday, January 16, 1979, the 2,507-year-old reign of the Persian monarchs came to an end. Mohammad Reza Shah Pahlavi and Empress Farah Diba left the country. The official explanation stated that the couple was heading to Egypt on vacation, yet everyone knew that they would never return. The protests against the autocratic shah’s absolute rule in the last months of his reign had brought Iran to the brink of civil war. An oil strike in the province of Khuzestan had lamed the nation’s economy and significantly reduced the amount of oil the country could export. With the fall of the shah it seemed as if Rich
had lost his most important trading partner: Iran.
TRADING with the
AYATOLLAH KHOMEINI
T
he fall of the shah was undoubtedly the toughest business challenge Marc Rich faced in his career. Iran had been his most important supplier of crude oil ever since he had founded his own company. He was purchasing 8 million to 10 million metric tons of Iranian oil every year, 200,000 barrels every day. Without Iranian crude Marc Rich could never have become the King of Oil. Yet his best contacts were now forced into exile—along with their Shah-en-Shah, the “king of kings”—where substantial amounts were waiting for them in foreign bank accounts. “Dr.” Parviz Mina, the director of the National Iranian Oil Company (NIOC), fled to Paris, where he would soon find work as an adviser to the oil industry. Ali Rezai, “Mr. Steel,” the Iranian industrialist and senator, boarded a private plane for Los Angeles. It seemed as if Rich’s Iranian adventure would soon come to a tragic end.
The traders saw that it was time to save what they could. Pinky Green, who spoke Farsi and was the company’s expert on Iran, offered to travel to the country and seek out contacts in the new government. It was impossible to fly to Tehran during the first two weeks after the fall of the Persian monarchy, however, as one of the first acts of the new government led by the secular opposition politician Shahpur Bakhtiar was to close Mehrabad International Airport. On February 1, 1979—a day that would go down in history—Green arrived in Iran on one of the first flights to land at the newly reopened airport. This required no small amount of courage, as it was not exactly the most opportune of times for a Jewish American businessman to travel to Iran. A part of the Iranian population could not contain its hatred for the United States. Many thought the Americans had helped the unloved shah and his corrupt associates come to power and had served as their protector. Israel, which had maintained relatively good (and discreet) relations with Iran under the shah, was also a target of public scorn. One of Bakhtiar’s first actions was to forbid the export of oil to Israel. He had hoped to placate public opinion and the religious opposition with this populist step.1
The King of Oil: The Secret Lives of Marc Rich Page 10
