Do You Sincerely Want To Be Rich? (16 page)

    The investor might then be persuaded to insure himself at the same time with IOS’s own insurance company, International Life Insurance of Luxembourg. The standard policy guaranteed to complete the investor's programme in the event of death or disablement. For this, ili would charge $158.12 on a $3,000 programme, bringing the total cost to 17.2 % of the money paid over.

    Then there was the 1 % brokerage that IOS charged for moving Fund of Funds money into our old friend FOF Prop. That would take another $24.80 out of a $3,000 programme, bringing the charge to 18%.

    All this money is taken before the customer's money actually gets to work in those booming stock markets. In other words, a customer paying $3,000, would actually have about $2,460 invested.

    But even when the money has been invested, IOS takes further large bites at it. First, there is the management fee, levied monthly in instalments of 1/24th of one per cent of the net assets of the fund. Then, at the end of each quarter of each year IOS itself shares with its advisers 10% of all gains made in the value of investments, whether those gains be on actual sales or increases in book value.

    Then IOS and the advisers collect 10% of all the income produced from fund investments, after deduction of certain running expenses.

    These performance fees are prohibited on publicly offered mutual funds in the US. In rising markets they are highly remunerative to managers of large funds, but they are also a temptation to speculation. It was natural for IOS to start levying such performance charges when it instituted the proprietary system. In 1967 Fred Alger made $500,000 out of his share.

    The effect of this terrific battery of charges - which could only be mounted in an offshore operation - is that wonders have to be performed with the remaining cash before the customers can get any worthwhile return on the risks of investment. Suppose the advisers achieved a steady one per cent-per-month gain through the ten years of a programme, this would mean the investor's money they were handling would grow by nearly 100% if there were no charges. An investor paying in $3,000 and subject to all the charges would get back roughly $4,750 at the end of ten years, an increase of only 58 %; he would do better to leave his money in a savings account at 5 % interest compounded.

    On this assumption the customer would have to wait until almost halfway through the sixth year before he could even get his money out without loss. And of course, even to turn in this performance, the actual shares bought by the IOS 'professionals' would have to more than double in value to cover the cost of stockbroking commissions on purchasing them. With all this, as we shall see, IOS was still busy devising ways to divert the stockbrokers' commissions back to itself.

    Bernie Cornfeld was fond of expounding the superiority of the deal IOS gave its clients over the service given by European banks. 'Their idea of money management,' he said once, 'is to hire a $200-a-month clerk who shifts Nestle's from one account to the other so that the bank can make two commissions.' His own ideas were more elaborate - but even more ungenerous.

    We have now described in outline the machine that Cornfeld and Cowett built for marshalling money. It is time to look at the way money was drawn into the machine, and then at the way the money was put to use. But first, an emphasis must be made.

    In September 1969, at the height of its powers, IOS listed no less than 55 principal subsidiaries. It had formed hundreds of companies around the world - there were sixty listed outside the Nassau offices alone. Cornfeld and Cowett were operating nine banks with deposits of nearly a $100 million. They had started another nine open-end funds, they had a real estate company with properties valued at a $100 million, and they were proposing to finance several major corporations in America and elsewhere.

    Somehow, people acquired the idea that all this represented the unintended latter day proliferation of a successful sales company. On the contrary, as George Landau has pointed out, the growth of the financial empire was implicit from the beginning. Indeed, in the first company report of IOS Ltd (sa) covering its first year, there was a section headed boldly
'underwriter and investment banker'
expressing Cornfeld's intention to develop strongly in this direction. The only actual investment banking activity reported there was a deal in which the IOS underwrote an offering of interests in the film
Snobs,
directed by Jean-Pierre Mocky with Bernard Cornfeld as executive producer. The IOS sales force had no trouble selling 35 $1,000 participations in the film to their clients.
Snobs
was Mocky's adaptation of William Makepeace Thackeray, and although it was one of the first things on which his now considerable cinematic reputation was made, it lost money at the time, and IOS had to reimburse the outside investors.

    Probably Wilbur Cowett of Wertheim would scarcely have regarded it as investment banking at all. But it showed where Bernie and Ed were aiming their sights.

    

    

    

    
The real sources of
IOS’s
wealth: why
IOS
was in trouble with the police in Portugal, Colombia, Brazil and other places. In which we crack some codes, uncover some clandestine financial arrangements, and make some calculations about hot money.

    The climactic consecration of the international mutual fund salesman as a hero of our time was solemnized in the first week of August 1969, thirteen years after Bernard Cornfeld arrived in Paris from New York. First, 83 'general managers' of IOS gathered in the prodigiously expensive Intercontinental Hotel in Geneva. Then, three days later, they were joined by nearly three hundred divisional and regional managers. More than one hundred of them, Bernie Cornfeld was proudly able to remind them, were on the verge of becoming dollar millionaires.

    In inspirational addresses - 'address' was always the word used-by Cornfeld himself, by Cowett, and by Allen Cantor, now the captain of the sales force, the managers were exhorted to think of themselves, not as salesmen, or even as successful business executives; but as missionaries, philanthropists, even statesmen. No flattery was too gross, no hyperbole too pompous for the occasion.

    'Today,' Cornfeld told his men, 'each of us stands in the forefront of one of the most important developments of our time.'

    'There are very few companies in the world that will make the kind of money we expect to make this year, next year, and in the years to come,' said Cowett.

    It would be cruel to dwell too long on the bombast and the

    boasting of that week. Cowett's friend John McCandish King

    predicted, for example, that IOS would provide 'a major part'

    of the astronomical - if somewhat arbitrarily precise - figure of $43 billion which, he quoted unspecified economists as saying, must be invested in natural resources over the coming twelve years.

    Dr Erich Mende, the politician who had been hired to put a high finish on the corporate image in Germany, thought the next decade would see 'a deepening of this sense of unity among the IOS family'. And Gladis Solomon, the first lady of IOS, forecast that the IOS Foundation would 'easily become the largest agency for international social work in the world'.

    To listen to the speakers, one might have been forgiven for supposing that IOS itself was already the largest agency for social work in the world.

    Cornfeld's own claims on behalf of what he was doing had been growing steadily more grandiose. His tone became first Napoleonic, then positively Messianic. He had for some time proclaimed 'World-Wide People's Capitalism' as the IOS goal.

    Now, in 1969, Cornfeld went even further. 'The service we perform,' he said, 'is vital not only to our economic system, but in a real sense it contributes to the survival of the democratic process.'

    More and more IOS propaganda concentrated on an idea that was perhaps most succinctly put by Wilson Watkins Wyatt, the former Lieutenant-Govenor of Kentucky who became a director of IOS. 'You are making it possible,' Wyatt told the assembled managers, 'for the average man to share in the greatest economic development in history. You make it possible for the smallest investor, anywhere in the world, to profit from all the professional expertise that two billion dollars can buy.'

    This was the myth that Cornfeld wanted to put across. His greatest feat,
Newsweek
once non-committally observed, was to persuade his employees that IOS was 'saving capitalism and improving
la condition humaine'.

    It was the conceptual salesman's greatest sale. For the truth was very different. The engine that drove IOS was not altruism. It was not even some broad-browed perception of enlightened self-interest that comprehended the potential of a new world-wide class of small investors. It is doubtful whether any such class exists. And if it did, it is far from certain that the IOS sales force would have been interested in selling to it. One of the most revealing episodes in the history of IOS suggests why.

    One of the ways that Cornfeld convinced a good many people that what IOS was really trying to do was to help the underdeveloped countries was that he hired, in mid-1966, Ambassador James Roosevelt, son of fdr, and regarded as something of an expert on the 'Third World'. Roosevelt was put in charge of something called the IOS Development Company, and he hired some well qualified and idealistic advisers. Early in 1968, fired by Cornfeld's rhetoric, a group in the Development Company worked out detailed plans for a 'low-income investment plan', which came to be known in the company as the 'People's Fund'.

    'IOS has generally concentrated its activities,' they wrote perfectly accurately in a paper proposing this project, 'on a spectrum of wealth located at or near the top of the income structure of most countries. This has resulted in impressive and profitable business.'

    'There remains in the world' they went on, 'a broad band of smaller levels of income and lesser amounts of savings which IOS has not approached in any way.' And it went on to propose, in the most careful detail, a savings plan for 'the lower economic elements in the major urban areas of the underdeveloped world… office clerks, hotel attendants, taxi drivers, vendors, and thousands of other low income wage earners who can afford to save in small amounts.'

    The plan was to sell saving stamps, in denominations as low as a dollar a week or its equivalent in local currency, which buyers would paste into a cardboard folder. Lotteries would be held to attract interest, and a highly original grass roots sales structure was proposed.

    That, it turned out, was precisely the trouble. It is impossible to say now whether the People's Fund would have worked or not. It seems possible that it was predicated on an over-optimistic estimate of the surplus income of the urban poor in developing countries. But that is not the point.

    The point is that if Cornfeld had meant even a tenth of what he said about People's Capitalism, and about helping developing countries, the plan would at least have been given a serious trial.

    It was not. It was killed at birth by the IOS sales force, because it offered no fat commissions to the salesmen, and therefore no 'overrides' - split commissions - to their bosses, the real masters of the company.

    That is the fact to set against Cornfeld's myth-making, IOS was first, last and always a sales organization, run by salesmen for salesmen. It was administered, insofar as it
was
administered, so that the boss salesmen - not the investors in the funds, not the outside shareholders and not even the lesser salesmen -should profit most from the vast flow of money that IOS handled.

    The logic of IOS’s expansion was that it would go anywhere that the salesmen could bring in money. And so the first crucial question to ask about IOS is really a very simple one. Where did the money come from?

    In the last two or three years before the crash, IOS developed new, and relatively broadly-based markets in prosperous parts of the world, most notably Germany.

    But IOS did not grow in the first place by selling to the middle and lower-middle classes of Europe, or anywhere else. The salesman turned to such markets only after more profitable fields had been closed to them, and after the first half billion doUars, which projected Bernie Cornfeld into the big-time, had been collected.

    The history of the IOS sales organization passes through five fairly distinct phases.

    In the beginning, and for some four years after Cornfeld first arrived in Paris, IOS consisted simply of Bernie Cornfeld, and a syndicate of salesmen he had assembled, selling the Dreyfus Fund from a European base. They had discovered that a small, but important section of the American market for the new mutual fund revolution lay outside the continental United States. This was the 800,000 or so American servicemen who had been removed overseas by the Cold War. It was a fruitful discovery because the military market was not yet subject to quite the same competitive pressures which affected mutual fund sales organizations in America itself. This was Phase One, and it was still the chief business of IOS when Cornfeld moved from Paris to Geneva.

    Phase One was overlapped in the early Sixties, by Phase

    Two, in which the salesmen journeying around American military bases made the discovery that us servicemen were not the only, and certainly not the richest, Americans abroad. They began to sell Dreyfus and certain other funds to the
2.5
million American civilian expatriates: technicians and administrators in the oilfields of Latin America and the Middle East; engineers and hard-hats in construction camps; teachers, government officials and doctors in schools, embassies and aid missions from Chile to Pakistan. All of these people had been isolated, for the moment, from the mutual fund boom.