Do You Sincerely Want To Be Rich? (3 page)

    But then he turned to his second, less optimistic theme. His own company, he predicted, would have by 1975 fifteen billion dollars to invest. In the past, it had invested overwhelmingly in Wall Street. But now he could give no guarantee that this would continue. 'From our vantage point in Europe, we sense a malaise within the investment community here…'

    What was the cause of that malaise? Fear that the market might continue to fall, as it had been falling for about a year? An uneasy recognition that much of the rise in the market in the last years of the boom had been due to reckless speculation in largely worthless paper? Nothing could have been farther from Cornfeld's mind. He spoke of the Vietnam war, and the decay of great American cities, of the alienation of the blacks, and of atmospheric pollution. It was not too much to say, Cornfeld thought, that America was in a state of crisis. And it was at this moment that the Securities and Exchange Commission had chosen to make its spring.

    The sec, he said, had 'adopted the simple device of attacking virtually every sector of earnings in the securities business. And a weak, unprofitable securities business means a weak, unprofitable market.' The point had been reached, he said, when 'the public interest seems to be the least of all considerations when the Commission moves into action.'

    In so far as he chose to support this sweeping allegation with specific charges, he accused the sec staff of misusing their power - by blocking the prospectus of a firm which continued to do business with IOS. He attacked the Commission for not regulating the trade in unregistered securities, and for impoverishing brokers by suggesting that commissions might be cut for the benefit of the customers.

    It was an inspirational performance, and the audience acclaimed it rapturously. A few years earlier, most of them would have examined the entrails of a goat for economic pointers as soon as they would have listened seriously to Bernard Cornfeld. Some of them remained a little dubious about some of the things they had heard about his early days, a little shocked by some of the things the sec had found out about him. Others were amused by his personal flamboyance - the tufty beard and the nippy-waisted French tailored suit. But after all they liked to think of themselves as a bit piratical too. 'Conservative' had become a bad word in their vocabulary, and many of them, while not going so far as to sport beards, had been carefully growing their sidewhiskers for several months in search of a more emancipated image. The main point was that Bernie Cornfeld was playing their tune: happy days are here again, and to hell with the spoilsports from the sec.

    Cornfeld had shown that his heart was sound by paying tribute to the social importance and wisdom of his hearers. And had he not proved his worth - while incidentally demonstrating the superiority of American get-up-and-go to the effete European establishment - by accumulating more than two billion dollars in assets under his management?

    There seems often to be a moment, just before the climax of any great folly, when even the sturdiest scepticism surrenders. Wall Street is not mainly populated by fools, and there were plenty of clever men present to hear Cornfeld's speech who knew what nonsense he was talking. Many of them knew, for example, that while he was denouncing the sec for not having regulated unregistered securities, his own funds were stuffed with them. Some of them, come to that, had sold them to him. Again, when he talked piously about brokerage commissions, there were plenty who knew that the sec had caught IOS diverting brokerage on a massive scale - not to the customers, but to themselves, via, on one occasion, a lady called Gloria Martica Clapp, who lived in the Bahamas. In more general terms, few who stopped to think for a second could have seriously accepted the thesis that the sec was out to destroy the securities business. But when the old tin kettle is drummed hard enough, disbelief is often silent.

    It was not only Wall Street that acclaimed Bernie Cornfeld that week. The night before his speech, he attended the annual cocktail party which the
Washington Post
gives in New York. The guest list reflects that well-informed newspaper's judgement of who really matters in the city. It includes writers, bankers, politicians, political hostesses and artists. In 1970 the unofficial but undisputed guest of honour in this company was the legendary Bernard Cornfeld, prophet of people's capitalism. He was, from all accounts, the success of the evening: warm, modest, amiable and statesmanlike - drinking, as always, nothing stronger than Coca-cola, speaking softly, and retiring early.

    A short while later,
New York
magazine published an article which rounds out this picture of Cornfeld at the height of his glory. It described an extraordinary meeting, a sort of Field of the Bed of Mink, between Cornfeld and that other merchant of fantasy, Hugh Hefner. Shortly after the
Institutional Investor
meeting, the two of them had retired, with their respective retinues of counsellors, hangers-on, girlfriends and servants, to Acapulco, where they wished to discuss possible joint ventures in the real estate business. (Cornfeld, it alleged, was not much taken with the layout in Hefner's private aircraft, known as the Big Bunny.) Altogether, the article portrayed Cornfeld as frivolous in a way which would have been lethal a few short years before, to a man who depended as he did on the approval of the financial community. No damage seems to have been done: the late Roman private life was taken as completing the enviable splendour of his image.

    In February 1970, Bernie Cornfeld seemed to stand on a high mountain. He owned more various chateaux, town houses, villas and apartments in the world's capitals than any Rothschild or Esterhazy in their high times: a few days before he flew to New York he had just bought his second castle. He owned horses, wild animals, boats, aeroplanes, cars, fashion houses and model agencies. He moved incessantly between these luxurious possessions surrounded by as numerous and pleasure-loving an entourage as a prince of the Holy Roman Empire. And there was something more nattering, and more interesting, about his famous 'lifestyle' than the ordinary spending power of great wealth. He had contrived to recruit, in the envious and egalitarian twentieth century, what amounted to a private army of vassals: his sales force. Many of them were fanatically loyal. And he knew how to keep them that way with a complicated system of lavish gifts, grants of profitable territory and elaborately structured financial rewards. It was even rumoured - and Cornfeld himself did little to scotch such rumours - that he lived in the middle of an adolescent's fantasy of a harem.

    But what impressed the hostesses and journalists of New York was not so much the picturesque surface of Cornfeld's life. It was that it seemed to be solidly built on a golden foundation of money. On one single day the previous summer, investors had poured $30 million into the IOS funds. 'The greatest single economic force in the free world?' The shrewd thing to say in February 1970, was that, by God, Cornfeld might just make it.

    As it turned out, that was almost the last moment when it would have been shrewd or even sensible to have said any such thing. And nobody would have been saying it then if they had realized the extent of the financial shambles the statesman of people's capitalism had left behind him in Geneva.

    On February 11, just eight days after Cornfeld's speech to the institutional investors, the financial controller of IOS, a young accountant called Melvin Lechner, finished the consolidation of the 1969 accounts for IOS’s many subsidiaries, and arrived at a tentative total for the company's profits.

    We shall see that the profit of IOS, as such, was by no means the all-important figure that it would be in more orthodox concerns. Profit, or no profit, the operations of IOS enriched the men who ran it in various ways. Nevertheless even the least sceptical of Cornfeld's hearers in New York might have been less willing to take him seriously as a prophet and teacher if they had realized the truth about his own business.

    The figure that emerged from Lechner's calculations was $17.9 million. That might sound like a lot of money. But Lechner knew that, in terms of IOS’s expectations, and of the way those expectations had been capitalized in the price of its shares, it was a catastrophe.

    Cornfeld had airily predicted profits as high as $30 million, In the end, as we shall see, even Lechner's first figure proved to be a mighty overestimate.

    When Lechner had reached and checked his alarming figure, he did not call Cornfeld. For more than a year, Cornfeld had delegated most of the day-to-day management of the business to Ed Cowett. Slim, cool, a trifle saturnine in appearance, Ed Cowett was now the master of detail.

    He was even further away than Mexico: he was in Tokyo. As soon as Lechner confided the profit figure to him, Cowett's assistant, Hal Vaughan called Tokyo and gave Cowett the news over the phone. Cowett cancelled his plans and was back in Geneva by the following weekend.

    Cowett knew perfectly well how serious the situation was. Already, in January, Lechner had been sufficiently worried by the financial trend to have written Cowett a confidential memorandum, describing in detail the alarm bells he could hear ringing.

    So Cowett reacted to the bad news with his habitual coolness. For some time, he continued to insist that the profits were, not the $17.9 million his own controller had told him, but $25 million.

    But the truth could not be hidden for ever. That telephone call to Tokyo was the beginning of the end. Bit by bit, the real state of affairs began to leak out. The sales operation was running into a loss… The profits from managing the funds had been propped up by the Arctic deal… The money raised from the public issue of IOS Ltd shares, little more than six months before, had all been spent.

    At the very moment when Cornfeld, parading himself to the world as a major prophet, was achieving his greatest public acceptance, the train of events was under way which was to expose the absurdity of his pretensions.

    Less than a year later, he was back in Acapulco. His shares in IOS had been sold, and he had cut his last links with the business he had created. Hardly anyone wanted to hear his views on the future of society any more. No one in their senses could believe any longer that Investors Overseas Services would ever have fifteen billion dollars under management, still less that it would be the greatest single economic force in the free world.

    Within weeks of Cornfeld's tirade against the sec, the stock market cracked and fell even more steeply. 'This decline, the largest and most protracted since World War II,' one of the best-respected investment men on Wall Street wrote, 'was a severe reaction to a period of excessive speculation.' Cornfeld blamed the sec for what had happened. We shall see that his own organization was not merely a victim of the market break; by a combination of sheer size and reckless commitment to excessive speculation, it was one of its principal causes.

    It is only fair to say that
Institutional Investor
remained loyal to the prophet it had sponsored. At its annual conference for 1971, Mr Bernard Cornfeld was again asked to speak. This time, however, his appointed topic was: 'What went wrong?'

    It is time to take a detailed look at what did go wrong. When we have done so, it will become plain that the really interesting question is not so much why Cornfeld and his friends failed. It is how they managed to succeed as long as they did.

    For this is not only a story about Bernard Cornfeld and Edward Cowett. They could never have flourished as they did without the acquiescence, and sometimes the active help, of others. Victory, they say, has many fathers, but defeat is always an orphan. It was the same at IOS. After the crash, it was surprising how many people gave us the same excuse: 'We never knew!' It is hard to believe that they could not have found out if they had wanted to. This is a story largely populated by people who didn't want to know, and grew rich in ignorance.

    Not all of them were inside IOS. For outside the company and its associates, there were concentric rings of others, less responsible for what happened, but still willing to profit in some degree from what was done. IOS worked with accountants, lawyers, bankers, brokers, advertising men and publicists of every kind. No doubt they didn't know quite how dishonest IOS was capable of being. But again, in too many cases, they didn't want to know.

    For the real importance of this story is not that a particular group of men managed to get away with certain manoeuvres which are not allowed by most developed legal systems. It is not even that a very large number of people lost a great deal of money as a result. The real lesson of the IOS story is an old one: it is that human communication is so fragile that a man can put out whatever propaganda he likes in his own interests and be sure that enough of it will be believed to make his fortune.

    The dwindling, but still huge pile of money in the IOS funds is a monument, not only to the energy of the legendary sales force, but also the proposition which Dickens expressed in his phrase about the human bees, and how they will swarm when the old tin kettle is beaten.

    Or, as that sceptical Scots philosopher David Hume put it: 'No man need despair of gaining proselytes to the most extravagant hypothesis, who has art enough to represent it in any favourable colour. The victory is not gained by the men at arms, who manage the pike and the sword, but by the trumpeters, drummers and musicians of the army.' Let us go back to the apprenticeship of a master drummer.

    

    

    

    
In which we examine the political and psychological background of Bernard Cornfeld, and the early growth of his talents.