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

by A. Craig Copetas

  One of the company’s boldest search-and-acquire missions took place in the old Belgian Congo (now Zaire), where Philipp Brothers traders outwheeled and dealed the Nazis for caches of tantalum, cobalt, and columbium necessary for bullets, bombs, and warplanes. German intelligence alerted Wolf Pack commanders and ordered them to torpedo the Philipp Brothers convoys as they crossed the South Atlantic. But Philipp Brothers — who always delivered — did something that no one had ever done before. They quietly arranged to fly container ship–sized loads of metal back to America under the cover of night. Winning the war was also a personal battle for the Philipp Brothers family. A few days after Nazi bombers leveled Rotterdam, the Amsterdam office was gutted by the SS. Julius Philipp was driven away in a cattle truck to be murdered for being a Jew.

  Traders at Philipp Brothers always had to move faster than the speed of sound. Jesselson instructed his people to change their mind about a price or a delivery the moment they got an inkling that some unseen market force (or a U-boat) was afoot. But getting solid information quickly was difficult. Before the advent of computers and telex machines, the price of a metal was established whenever the mail arrived and stayed firm for about three months. Jesselson encouraged the use of telegrams for everything from up-to-the-minute prices to the strength of Third World regimes. He developed a series of traffic codes for each metal and its price, a system that was designed to save money on telegraph bills and not to conceal prices, as is done today. By VE-Day the amount of information filtering through Philipp Brothers trading rooms had propelled the company from a small group of German-Jewish traders who, as Jesselson said, “only got into the business because trading metals was the only business opened to us” into the commodity world’s most irresistible force, in a perfect position to establish the ruthlessly pragmatic trading patterns for the Nuclear Age.

  The first thing Philipp Brothers did was strengthen the ties they had established with America’s allies and the Third World during the war. Jesselson made scores of trips abroad, and in 1948 found himself on the Orient Express bound for Yugoslavia for “no particular reason.” On the exact day he arrived in Belgrade, Marshal Tito broke all ties with the Soviet Union, an event that Jesselson knew would leave Yugoslavia’s rich reserves of copper, silver, lead, bismuth, and antimony up for grabs. Without contacting New York, Jesselson went in and cut a long-term deal that made Philipp Brothers the sole broker for Yugoslavian mines. “Doing business with the Communists in 1948 was like making a deal with Dracula,” Jesselson said of his enterprise. The New York office found out about the deal along with the rest of the world days later when it was reported over the radio.

  While Jesselson made deals, Rothschild was dispatched to open the first of what would become fifty full-time foreign offices sending news of commodity developments to New York at a rate of one message every twenty seconds. Rothschild structured the Philipp Brothers outposts in Thailand, India, Peru, and Brazil, and set the standards for the ones that would follow. Jesselson wanted on-the-spot Philipp Brothers traders wherever the company had an interest. The use of agents was strictly forbidden because Philipp Brothers would have no quality control over the purchase or shipment of a material. “You can’t rely on agents,” Jesselson told his staff. “Agents are not interested in Philipp Brothers. Agents are only interested in making their commissions.”

  The traders Philipp Brothers hired to fill these posts in the early fifties were handsomely developed and exceptionally coordinated by Ullmann, Jesselson, and Rothschild. Traders in Europe were under the direction of Dr. Adolpho Blum at Derby, which by 1950 had changed its corporate structure to become a partnership between Oscar Philipp, Nathan Issacs, Henry Levy, and Philipp Brothers. Derby had already established a foreign foothold in the Commonwealth nations, and the new guard being hired in America would ensure that it remained firmly in place.

  Entrepreneurship and eagerness were encouraged. Traders were trained to always ask, “What can I do to improve a market situation?” If the ego of a Philipp Brothers trader was bruised by the cyclical downturn of a fickle market, Jesselson would intervene to soothe the wounds like a father consoling a son who skinned his knee sliding into home plate. And if a trader got in trouble, Philipp Brothers was always there to take care of the problem. The stories of Jesselson helping his traders with money or time off have assumed the stature of coffee-break legend at Philipp Brothers. If a trader’s child was ill or his mortgage payment late, it was Jesselson who quietly took care of matters, believing it to be no more than his duty as head of the Philipp Brothers American household. Gratitude was, of course, expected, but fierce loyalty to Philipp Brothers was demanded. “It was a holdover from the old days,” Ben Bollag, who spent thirty years at Philipp Brothers, explained. “Both Ullmann and Jes honestly believed that there was no need to pay traders lots of money because Philipp Brothers would always be there to take care of them.”

  “Jes” Jesselson, however, had one tragic flaw: He never knew how to muzzle the aggressive nature of his young traders. “Jes never lost a nickel on a trade, but he lost people by pitting them against each other in the office,” said Hubert Hutton, a former Philipp Brothers trader and friend of Jesselson’s. “He often overvalued aggressiveness.”

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  Chapter 5

  “There is a universal tacit agreement among all traders to take from each other increase for their products, to work in the dark in their dealings, to play a sharp game; in a word to take each other by surprise by all the tricks of the trade.”

  — Pierre Proudhon,

  NINETEENTH-CENTURY FRENCH ECONOMIST

  LUDWIG JESSELSON is a nostalgic monument to a time when the business of business was less acute and the relationships between men were glued together with trust, not corporate lawyers. Philipp Brothers was a firm without need of golden parachutes, leveraged buy-outs, secret agendas, Mary Cunninghams. Jesselson was always there to support his family, cultivate them in the trading techniques they would need to lead the next generation of Philipp Brothers traders. There were no executive recruitment firms employed to spend millions in finding people worthy of leading Philipp Brothers into the future; lehrlings like Marc Rich were tomorrow’s leaders, trained in-house, and Jesselson considered the idea of looking elsewhere to be the bitterest of humiliations. Trading was an arcane and unpredictable game that Jesselson, like a sorcerer, made predictable for the apprentices who came to Philipp Brothers to trade the Earth’s crust between nation and industry. It was a philosophy that demanded total and immediate candor between Jesselson and his lehrlings.

  Trading called for a quick and facile mind, and while other corporate executives aggrandized themselves to get ahead, Philipp Brothers traders just didn’t have the time to partake of such superficial corporate fashions. The Philipp Brothers’ totem was a hierarchy of shrewd deals, not inflated vanities; getting to the top demanded a talent to tame the furious chemistries of volatile markets. And Jesselson gladly taught these men how to balance these tensions. He showed them that it was possible to remain humble while retaining the ability to endure.

  The first thing Philipp Brothers did before hiring a trader was to administer a simple test to see if the prospect possessed a talent for calculating figures. Jesselson believed that a trader should be able to calculate in his head or with the occasional aid of a pencil. (To this day, Ludwig Jesselson has never used an electronic calculator. Years ago he was given one. It still remains in its original box, held together with rubber bands, in the bottom drawer of his desk.) If the prospective lehrling displayed a capacity for figures, he was hired and placed in the traffic department, where he would learn how to ship material around the world under the guidance of Sam Fishman, the master mover of Philipp Brothers.

  The ethos of the trading mentality hinges on nerve and, when in action, like a soldier, being able to control fear. The traffic department of a trading organization is the best place to teach the control of fear because it is the closest thing to wa
r. If a trading passage was closed to ships with Philipp Brothers’ material on board, then it was up to the traffic manager to discover the alternative route. Such problems forced traders to be inventive and to realize when to be daring. There was no room for fear or disenchantment, because the material had to hurdle whatever obstacles had been placed in the way. Young traders admired Fishman, impressed with his ability to blank out fear as an inferior form of nerve. And Fishman was the action man on whom all trades hinged. It did little good if a deal was concluded and the material never made it to the buyer. It was up to Fishman and his young trainees to fulfill the Philipp Brothers promise of always delivering.

  The traders who entered Fishman’s classroom were varied in nature, background, and style. David Tendler, the man who would start in traffic at $75 a week in 1960 and end up as chairman of the board with a salary in the millions, was a hard-nosed kid from New York’s Lower East Side who got excited looking at maps and traded bananas during summer breaks from City College of New York. Many of the traders hired by Derby out of London never “did traffic.” Alan Flacks, a university dropout who started at £70 a week in 1954, was thrown immediately into the deep end and sent to India within days of his being hired. “When we started, there were guys here our age who had been trading since they were sixteen years old,” Tendler said. “These guys came up from the mail room, had no college education, and were more experienced than all of us put together.”

  One of the traders who entered Philipp Brothers’ New York traffic department in 1954 was Marc Rich, the “tall man with the soft voice and the strained smile who always wore Saks Fifth Avenue suits.”

  “He was not the kind of fellow you’d ask out to lunch,” said a European trader who sat across from Rich in the early days of his career. “Marc always felt he was brighter than us, that his shit didn’t smell. And he never talked about anything except business.”

  There were about a hundred people at Philipp Brothers’ New York office and the bureaus in the process of being buttressed in Buenos Aires, São Paulo, Tokyo, Osaka, Ankara, Amsterdam, and Zug. It was a perfect time for the $60-a-week lehrling to learn the mysteries of moving fleets of container ships between nations, the nuances of complicated bills of lading, the subtleties of figuring out which shippers could be trusted to deliver material intact. Jesselson and Ullman played good guy/bad guy, respectively. Ullman hovered over the young traders like a storm cloud ready to explode. “Ullman scared the living daylights out of me,” Tendler said, his eyes flashing back to the fears and insecurities of a lehrling. Jesselson stroked and encouraged, using his warm smile as a beacon the traders could follow to realizing the full extent of their capabilities.

  “Jes identified with all the young traders, but more with Rich because their family backgrounds were so similar,” a Philipp Brothers senior executive explained. “But there was something about Rich that the rest of us never liked. He was always shifty and never engendered trust. He made everyone feel that they always had to be on guard when he was around.”

  “Rich could be a bundle of sincerity if he wanted to,” said a Philipp Brothers trader who worked alongside Rich for ten years. “He was so damn changeable.”

  Rich’s contemporary colleagues found him “aloof, frosty, occasionally irrational, dangerously irritable.” But they were double-edged traits that, if applied correctly, could fine-tune the combat psychology necessary to create a good trader. “Marc’s great strength from the day he came here was his incredible impudence,” a Philipp Brothers executive admitted coldly. “The man never hesitated to ask for anything; the kind of person you’d throw out the front door and he’d go around and crawl back in through an open window like a sneak.”

  Bill Spier, a Philipp Brothers trader who would later serve as an usher at Marc Rich’s wedding, suggested that Rich’s drive isolated everyone at the company. “We were both aggressive hustlers,” Spier said. “Marc was always successful and dynamic. We’d come into the office together on Saturdays and read all the weekend mail, find out what was going on while everyone else was at home. What separated our friendship was his belief that you could only make it bigger and better than the next guy by buying people off. Marc was suave and sophisticated and obsessed with power. He was always looking to see who he could buy off.”

  Rich’s obsession with business even carried into his personal life. He still lived with his family and when he did make the time to visit with friends, the get-togethers were all business. He was a frequent visitor to the Fire Island, New York, home of Ralph Meyer, a Philipp Brothers senior executive who became his father confessor. Rich and Meyer would go on ski trips together, but even those were cut short by the ever-present telephone calls that usually pulled Rich off the slopes for hours. And when Rich decided that he wanted out of the traffic department, it was Meyer who helped pave the way. “All Marc ever did during his off hours was sit and brood about business,” a former friend said. “I spent many weekends with him, and all he ever talked about was business and when he could start making deals on his own.”

  Rich was Philipp Brothers’ fastest learner, according to Hubert Hutton, who had the opportunity to watch Rich grow into a trader. “He had the best memory of anyone at the company and the nature of a true gambler. He never stumbled into anything in his life. Every risk he took was calculated.”

  Philipp Brothers traders recall that Rich’s first big deal was in mercury, the quicksilver liquid leftover of cinnabar broiled in a Herreshoff Roaster. Mercury is one of geology’s two-faced creations: It’s so toxic that it causes birth defects, but it remains a not-to-be-duplicated ingredient for dental fillings and catalytic converters. Mercury, which has been used since Roman times, first established itself as an industrial mineral in seventeenth-century Europe when felt-hat makers refined “water silver” by treating cinnabar ore with a ghastly solution of vinegar and urine. The mercury was then boiled and the fumes used to stabilize wool. The inhaled vapors, however, caused erethism, a nervous disorder highlighted by irritability and weird personality changes, the so-called Mad Hatter Syndrome. Mercury’s price was just as schizophrenic, jumping anywhere between $120 and $800 for a 76-pound cast-iron flask.

  When Rich began to trade mercury in the late fifties, the stuff was used for mirrors, thermometers, cure for syphilis, and as a major propellant for the machinery of war. By World War II, mercury had replaced magnesium in batteries providing more power and making the liquid metal much in demand. Quicksilver was also used in making ammo caps and painted on battleship hulls to prevent the growth of barnacles. The Korean War had proved the “mercury equation,” a bit of razzle-dazzle arithmetic that statistically showed the price of mercury always increasing 20 percent the moment a major military conflict ignited. So, when the post-Korea war machine began bargain shopping, it was natural that it would call upon Philipp Brothers to fill its orders. Rich found himself dealing the right metal at the right time. He purchased mercury from the Almaden Cinnabar Refinery in Spain and from Soviet quicksilver capitalists and then sold the flasks to various manufacturing plants in America and the Far East. The amount of profit made from Rich’s mercury deals has been forgotten, but the creation of the deal was enough to curry the interest of Jesselson.

  “It doesn’t matter what the commodity is,” Tendler said, downplaying the role of luck a trader might have in creating a profitable trading situation in any of the 160 commodities traded at Philipp Brothers. “It’s more important that a trader know what the manufacturing role of a commodity is at the precise moment it’s being traded.”

  Marc Rich’s sweeping success with mercury resulted from his embracing the market, studying the needs of the industries shopping there that particular day and then getting in an offer. Rich “made a market,” as traders say, because he knew that manufacturers needed mercury. He had seized an opportunity and had turned it into a profitable trading situation for Philipp Brothers because Jesselson gave his lehrling traders the leeway to explore. “There is no mathematical fo
rmula for evaluating risk,” Alan Flacks advised. “You have to figure it out on your own.”

  Jesselson, as David Tendler says, “allowed us to have our own heads.” And if a trader made a few dollars on a metal that everyone else ignored, then Jesselson grew excited. “I started playing with zinc dust,” Tendler recounted. “It saw an extremely small return, just a little over $100,000. I thought nothing of it until Jesselson heard about it and came running into my office and told me to take off for Belgium on the next plane to talk to the producers. The same thing happened with a fertilizer deal I did back then with South Africa.”

  “He shaped our growth, let us assume responsibility from a very early age. He knew that we grew excited about the deals and that we would report back to him for guidance and information. And then you sat there and listened to him as if you were attending a lecture.”

  Jesselson also whisked his traders around the world and introduced them to the buyers, sellers, and cultures in which Philipp Brothers conducted business. Nothing, it seemed, was too good for a Philipp Brothers trader. “He really took us everywhere with him,” Flacks said. “I remember one of our first meetings in the finest hotel in Zug. Jesselson sat me down for a wonderful meal and wanted to know everything about me and my ideas. He made everyone in the firm feel wanted and genuinely important to the success of Philipp Brothers.”

  Nineteen-sixty was a watershed year for Philipp Brothers traders, a time when the company supplemented their trading education by making them part and parcel of what at the time was one of America’s largest corporate mergers. By the turn of the decade, Jesselson became acquainted with Andre Meyer, the merger magician from Lazard Fréres. Philipp Brothers was regularly posting profits of $6 million a year on a business worth $200 million, but Jesselson knew that the net worth of Philipp Brothers could be dramatically increased if the company went public and that Meyer was the man to make it happen. Under Meyer’s direction, Philipp Brothers merged with Minerals & Chemicals Corporation, an already publicly owned company that made kaolin, a petroleum-cracking catalyst that helped break down heavyweight oil into plastics and gasoline. Minerals & Chemicals Philipp Corporation was born in July 1960 and sent a lightning bolt immediately across the international trading landscape. Jesselson and Ullmann, the two top principals of the merger, were now worth over $20 million and in a position to restructure Philipp Brothers for the future.