Do You Sincerely Want To Be Rich? (56 page)

    These confident noises were made on May 21. Eight days later, John King abandoned his bid for IOS, while expressing a fervent hope that someone else would rescue the company because of 'the potential impact on world securities markets' if it should collapse. The immediate reason for his withdrawal was that the sec had tossed a spanner into the works by pointing out the terms of the 1967 settlement with IOS. This provided that any company owning more than 10 % of IOS should be regarded as an 'affiliate' of IOS, and would be prohibited from selling its own securities to Americans. In other words, if King went ahead with his takeover bid, he would become illegal in America. This price, obviously, he could not pay. But in any case King's 'rescue mission' was really a last dash for survival on his own part. The scandal of the Ohio loans shows that by early 1970, along with many of the financial wizards of the latter Sixties, King was searching for money with the desperation of an elephant trying to find a waterhole in the dry season.

    It was a money-broker named Ronald Howard, from Beverly Hills, who introduced King to his novel source of finance. Sometime in March 1970, Howard asked for an interview with Keene Wolcott, the president of John King's Colorado Corporation. Wolcott's assumption was that Howard, like everyone else in the credit squeeze, must be looking for money. 'Not a penny!' he cried as Howard came into his office.

    'You've got it all wrong,' said Howard. 'I've got fifty million to
lend.'

    The reason for Howard's happy position was that through an acquaintance in Miami he had been put in touch with another money-broking firm in Ohio, called Crofter's. This was owned by three men called Sidney Griffith, Harry A. Groban and Gerald A. Donahue. Donahue was an influential member of the Ohio Republican organization: he had been assistant attorney general of the state, and tax commissioner.

    In 1967, it turned out, Ohio had passed a law which allowed the state treasurer to invest up to $50 million of the state funds in commercial paper - short-term loans to private businesses -so long as the borrowers were rated by the National Credit Office, which is a subsidiary of Dun & Bradstreet. To qualify as commercial paper under the Credit Office rules, such loans would have to be for a period of 270 days or less. It was this time limit which got ignored in the eagerness to put Ohio's cash to work.

    King Resources' loan of $3 million from the state of Ohio, which was taken on April 17, was for two years. Half of that money was immediately re-lent to King's privately-owned Colorado Corporation. The loan of $5 million which King Resources took up just before John King flew to the rescue of IOS was also for two years. For this reason, they were branded as illegal when the sec discovered them. The Commission also complained that when negotiating the loans, King Resources had not given a sufficiently complete picture of its own financial position.

    King and his companies, it must be said, did not hog the new source of money for themselves. Even before the King loans were negotiated, Ronald Howard had gone to Consolidated Oil & Gas, bearing a reference from a King Resources executive. Harry Trueblood's company arranged two loans: the first, of $3 million, breached Ohio law in the same way as the King loans, because it was for two years, not 270 days. The second loan, of $2 million for one year, was from the Disabled Workmen's Relief Fund, which was not subject to the same regulations. It was therefore controversial, rather than illegal. Consolidated paid a 'finder's fee' of $50,000 to Crofter's for making the arrangements. And Crofter's got an even larger fee when they fixed a loan for Four Seasons Nursing Homes: they got $160,000 for providing $4 million out of the Ohio Treasury. Shortly afterwards, Four Seasons filed a bankruptcy petition.

    Actual bankruptcy was avoided by King Resources, although only narrowly. Having dropped its IOS bid, the company allowed its bills to pile up during the summer, and by early August it owed some $16 million to various trade creditors, and another $20 million in unsecured loans from banks. The creditors met several times to try and devise a plan of rescue: they were successfully persuaded to accept a version of events in which all King's troubles were due to its own attempts to rescue IOS. On August 14, at a meeting in the First National Bank of Denver, the creditors adopted a scheme which would allow King Resources to struggle on, in the hope of recovering financial stability. But John King had to resign as chairman and president. Conceptual to the last, King bowed out with the thought that 'like a human being, a corporation has a life cycle - a beginning, or birth, a youth and a maturity.' Another of his Great Thoughts had been that 'if you have a goal, the worst thing that can happen to you is that you might make it'. If John King's aim had indeed been, as he told the
Wall Street Journal
in May 1970, to become a billionaire, then he had been spared the worst.

    

    

    

    

    

    
A great desire is manifested to 'save
IOS
for capitalism. But the rescuers are afraid of Bernie, who isn't quite dead. An intrigue is mounted to dispose of the Emperor, who is rubbed out effectively, if none too tidily.

    

    

    The only real result of the King intervention was that it ended the possibility of a rescue coming from the Rothschild group. The bankers decided that one thing they would definitely not do was get into a bidding competition with John King. Furthermore, they thought that if the directors could even consider a deal with King, they could not be very serious about wanting to change the way the business had been conducted.

    This left IOS, in June, still thrashing about, searching desperately for a rescuer. And at this point it became all too clear that Bernard Cornfeld was not going to take his banishment quietly. Although his company was in a state of financial ruin, he determined to try and reconquer it. His attempts almost finished IOS off.

    When John King collapsed like a leaky balloon, a period of low comedy and high intrigue set in. Immediately, titular over-lordship of IOS fell into the unlikely, not to say reluctant, hands of Sir Eric Wyndham White, late Secretary General of the General Agreement on Trade and Tariffs. It was more difficult to say where actual control of the empire lay. It tended to shift from hour to hour, almost from minute to minute.

    During the next twelve months of scheming and manoeuvring, two essential considerations moved all the participants, both inside and outside IOS.

    1. IOS Ltd, the parent company, so recently floated, and the heart of the group, was as comprehensively impoverished and heftily discredited as any investment company could be without actually going bankrupt. Indeed, it is probably fair to guess that only its offshore status kept it alive at all; if it had lived in some more regulated environment, IOS would have perished in a hail of lawsuits from its customers some time in 1970.

    2. With all that said, the stricken company still controlled one of the largest pools of fund money in the world. The IOS funds began 1970 with total assets of $2.4 billion. During May 1970, the customers were reducing that total by redeeming their shares at the rate of $3 million a day. But any international banker could work out on the back of an envelope that even a full year's redemptions at that phenomenal rate would only take a billion dollars out of the funds, leaving $1.5 billion apart from shrinkage in the value of the fund investments.

    Some financiers wanted to get their hands on the funds for their own profit. Some wanted to rescue the funds for the safety of capitalism. Some wanted to protect the investors who had put up the money in the first place. Other financiers were moved by various combinations of such motives. It was, however, generally agreed that even after the May crisis, the IOS funds were an interesting pile of other people's money. The key to controlling them was to gain control of IOS Ltd.

    During May, the interest in rescuing IOS was almost indecent. Paul Vincent, of Banque Rothschild, to his mixed amusement and annoyance, found himself acting as a kind of informal clearing house for many of the transient consortia that got together to talk about IOS and then lost interest. One day, he was woken by the first American bank at 7.30 am, and did not get away from the phone for long enough to shave until 2 pm. Near the end of the month, he drew up a list of banks and other institutions who had expressed interest, which covered a large sheet of paper. But the trouble was that everyone was frightened, as well as interested. On three separate occasions, Vincent got calls from senior officials of US banks, only to have another call from the same bank next day, withdrawing the commitment.

    The last real chance of an international banking consortium seems to have been a meeting sponsored by the Banque Rothschild in Paris in early June. The banks who gathered to hear Sir Eric put the case for support could not have been mightier. This list included the Bank of America, the First National City Bank, Barclays Bank from Britain and the Dresdner Bank from Germany. But, in the words of one participant, everyone was 'paralytically nervous', and when news of the gathering leaked to the press, several eminent bankers tried to bolt, and were calmed only with difficulty. In the end, Wyndham White was able to put his case, which revolved around the 'essential soundness' of the IOS concept. But he was not able to convince them.

    Sir Eric stepped into the chairman's position, after the destruction of Cornfeld's authority in May, and he remained there because there was really no-one else who could lay any useful amount of prestige on the line when dealing with potential rescuers. For a few weeks, Richard Hammerman served as president of IOS, but he made the unforgivable mistake of trying to limit the sales bosses' incomes to a mere $100,000 a year each. He resigned on June 6. After that, Sir Eric combined the roles of chairman and president.

    Early computations by the accountants suggested that IOS Ltd would dissipate the last of its operating cash by mid-autumn. However, a fierce programme of economies extended the possible breathing space. King Resources' rescue bid had got as far as advancing $8 million of the proposed loans to IOS: this loan remained, and King Resources also repaid the King and Cowett family trust loans, some $8 million together. This scarcely compensated the Fund of Funds' customers for the money King had clawed out of their fund, but it helped IOS Ltd to stagger on, while attempts were made to call in as many of the other loans as possible. Regular employees were dismissed steadily, at a rate which halved the staff by the end of the year. Then the sales force, which had reached its costly peak of 16,000 associates at the New Year was subjected to a process of 'weeding out the less productive salesmen' and 'attrition'. By mid-summer that process was to bring it down to an official figure of 10,766: in fact, it was hard to tell how far 'attrition' had gone, because many 'orphan' salesmen could only be contacted through managers who had deserted or been terminated.

    In this difficult moment, Sir Eric gathered around him what the IOS publicity men called 'a new management', to uphold and defend the 'basic soundness' of the IOS concept. If it was, by then, not easy to see what was so sound about the idea of speculative and unregulated investment funds, promoted by a ferociously overpaid sales force, then it was even less easy to see any novelty in the management that succeeded Cornfeld and Cowett. The affairs of the company were now handled by a committee of eight, including Sir Eric himself. Two were indeed recently promoted: a lawyer named Jay Leary, and an accountant named Marvin Hoffman. Both, however, had worked in senior positions under Ed Cowett's legal and financial direction. A third member of the group was Hal Vaughan, who had been Ed Cowett's personal assistant. And the other four were Allen Cantor, Harvey Felberbaum, Richard Hammerman and C. Henry Buhl III, who, whatever their other virtues, could hardly have been bettered as members in good standing of the Old Guard; and Sir Eric had been on the executive committee in 1969. The best that these men could say about the past was that they had not known what was going on, with the exception of Hammerman, Buhl and Wyndham White himself, who could claim to have done a good deal to find out. (Lechner and von Peterffy, the ones who probably did most in that respect, were on the way out.)

    The general attitude of the 'new management' may be gauged by the reaction to a speech which Robert J. Morgenthau, former US District Attorney for the southern district of New York, made to a congressional committee on June 11. He said that IOS, among other things, had concealed massive loans to insiders and directors, and that it had traded secretly in its own shares. Considering the amount of information then available, Morgenthau's account was remarkably accurate. Yet Allan Conwill, IOS's New York lawyer, although he had sat in on meetings that discussed the insider loans, chose to allege that Morgenthau's remarks were those of 'an ambitious but bitterly frustrated man who still grasps for publicity through sensationalism.' Mr
d they had managed a personal chat on relatively friendly terms.