4:
HOW MY SWISS BANK BLEW $40 MILLION AND WENT BROKE
IN early September of that bad year, 1970, I was riding into New York on one of the Penn Central’s surviving trains when a story in The Wall Street Journal caused some hot flashes and palpitations. Nothing alarming; in 1970 it was impossible to read The Wall Street Journal without having hot flashes and palpitations. This story was not even on the front page, and I am sure was passed over by many of the newspaper’s readers. UNITED CALIFORNIA BANK, read the headline, SAYS SWISS UNIT INCURRED LOSSES THAT MAY HIT $30 MILLION. Swiss unit? United California Bank? That was my bank!
I don’t mean it was my bank in the sense that the Bank of New York is my bank because I have a checking account there, or that people have a friend at the Chase Manhattan because that is where they owe the payments. I mean it was my bank because I owned it. There was no public stock in this bank; it was the biggest, solidest and safest investment I had ever made. A lockup, as they say. And only months after I bought this hunk of the bank, my judgment seemed to be confirmed. The majority interest was bought by the great United California Bank of Los Angeles, one of the fifteen largest in the United States, second largest bank on the West Coast, itself the flagship bank of Western Bancorporation, the largest bank holding company in the world. Big brother.
Clifford Tweter, senior vice-chairman of United California and president of its parent, Western Bancorporation, last night declined to explain how the loss occurred. He said he hoped to be able to provide more data once an audit at the Swiss bank is completed. That would be within the next few days, he added. “We think we should speak in general terms at this time,” Mr. Tweter said.
The troubled institution, United California Bank in Basel, is 58% controlled by United California Bank . . . the other 42% is held “by a variety of investors, mostly individuals,” Mr. Tweter said.
It was a good year when I bought into my Swiss bank. I had a popular book on all the best-seller lists. Now you take the average American male who has a fat year or a windfall, and there are a lot of ways to spend the money in tune with fantasyland. He could buy a beautiful sloop (not to mention yawl, ketch and cutter) and cruise around the world. He could get fitted for a Purdy in London or a Wesley Richards .375 and go shoot an elephant in Kenya while they are thinning out the herds. He could buy a pro football team—or at least part of one—and buy and sell 280-pound tackles, and have a modest little speech prepared when the television cameras roll into the locker room amidst the victory whoops, the champagne, and the wet towels. Not me. I had to buy a Swiss bank. Overexposure to early Eric Ambler, I guess, when if you really wanted to know what was going on, you certainly didn’t watch the newspaper headlines because they didn’t tell you anything; you watched the rise of the dinar and the fall of the drachma, and those barely perceptible flutters told you that Peter Lorre and Sidney Greenstreet were in a compartment on the Orient Express on their way to Istanbul. They were looking for Demetrius, and you remember the trail led right back to Switzerland, good old Switzerland, where the master spy was in his château playing a Bach fugue on his magnificent organ.
So it wasn’t all safety and solidity that attracted me, though what could be safer than a Swiss bank? It was a hedge against the troubles of the dollar, and a friendly place to call upon in Europe, and the prospects of a lot of fun, and maybe even a very good investment to boot. The United California Bank of Los Angeles didn’t buy into the bank because of Eric Ambler. American business was expanding in Europe. There was big merchant banking to be done. American banks were expanding in Europe—opening branches, chartering banks. Dollars had piled up overseas and there was a big business in Eurodollars. American banks sought to start banks in Europe, but that was hard, and took time; if they could buy one, that would put them right in the middle of the action. We junior partners were delighted when the United California Bank took over; obviously our bank was to be part of the big expansion in Europe. We were in for a great ride.
When I got to my office that September day the story came out, I dialed 061 35 94 50, the number of the bank’s office in Basel. I remember that I was worried but not stricken. No one likes to see his biggest investment have a bad year. But with the great United California Bank as a senior partner, could anything really go seriously wrong? It was like owning a great ship in partnership with Cunard. The Titanic is unsinkable. If you hear that it has had a little brush with an iceberg, you are annoyed that maybe some paint has been scraped off and now the damn thing is going to need a new paint job when it gets to New York.
After only a few moments, 061 35 94 50 answered, but the bank’s office seemed to be in some confusion. I asked for Paul Erdman, the thirty-eight-year-old American president of the bank. Previous calls had gone right through, the voices across the Atlantic sounding clearer than a local call. Both Paul Erdman and his secretary seemed not to be there. There was some chattering in German on the other end.
Finally a male voice said, “Mr. Erdman is not here. He is not with the bank any more.”
Since when? I wanted to know.
“Since yesterday,” the voice said. I asked where I could reach Erdman, and the voice said to try him at his home in Basel, which I did. Erdman sounded cheerful as usual.
“I’ve resigned,” he said. “But I’m staying on as a consultant. There’s a bit of a mess. Maybe you heard.”
I told him I had just read about it, and what exactly was the problem?
“There’s a shortfall in the trading account of thirty million dollars.”
Thirty million dollars?
Unlike American banks, Swiss banks act also as brokers, and can trade for their own accounts. The assets of our bank were reported to be $69 million at the end of 1969, but of course there were liabilities against those assets. The capital of the bank was less than $9 million. A loss of $30 million would have busted not only our bank but two more the same size, except for our giant parent. I brought this up.
“UCB will keep the bank open,” Erdman said. “They have to—their reputation would be damaged if they closed it.”
Where is the thirty million dollars? I wanted to know.
“It’s lost,” Erdman said. “We lost it trading. A commodities trader lost it.”
“Listen,” I said. “I have seen guys lose one million dollars. Two million dollars, even. But there is just no way to lose thirty million dollars. No way.”
“Well, it’s lost,” Erdman said. “The UCB will make it up. You’re going to suffer some dilution. But the bank will go on.”
“How come you resigned?” I asked.
“The buck has to stop somewhere, and I was in charge,” he said.
At that point I began to feel some sympathy for Erdman. For me the bank was an investment: for him it was a personal creation, something he had spent years building up. I said, “This must be tough.”
“I’m all right,” he said. “I’ll be at the bank tomorrow, helping to clean up the mess.”
But he wasn’t. Shortly thereafter, the Basel police picked Erdman up, as they did all the directors of the bank who were in Switzerland. The two directors they did not pick up were the chairman of the board, Frank King, who was also the chairman of the United California Bank in Los Angeles and, in fact, of the Western Bancorporation, and Victor Rose, a vice-president of the Los Angeles bank. Both of them were in Los Angeles. It seemed somehow very Swiss to put the board of a bank in jail. I never heard of it happening here.
Erdman was to spend ten months in the Basel prison, much of it in solitary confinement. Habeas corpus is an Anglo-Saxon institution. In Switzerland they can keep you in jail as long as they see fit, for investigation. The Swiss say it’s very efficient.
I called Erdman’s house a few days later, and talked to Erdman’s attractive blond wife, Helly.
“It’s like a nightmare,” Helly said. “No one will speak to me. They won’t let me talk to Paul. I am afraid the house is being watched. It’s like a bad criminal show on TV.”
How could they simply hold someone without a charge?
“This is not the United States,” Helly said. “There is a long phrase, Verdacht der ungetreuen Geschäftsführung. I don’t know how to translate it.” Helly was a native-born Baseler, but she spoke good English. “I think,” she said, “it means Suspicion of Crimes Against a Bank.”
I couldn’t think of anything like that in English.
“There isn’t,” she said. “In Switzerland this is very serious. More serious than murder.”
That, incidentally, is true. Long jail sentences do not meet the Swiss standard of justice. There is a gentleman at this moment in the Basel jail who caved in his wife’s skull with a blunt instrument. She was a nagging wife, he said, and she liked to boss him around. One day he had had all he could stand, and he dispatched her. Then he went downtown and mailed a letter. Murder one, five years, with a year and a half off for good behavior. In Switzerland almost everybody gets off for good behavior, because almost everybody is well behaved.
On September 16, 1970, at 2 P.M., the United California Bank in Basel AG closed its doors and posted a notice on its premises at St. Jakobsstrasse 7. According to the papers, the losses were closer to $40 million than $30 million. Representatives of the United California Bank in Los Angeles presented a plan to the Swiss banking authorities in Bern. They would, they said, make good to the depositors and creditors. In a report to its own stockholders, the California bank explained that a great international bank has deposits from other great international banks, and if it were to welsh it couldn’t continue in business. The loss, it said, would be treated as an ordinary and necessary business expense, and it applied to Internal Revenue for a tax saving of half the loss. Furthermore, insurance might cover $10 million. On the New York Stock Exchange, Western Bancorporation went down two and a half points, and then back up two points. In 1969 Western Banc had had a net profit after taxes of a bit more than $60 million, so a $10 million or even a $20 million loss, while quite an inconvenience, was not a serious impediment to doing business.
Western Bancorporation was a publicly traded company; the United California Bank in Basel was held privately, by the Los Angeles bank and a few of us faithful junior partners. No one called the junior partners—at least no one called me, and I certainly left my phone number in enough places. There seemed to be nowhere to get information. I called an investment officer I knew professionally at the UCB in Los Angeles. He clucked sympathetically, said he didn’t know anything that hadn’t been in the papers, and suggested that the best use for my stock certificates was as wallpaper.
“Write it off,” he said.
“Off what?” I said.
Finally I began to play a little game. I would call the office of Frank King, the chairman of the United California Bank, and explain carefully why I was calling, what it was in reference to, and that it was a call from the junior partner to the senior partner. Frank King’s office would say they would take the message and he would call back. Then he wouldn’t call back. We tried this thirty-one times and then gave up. I had to conclude that nobody wanted to talk to me. We were, after all, in the same boat, and we did have something to talk about, but when there is trouble, bankers get very tongue-tied, and this incident was a real conversation-stopper, bankwise.
My calls were over several weeks. Paul Erdman’s salary stopped instantly, and since his only real possession was the bank stock, Helly got a job as a secretary. Teams of auditors moved onto the premises of St. Jakobsstrasse 7, but no one had any clear idea of how $40 million could disappear from a modern banking institution. Especially a Swiss bank.
Paul Erdman was in a small single cell, with a toilet, a fold-up bed and a table.
My bank was busted.
Paul Erdman had come to my office one summer day in 1968. He was lean, tall and bespectacled. I forget now who sent him; we were seeking to expand our knowledge of European banks, and Paul Erdman was to tell us about the Swiss, who are not eager to tell about themselves. We went to lunch, and Erdman began to tell me not so much about the rest of the Swiss banking establishment—he would introduce me to someone who could do an even better job than he could—but about his own small bank in Basel. I liked Paul.
Furthermore, I have an interest—or a weakness—for and in small companies that have big ideas. You would never consider running General Electric to be fun. It might be something else, but not fun. But you take a couple of guys with a sheet of yellow paper and an idea, and the idea is right, and they have an itch to make something happen, to build something that grows—that’s quite exciting. If it works, it’s exhilarating and—though the word is inadequate—fun, almost as much fun as anything else you can think of. The odds against success are quite long: the idea does have to be right, and the money—enough money—has to be there, and then more money has to be available, and then you have to have the counter-strategy ready when the existing establishment feels the sting and starts to growl. And most important, you have to have the right combination of people, and they must all bring out each other’s positive qualities to the optimum. This is hardest of all, because people are the most valuable resource of any quickly growing operation, and the fellow who first started musing on the sheet of yellow paper is likely to have a very big ego along with his imagination, and a corresponding lack of sensitivity to the people the company needs.
I suppose I have been involved in about a dozen of these amateur venture capital situations, and the record is no worse than anybody else’s. It used to be, when the venture business was easier, that in the morning you expected to find a couple of your colts stiff, their feet in the air, but that one or two would turn out to be great winners, ten or fifteen for one, and that would more than make up for the losers. In the early sixties I was in a company that made radar antennae so successfully it went broke. It doubled its sales every year, and the Navy loved the antennae, but they sold for less than they cost, somehow, and the company ran out of money. It barely managed to sell its stock to the public before it went broke. Then there was the electronic grading machine that was going to be used in every school in America—a lot of them were sold before they found all the bugs in the machine—and the company that made the typewriter that talked back to three-year-olds when they pressed a key.
There was one outfit that was designed to relieve office overtime. No need to hire expensive temporaries for, say, peak insurance work: you just dictated into the attachment on your phone, and Dial Dictation would have it for you the next morning. The company hit some foul weather, and at night the president used to call me in California, where I lived at the time, to talk to me. Finally I asked him why he was calling me; I wasn’t a very big stockholder and I wasn’t a director.
“Nobody else will talk to me,” he said.
There were a couple that worked: Control Data bought the laser company, and the company that made the radiation equipment for atomic tests not only made it to the public-offering starting gate but was given a very nice ride in the 1967 enthusiasm. So—no great fortunes, but a lot of interesting entertainment, and my basic conviction was still unshaken: you don’t get rich owning General Motors, because General Motors has already grown up. What you should do with General Motors is inherit it. What you look for—at least before technology became a bad word—was “the next Xerox.” A lot of people have gone down swinging trying for that one.
Typewriters that talked back to three-year-olds; attachments for telephones. I had never thought about a Swiss bank.
I took Paul to lunch at the restaurant of the American Stock Exchange, and he told me how he had started his bank.
“Swiss banks,” he said. “The most common concept is the secrecy—numbered accounts, tax evasion, South American dictators, all that. But Swiss banks are universal banks. They operate everywhere and they are used to processing information from all over the world. But did you ever do business with a Swiss bank? Cold, formal, snooty, extremely cautious, very conservative, eh? I could see the age of the multinational corporation arriving, Polaroid and IBM building plants in Europe, Swiss drug companies expanding in the United States. The services offered by Swiss banks weren’t up to those offered by American banks. I thought, What about an American bank in Switzerland, eh? A bank that would have American management techniques and American aggressiveness, but that was operating in Switzerland under Swiss laws, with Swiss universality. With maybe some of the dynamic qualities of a top-flight British merchant bank, eh?”
Paul was an American, but enough of Basel had rubbed off on him so that he frequently ended his statements with a Baseler interrogative, ja? Certainly if anyone was going to start an American bank in Switzerland, Paul was uniquely qualified, except that, with hindsight, maybe his knowledge of bank operating procedures was a bit sketchy. The Wall Street Journal was to describe him later as “a personnel man’s dream.” He was born in Stratford, Ontario, where his father, an American Lutheran minister, had been called to a parish. Paul’s father is now a vice-president and administrator of the Lutheran Church in Canada, responsible for such activities as Lutheran hospitals and Lutheran insurance. Paul was sent at fourteen to a Lutheran “gymnasium” boarding school in Fort Wayne, Indiana, and then to Concordia College in St. Louis, where he met Helly, a native Baseler.
After he graduated from Concordia in 1953, Paul enrolled at the School of Foreign Affairs of Georgetown University, thinking he might be interested in the foreign service. He worked part-time as an editorial assistant at the Washington Post and graduated with an M.A. in 1955. Still not sure of a vocation, but wanting to study abroad for a while, Paul and Helly returned to her native Basel, where Paul enrolled at the University of Basel; one of his professors there later remembered him as a brilliant student. He received a second M.A. and then a Ph.D. in 1958, and his dissertation on Swiss-American economic relations was published in 1959. His academic credentials got him a job with the European Coal and Steel Community; in collaboration with a German economist, a friend of his, Paul produced another book, this one in German, called Die europäische Wirtschaftsgemeinschaft und die Drittländer, a study on the European Economic Community. Now his visibility was such that the Stanford Research Institute of Palo Alto scooped him up as a European representative. For three years he commuted from Basel to the Stanford Research office in Zurich, but, he told me, “I wasn’t there much. I was all over Europe, consulting on business problems. We did a study for Alfa Romeo on their trucks, another for a Dutch steel mill that wanted to know whether and how to build large-diameter pipe, and so on.” Stanford Research moved him back to Palo Alto, but consulting began to pall. He wanted to do more. Through Neil Jacoby, dean of the UCLA Business School and a director of Stanford Research, he met Charles Salik, a San Diego businessman who had formed an investment company called Electronics International, Inc. Salik sent him back to Basel to monitor European companies, and then bought the idea of a brand-new, American Swiss bank.
“What’ll we call the bank?” Salik asked, and after some toying with words such as Swiss, Universal and American, Paul suggested they call it the Salik Bank.
“Why not?” Paul said. “It was his money.” Salik and his family put up $600,000, and the bank began in two rooms.
No one could accuse the Salik Bank of being formal or snooty. Paul himself hustled customers all over Europe, and at one time the bank claimed to be Basel’s second biggest Swissair customer, even though Basel is head-quarters for several of the world’s great drug companies. The Salik Bank not only took deposits and made loans—short-term collateralized loans in this case—but like most Swiss banks, it dealt in portfolio management, commodities and foreign exchange. Its resources grew apace: from 13.7 million Swiss francs ($3.5 million) at the end of 1966, to 37.8 million Swiss francs ($9.8 million) at the end of 1967, to 142.5 million Swiss francs ($37 million) in mid-1968.
Paul’s particular interest was in currency speculation. In many ways, this is the headiest speculative game of all, for it involves anticipating the moves of central banks, watching the trade balances of countries, and assessing both gossip and political intelligence. Basel itself is an arena for such talk, because the Bank for International Settlements, the clearing house for nations, sits in an old converted mansion opposite the railroad station. The headiness of the speculation comes from the large sums and high debt involved, because one side of the transaction has a floor.
For example: let us say, as it was in 1967, that the Bank of England is committed to buy and sell pounds at roughly $2.80. That is where the value of the pound was arbitrarily pegged. But Britain has a trade deficit; no one wants to hold pounds; there are more sellers to the Bank of England than buyers. You decide that the pound is weakening; sooner or later it must be marked down to a level where international trade will once again support it, and where once again it will reflect the realities of that trading.
So you sell, for future delivery, a million dollars’ worth of pounds. You have already sold them, so to deliver them you will have to buy them back at a future date. You have sold them at $2.80; you know that you can buy them from the Bank of England close to that price. You need put up only $50,000 or so; your only expense is the commission on buying and selling, and the interest charges on your obligation. You hope, of course, to buy the pounds back cheaper, marked down.
But ripeness is all. Those interest charges can begin to mount.
Analysts of World War II like to point out the influence of kendo, the Japanese bamboo-stave fencing, on Japanese military strategy. A lot of parrying, watching for the perfect moment, and then victory in one devastating, lightning stroke—thus, Pearl Harbor.
Paul’s mentality was something like that. Not for him a slow, quiet, dust-covered compounding in some vault.
In the fall of 1967, Paul was watching the sterling situation closely. A number of customers of the Salik Bank sold pounds for future delivery at $2.80. When Britain devalued the pound to $2.40, the customers bought their pounds in at $2.40 and delivered them, cleaning up. One client made $80,000 over the weekend. The coup, the shattering kendo stroke, had worked. Paul’s reputation on currency matters rose, and he enjoyed the role of the currency critic. He wrote papers on gold and the dollar, signed by Dr. Paul Erdman, President, the Salik Bank, Basel. Not only is there something heady about currency speculation, but there is an element of the ultimate judge when one in effect says to a whole country: “Get your inflation in check and your trade balances up, or down goes your currency.” That is the role not only of the Bank for International Settlements opposite the railroad station in Basel, but the currency speculator.
Paul also wrote for The International Harry Schultz Letter, a breezy investment advisory letter from London with Winchell-like tones:
“Hi-lo ratio is negative but mkt not ready for a real kachunk . . . $ trading in Germany hectic . . . frustration with biz expectations causing a rise in nationalism.” While the Winchell gossip might have been about starlets and entertainers, Schultz’s concerns trade deficits, currencies weakening, and cryptic bulletins on world markets:
“Austria: sell into strength . . . Holland: buy, Italy: avoid, Japan: hold (reread HSL 254) . . .”
Schultz had been a California newspaper publisher, and is the author of several investment books, including one on Switzerland and Swiss banks.
Schultz’s readers, called HLSM, for “Harry L. Schultz men,” are a loyal group—“Take an HLSM home to dinner”—who buy HLS ceramic cuff links and spend several hundred dollars for a ticket to his seminars in London and Denmark. Schultz likes to compare the United States to ancient Rome in its decadence; in fact, he signs his letter “Slavius.” Debasing of the currency is a favorite Schultz leitmotif; he considers it not the symptom but the cause of national decline:
“A people can only sink lower without a dependable store of value. Currency debauchery is the sole source of U.S. decline & decadence—just as it has been in every society of recorded history.”
Schultz’s letter was a boost for Paul. It ran his short articles, detailed in one-liners some of Paul’s travels and thoughts, and even identified some customers for the bank. It was one of Schultz’s tenets that in the face of the weakening dollar, investors should not hold cash in U.S. savings or bank accounts. Instead, they could profit from the revaluation of the harder currencies: the Dutch guilder, the Japanese yen, the German mark, and Belgian and Swiss francs. Accounts in a Swiss bank could, of course, be invested in any of those currencies, and in fact an account could be left in a Swiss bank in a time deposit and denominated in Swiss francs.
Because of the corruption of the dollar, the faithful also saw exchange controls coming. Soon you would not be able to take dollars out of the country. After all, the English had once roamed the world, and now they were restricted at the borders to a few measly pounds and could scarcely travel abroad. The same could happen to Americans; the faithful, by getting their money out ahead of the lowering boom, could assure their future mobility. They would still be able to travel, to buy a house in France or a ski lodge in Switzerland; their foresight would be rewarded. Denuded of the rhetoric, the faithful were, of course, right. The dollar has been devalued, some say not for the last time. Specific taxes have been laid on to discourage American investment abroad, and the first limitations on transferring capital abroad have been imposed. Your bank keeps a record of each transfer into another currency of more than $5,000, and in fact you are supposed to report any such transfer to the IRS. Brand-new law. Presumably the IRS can thumb through all the microfilm any afternoon it feels like looking for fleeing capital.
Schultz ran a short list of Swiss banks in his letter, with the Salik Bank conspicuously on the list. After one Harry Schultz seminar in London, an excursion to Switzerland was formed, with Paul and his fellow Salik Bank employees entertaining the excursioners in Basel. Paul said he did not always agree with Schultz’s apocalyptic notes, and he disparaged some of the Schultz faithful as “right-wing Texas kooks, who eat that stuff up,” but he was glad to have them as clients. For a small bank in Switzerland’s second city, the bank had an unusual number of Texas clients, and reportedly some of the clients became shareholders.
When Paul came to see me, he was not seeking another shareholder; he was seeking a friend for the bank. He did this naturally, as an active promoter, a selling president. He sought friends everywhere, and found them. Economists, business-school deans, currency experts, commodity dealers—all found him interesting and agreeable. He even cultivated the press—unlike, I am sure, any other bank president in Switzerland. Other Swiss bankers went to lengths to avoid the press. Paul courted friends for the bank everywhere. If he were asked to write an article on currency for a magazine, he was glad to do that; if, as we did, someone requested more information on Swiss banking, he would set us up with people who could help us.
But he could sense my enthusiasm. A dynamic young bank that had increased its resources by a factor of fifteen in less than three years—that was exciting to me. Coincidentally, the bank had grown so fast that it needed more capital, and it was just in the process of raising it. Paul himself had written the prospectus, and while the prospectus, representing a Swiss corporation, naturally did not need to be registered with the SEC in Washington, it was “just like a prospectus for the SEC, because we want to do everything right; we may come to the U.S. some day, and a New York law firm is going over it completely.”
“It occurs to me,” Paul said, “that you would be a very good shareholder for us to have.”
I said I was very interested. We shook hands, mutually impressed, and Paul went back to Basel that evening. The prospectus arrived a month or so later.
“From the beginning (1965),” said the prospectus, “the Salik Bank was conceived as a bridge between conservative Swiss banking—characterized by extreme caution, stability, and a unique expertise concerning financial matters on a worldwide basis—and modern corporate and financial management techniques usually identified with the United States.” The bank had, the prospectus reported, recruited talent in the fields of portfolio management, foreign exchange, and commodities, and a Swiss financial newspaper had reported that the bank was the fastest-growing banking institution in Switzerland.
The bank, the prospectus reported, acted as a broker and dealer in foreign exchange, metals and commodities. “This field of activity,” said the prospectus, “is usually reserved to the large commercial banks, since the private banks of Switzerland seldom have sufficient expertise in this rather esoteric area of international finance.” “The Salik Bank has sought,” it added, “to move beyond the usual areas of money management offered by many of the more traditional private banks in Switzerland, and to provide ‘total money management’ by building its capabilities related to type of investments other than the usual stocks and bonds.”
Little did I know, but those paragraphs contained the potential for disaster. But like the hidden figures in the child’s puzzle—how many animals can you find?—my eye could not see anything but good.
The bank was also to open a subsidiary in Brussels; then within three to five years, there would be an international bank holding company, which could make other acquisitions “on a larger scale in other areas of Europe, as well as perhaps the Far East and even Australia.”
The Far East and even Australia! The sun would never set on the Salik Bank!
I asked some of my pals on Wall Street for their counsel. I said I had a chance to buy a rapidly growing Swiss bank at a quarter over book value. Would they do something like that?
“How much can you get me?” they said, to a man, and they offered to take any left over. Of course, they were basically gunslingers, attracted to such situations. They didn’t get any of the stock, but that didn’t help them. The nursing home and peripheral computer companies they bought did just as badly. My enthusiasm grew. I decided to go to Basel.
When you land at the airport in Basel, you notice one thing right away. You’re not in Switzerland, you’re in France. Everybody wants to own land in Switzerland because of its stability, and that puts a premium on land. So the Basel airport is over the border in Alsace, a part of France, halfway to the town of Mulhouse, and when you come out of the airport the freeway or turnpike has a big fence on each side, a nice sanitized corridor into Switzerland, uncontaminated by France.
You would have to say that as a European city, Basel is undistinguished but likable. Green trams seem to run everywhere. You can sit by the Rhine watching the barges and sip pleasant Swiss wines—or even pleasanter German ones—and there are some nice parks and squares. For a city whose main industry is a series of drug and chemical complexes, it seems remarkably clean. At first, when you walk the streets, you can’t quite define what’s missing, and then you realize: it’s the garbage bags, spilling over on the sidewalks, that you see so consistently in New York and London. And where is the litter? Where are the wrappers underfoot, the cigarette butts, the old newspapers? I never could figure out whether everybody peel-strips their butts and throws the tiny shreds into a container, the way they bring you up at Fort Dix, or whether the Turks and Spaniards and Italians who clean Basel just do a good job.
Paul picked me up at the airport, and we had lunch with the gentleman who was to fill us in on the background of Swiss banking—the subject that had brought Paul and me together. And after lunch we went to St. Jakobsstrasse, one of the main thoroughfares of Basel. There it was at Number 7, all glass and metal and shiny, four stories of it: my Swiss bank.
Paul had worked with the architect, designing the circular staircase that connected two floors. Otherwise it looked like—well, what can you say? It looked like a bank—like an American bank, all open and bright and shiny, with tellers and people in shirt sleeves and calculators. Which is to say that it did not look like a private Swiss bank, with its corridors and guards and its general air of reticence.
We sat in Paul’s office, with its impressive desk and conference area—the right dimensions for a proper Bankpräsident—and I met a variety of people. Now I can only remember one of them, and that is perhaps because I met him a number of times later: Louis Thole, a pleasant, blond Dutchman in his thirties, scion of an Amsterdam banking family, who was going to handle the bank’s portfolio-management activities.
“The Deutsche mark looks a bit stronger,” said one of our staff.
“Let’s buy another million Deutsche marks,” Paul said.
Louis Thole wanted to know if I had looked at Japanese convertibles. I hadn’t.
“The Hitachis are coming next week,” Louis said. “They are beautiful. They are quite sexy.”
“Silver,” Paul said. “Silver is going to go through the roof.”
I knew the silver story.
“I’m doing a report on silver,” Paul said. “The U.S. Treasury will run out of silver at some point, and then, whoom. We have a man in Beirut who is very good on silver.”
And gold—well, the world was not going to stand for long for all these jerry-rigged paper currencies, depreciating every day as their governments printed more paper.
Then another pleasant gentleman came in, whom I will call Alfred because I can’t remember his name. Alfred had with him the forms to open an account. I said I was going to become a stockholder, not a depositor. Alfred said most of the stockholders were also depositors, and didn’t I know all the advantages of a Swiss bank account?
I don’t know what made me hesitate. Swiss bank accounts seemed appropriate for Las Vegas gamblers, South American dictators, Mafiosi, and people with cash incomes—some doctors, say—or with incomes abroad who weren’t about to tell the government their foreign earnings because they considered taxes a personal injustice. I didn’t see myself as the holder of a numbered account. Where would I keep the number? Tattooed on my heel? And what would I put in the account, anyway?
“I don’t need an account,” I said. “I already have a checking account. In the United States.”
Alfred looked a little weary. Obviously that was not the right thing to say. I began to think the other visitors to the bank must have arrived with cardboard suitcases full of currency.
“Look,” I said. “I’m very excited by the bank as an investment, but I pay my taxes.”
Alfred looked absolutely blank at that. I was still apologetic.
“My income,” I said, “is totally visible, and they take the taxes right out. And anyway, if you don’t want to pay your taxes right away in the United States, you put your money into tax shelters, and then you don’t pay them—at least that year. All legal and approved by the government.”
I had Alfred’s interest.
“See, the United States Congress writes the tax laws,” I said. “Then special-interest groups lobby for privileges.”
I told Alfred about my cattle.
Alfred liked the Western flavor of the tax postponement, but it did not deter him.
“You do not have to have a numbered account,” Alfred said. “You can have an account as public as you like. I am happy you like to pay your taxes. In Switzerland we feel that what happens between a gentleman and the tax agents of his own country is his own business. In Switzerland we cooperate fully with other countries in pursuing criminals, but by Swiss law tax evasion in another country is not a crime. But let me ask you: are you married?”
I was married.
“Happily married?”
Happily married.
“Now,” said Alfred, “you are happily married, you have insurance on your house. You naturally believe you will always be happily married, but you know that statistics do not bear this out, especially in America. And we know what happens in American divorces. They are famous. The woman keeps the house, she continues to live the same life; the lawyers and the courts take the husband’s income and permit him to live on seventy dollars a week, in poverty. You are happily married now, but no man knows the future, five, ten, twenty years away. You are an American; you like to pay taxes; if you do not want to pay taxes, you feed cows; you think you will always be happily married. But do you not owe yourself a little insurance?”
“What are you saying?” I asked.
“With an account here, you need do nothing illegal. You can pay your taxes, you can buy stocks on any exchange in the world, you can buy and sell commodities anywhere in the world, and no one need know about it. And someday, when your wife’s lawyers are trying to take away the money you have worked for twenty years to build up, you will have a private reserve.”
Alfred must have met Americans before. Like a master insurance salesman, he closed in. Even the happiest of husbands would have paused for a moment.
“Nothing illegal,” Alfred said. “There is nothing illegal in trying to strike a more equitable bargain with your wife’s lawyers. That is nothing to do with you and your government.”
Now that the matter was not between me and the government but between me and my wife’s lawyers, those sonsabitches who were going to make me live on $70 a week, I began to loosen up. I could see them, the ferret-faced wretches—Bardell and Pickwick, crackling at their rolltop desks, rubbing their bony hands together as they dispatched me to some roach-infested garret with winos lying in the hallway and junkies shooting up under a ten-watt bulb. Why? What did I do?
“It’s not illegal not to tell my wife’s lawyers?” I said, forgetting for the moment that my wife had no lawyers nor any need of them.
“You don’t owe your wife’s lawyers anything, do you?” Alfred said. “They are going to try to prove you a criminal—that is the nature of American divorce justice: one party must be a criminal, an adversary proceeding. A criminal in fiction, mind you—mental cruelty, lack of attention, what-have-you—things that would make a European laugh. When an American wife behaves in a manner that would cause her to be shot if she were married to a European, the American stands still like a patient lamb to be fleeced.”
“I’ve seen some tough cases,” I said. “A friend of mine just went through it. They left him one shirt and one cuff link.”
“Another thing,” Alfred said. “Your dollar is declining. Your Vietnam war is bleeding it. Your government mishandled its finances. That is going to cost you dearly as a citizen.”
“I’ve been saying that for three years,” I said.
“Good,” Alfred said. “Now, you pay your taxes, so you are already paying for your government’s political sins, but why should you pay for its fiscal sins, when you yourself warned against them? Your account here will be in Swiss francs, so when the dollar falls apart, you will still have some currency with some value.”
“Terrific,” I said.
“Sign here,” Alfred said, holding the pen out for me.
“Wait a minute,” I said. “I don’t need a number. Just a name.”
“That number is for us,” Alfred said. “Not secret. Your own account in America has a number. All bank accounts have numbers. Computers can’t work with Roman numerals.”
“Okay,” I said.
Alfred held the pen out. I signed the form.
“No secret number,” I said firmly.
“As you wish,” Alfred said.
I had a Swiss bank account. I put $200 in it.
“No alarm clock,” I said. “No toaster? No bonuses for signing up? Do I get pretty checks? A winter scene?”
Alfred did not seem to know about the American banking tradition of giving away two-dollar appliances for new accounts, and he indicated as long as the account was that size I would probably not need checks. The bank charges for the various bookkeeping transactions of deposits and checks were higher than in the United States. Paul came back into the room.
“You have a new depositor,” I said. “But no number.”
“Good,” Paul said.
“Now that I’m part of the family,” I said, “tell me. Do we have any South American dictators as depositors?”
“Oh, for heaven’s sake,” Paul said.
“I bet we must have one Mafioso. What’s a Swiss bank without at least one Mafia account?”
“For heaven’s sake,” Paul said, “we want to go public with this bank.”
We walked out through the bank, and Paul pointed out various of the officers. One was working in a small room with a desk calculator. Paul said he was from a wealthy family; he himself was a multimillionaire. Then why, I asked, was he working in a bank?
“First of all,” Paul said, “in Switzerland everyone works. We have no playboys. If you are going to be a playboy, you have to go to the south of France or to London or New York or wherever they have that environment. Saint Moritz is for foreigners. And second, in Switzerland you never know how much money anyone has. There are families in Basel whose net worth must be a billion dollars. But you never know. If you ever get to anyone’s house, and through the front door, sometimes you see it on the walls—Picassos, Renoirs, and so on. And when they take a vacation they take a good vacation—a safari in Africa, a visit to South America, and so on. But you must leave Basel to spend the money. The houses are solid and square, not ostentatious. In Switzerland it is not only the money you have that is important, it is the money you get.”
On the way to his house, Paul drove up to the cathedral, and we stood in back of it, overlooking the Rhine. We walked around among the gabled houses of old Basel, some of them built in the fourteenth and fifteenth centuries.
“Basel’s skills came from the Catholic persecutions,” Paul said. “The Protestants who fled here had two skills. One was that, not being Catholics, they could lend money and change currencies, and that grew into banking. The other skill was in dyeing, dyeing textiles. During the nineteenth century the skill of mixing dyes grew naturally into chemicals, and during the twentieth century there was a natural transition from chemicals into drugs, and that is how Basel became one of the great chemical-drug complexes of the world.”
Paul lived in a pleasant American-suburban-style house with a cathedral ceiling and books in three languages overflowing the shelves. The house was located in a solid residential section of Basel. The Erdmans did not live elaborately; they had an Alsatian girl who helped with the two daughters.
“It’s nice to have somebody for dinner,” Helly Erdman said. “In America you do that all the time. In Switzerland you just don’t do that. Visits inside the house are inside the family. You go out to dinner only to see your own relatives.”
“Once a year,” Paul said, “maybe you will go to someone’s house—another banker, let’s say. Then it is very stiff, very formal. Dinner jackets. You send flowers to the hostess ahead of time.”
“The conversation is very stiff too,” Helly said.
“There are no backyard barbecues in Basel that I know of,” Paul said. “Switzerland is built on privacy.”
We talked about the plans for the bank. There would be a branch in Zurich, and then another in Geneva, and a subsidiary bank in Brussels; eventually the bank would sell its stock to the public in Europe and spread its activities far beyond Switzerland.
“Paul is involved in every detail,” Helly said. “I can’t tell you—he even debated with the architect over where that stairway should go in the bank.”
The next morning we went back to the bank, and I went over various reports on European issues and European currencies. I also used my new bank to make an investment.
The Bank for International Settlements is the international clearing house for the central banks of governments. It is through this bank that government currency swaps are engineered, and also through this bank a government that is going too deeply into deficit in its international accounts is told to shape up. The stock of the bank is held by the member governments: the United States, Germany, France, Japan, Italy, and so on. Every once in a while there seem to be a few stray shares floating around, and so there was this day. For something like $1,100, I bought one share. Then the stockholders were the United States, Germany, France, Britain, Japan, Italy, and Adam Smith. I think I had in mind going to a meeting of the stockholders, or having some conversations with them, but I never got around to it.
Paul had a present for me. It was a diseased cocoa pod; someone had brought it to him, and there had been a section on cocoa in my book which Paul liked. We took pictures of each other holding the cocoa pod in front of the Bank for International Settlements. In the light of what was to happen, it was the ultimate in irony.
I got on the train for Zurich. Swiss trains were supposed to run with the precision of watches; the train was to leave at 11:59, and I had just had my Swiss watch set. Starting at 11:57, I watched the sweep of the second hand. The train left ten seconds early.
In Zurich I had appointments with several major banks. Sometimes, peripherally, I would drop the name of my new bank into the conversation just to test the reaction. There wasn’t much of one. Those that had heard of it didn’t know much about it; one banker who had thought the bank was “very aggressive,” which in Switzerland is not a term of praise.
In Zurich the visceral feeling I had about Switzerland and money began to be confirmed. Now, I do realize that a week spent in banks does not provide a very broad background for generalizing about a country. You could spend a week on the ski slopes and come away with a different feeling, or a week in the chocolate factories, or some time with watchmakers or with the cuckoo-clock guild. Nonetheless, there is something about Switzerland and money that makes it ultima Thule, the country that provides one definitive end to the spectrum. After all, why Swiss banks? Most Western industrialized countries have well-developed banking systems, and a number of countries—Lebanon, the Bahamas, and Uruguay—have imitated the Swiss system of secrecy. Lebanon even used the Swiss banking code as a model. Still, for its size and per capita income, Switzerland leads the world in this profession. Why? It is the Swissness of the Swiss, and it might be interesting to take a moment to see how they got that way. Even though my new bank was not very typically Swiss, it gave me a feeling of confidence against fiscal dangers unknown, a home away from home.
By rights, Switzerland ought to be one of the world’s losers. The popular image of Switzerland is mountains, and the popular image comes pretty close to being right. Only 7 percent of Switzerland can be farmed, and the country can’t feed itself. Unlike much of Europe, it has no coal, oil, gas, iron ore or other industrial amenities, and no access to the sea. It had, of course, William Tell, a symbol of pragmatism, technical competence and an unwillingness to be pushed around. Being mountainous, Switzerland had no large estates, no large convenient political divisions. Each valley community had to survive by itself. That led to a certain amount of hard-headedness. It isn’t a Swiss proverb that says if you have an ugly face, learn to sing, but it might as well be.
In the late Middle Ages, the small Swiss towns found themselves astride a German-Mediterranean trade route, handling sugar, salt and spices, discounting the gold from Venice and the silver from the Rhineland. According to one author, T. R. Fehrenbach, the Swiss burghers also had little use for medieval Christianity. For the Swiss businessmen already honored hard work, individual effort and money, and medieval Christianity denigrated all of these things. Gott regiert in Himmel und’s Galt uf Erde, went a Zurich proverb, Für Galt tanzt sogar de Tuufel. “God rules in Heaven, and money on earth. Even the Devil dances for gold.”
John Calvin and Ulrich Zwingli changed the course of Switzerland. Gold was the sober gift of God and work was holy. Calvinism’s ideal was “a society which seeks wealth with the sober gravity of men who are conscious at once of disciplining their own characters by patient labor, and of devoting themselves to a service acceptable to God.” (This is from Tawney’s Religion and the Rise of Capitalism; so is what follows.) Calvinism is “perhaps the first systematic body of religious teaching which can be said to recognize and applaud the economic virtues.” No longer was “the world of economic motives alien to the life of the spirit.” Here is Zwingli, quoted by Wiskemann, quoted by Richard Tawney: “Labor is a thing so good and godlike . . . that makes the body hale and strong and cures the sickness produced by idleness . . . In the things of this life, the laborer is most like to God.”
Thus banking became one of the Protestant fine arts. According to Fehrenbach:
Zwinglianism did not reconcile Christ and Mammon. Zwingli and his rational spiritual descendants never saw any conflict. The Swiss did not learn to love money . . . The Swiss respects money, a very different thing. Respecting it, a Swiss pursues, handles, and husbands money as an end in itself, which is utterly different from German materialism with its emphasis on things or American status-seeking, with its drive for power or prestige . . . respecting money, the Swiss made its handling not a miserly trait but more a priestly calling. He erected ritual rooms and bare confessionals, guarded one and gave the other secrecy.
For four hundred years, the Swiss stuck close to the proverb, Money rules on earth. No political passions, no religious crusades. When the Swiss went to fight a war, it was somebody else’s war. Something like two million Swiss soldiers left Switzerland to fight all over Europe—but always for money. The Swiss mercenary became a factor in the military history of the world.
Hard-headedness, pragmatism and a distrust of new ideas; if the Swiss had had General Motors, they would have erected a statue to Charley Wilson for saying that what was good for General Motors was good for the country. Feudalism and Catholic Christianity weren’t good for business; nor was despotism, anarchy, nationalism, a strong central government, socialism, Marxism, and even female suffrage. All of those winds have swept over the mountains without effect. (Only recently did the ladies get the vote. But Switzerland is still a male-chauvinist-pig country. If community property is involved, any husband can request information on his wife from a bank, but no wife, for any reason, can get such information on her husband without his consent.)
Non-Swiss seem to have been affected most by two factors in the Swiss banking code. One is the Swiss attitude toward taxation. In the Zwinglian Protestant society, honesty was not only the best policy, but work and the reward of work were holy. There was no strong central government, only a confederation of states, so by any world standard, national taxes are not particularly high. Therefore you get what you pay for, and you pay your taxes; taxes are a part of duty, and duty is a part of life. In the 1300’s, the Austrian Hapsburgs had made life tough for William Tell, and sent the nasty agent Gessler, still booed in schools. Swiss society is structured to leave the individual Swiss alone. No Swiss government has ever made the evasion of taxes a crime. Americans shook off the stamp tax and the tea tax imposed by the Crown and went on, independently, to taxes of their own. The Swiss, having gotten rid of the Hapsburgs, saw no need to complicate life further: that lesson was learned.
Most governments in the world today cooperate with each other in apprehending criminals—but only if they agree on the crime, or on what is a crime. A crime in Soviet Russia or in Mao’s China might not be a crime in the United States. A tax matter in Switzerland is an administrative detail between the state—that is, the canton—and the citizen, not a crime. But if you rob a bank and send the money to a Swiss bank, the Swiss government is delighted to cooperate, take the lid off the bank account, check the serial numbers, and help send you to jail. Everybody agrees that bank robbery is a crime.
In the early sixties there was a scandal concerning a Texas promoter called Billie Sol Estes and a lot of missing assets. Some people thought that maybe some of the assets had worked their way into Swiss banks. But the U.S. government had slapped a tax lien on Billie Sol’s assets, making the affair a tax matter, so as far as the Swiss were concerned, that was the end of it.
The other factor in the Swiss banking code that has endeared Swiss banks to foreigners is secrecy. But secrecy is nothing new to banks; in fact, the lack of secrecy is something relatively new, a part of contemporary nationalism. Roman banking law, Germanic civil law and the laws of the northern Italian states, where banking flourished during the late Middle Ages, all contained secrecy provisions. Europeans are still a little startled by the way an American department store—or worse, the American government—can call up your bank and find out your fiscal habits. Until the 1930’s, a Swiss bank account was properly secret, but it was up to the Swiss banker to preserve the secrecy.
As Germans—particularly German Jews—began to send their money out of Germany under Hitler—Gestapo agents tried to follow the money. Some of them simply bribed or cajoled the employees of Swiss banks, but others came up with a more ingenious device: they tried depositing money in Swiss banks, in the names of various wealthy Germans. The Swiss bank that accepted the Gestapo agent’s ruse as a courier, and accepted the deposit, confirmed the fact that there was a bank account, and the unlucky German was whisked to a concentration camp, from which he asked the Swiss bank to send his money back to Germany, and then was tortured and executed. Much of the money that left Germany was never recovered and is still in the Swiss banks, and by now it belongs to the banks themselves, since under Swiss law if no one has claimed the deposit after twenty years it escheats to the bank.
The Swiss government was annoyed enough by the Gestapo’s tactics to ratify the Banking Code of 1934, which made bank secrecy a part of the penal law. It took the moral burden off the banker by making it a crime to reveal any banking secrets, and it reassured foreigners that foreign deposits were protected by Swiss law.
The final appeal of the Swiss bank is not in the Swiss banking code, but in the Swiss banker. From his neutral perch, he has seen the world on the horizon go to war for seven hundred years. Castles are sacked in war, chieftains are scattered far, kings are deposed, governments fall, currencies become worthless, families break apart, wives leave husbands, husbands leave wives, children turn on their parents, mobs swirl in the streets—all like one of the Breughels in the Swiss museums. If governments were not corrupt, if paper currencies did not depreciate, if taxes were fair, if there were no wars, if humanity were not so fallible—if the world were like Switzerland—then there would be no need of Switzerland. But the world is like that, and if Switzerland did not exist, to paraphrase Voltaire, it would have to be invented. The money in the bank is there in solid Swiss francs, backed by gold. Never mind the people who brought it there; it is the money that is immortal, to be tended like a delicate flower by God’s own anointed gardeners. Even that simile is not quite accurate, for it is more important that the money be preserved than that it grow. Thus the honored calling: to preserve the incremental lump, the evidence that somewhere, sometime, someone pleased God with some work that was rewarded: husbanding the lump—that stewardship is an elite-enough calling.
And, incidentally, very profitable. Can anything profitable be all bad?
I have had some time to think about the policing effects of the Protestant ethic since my Swiss adventure. Clearly, something was lacking in the competence of Swiss accountants or in the Swiss banking system. Somewhere, some Swiss had not made the handling of money a proper priestly calling. Would I rather be policed by the Fed in Washington or by the ethics of the good Swiss bankers? The trouble is, even in Switzerland nobody really lives in fear of God, Calvin, or Zwingli any more. Most of the habits continue in good shape, but the Protestant ethic leaks.
In the month following my first visit to the bank, Paul and Louis Thole came to New York. Paul was eager to get the bank established in underwritings—that is, to be one of the group selling securities to the public, a function usually done by brokerage houses in the United States. Paul also wanted the bank to get more deeply into money management, running portfolios for clients.
Those were the heady days of “offshore” funds, led by Bernie Cornfeld’s IOS. The funds were headquartered in “tax havens” such as Curaçao and the Bahamas. These are countries equal to the United States, Britain and West Germany in legal status, but their laws governing taxes, investment policies and the ability to borrow on the funds were (and are) more relaxed than those of more developed countries. Paul and I talked about a hedge fund to be operated by the bank, as an additional service to its clients. We tried the hedge fund for a brief period on a “pilot” basis—that is, with a very small amount of money but with the pretense on paper that it was really full size. We washed around in some of the popular stocks of the tail end of the bull market, but it was plain to see that there was something nervous in the market: it simply did not behave with any degree of health. We discontinued the experiment after a few months with a small loss.
In the spring of 1969 I got a jubilant letter from Paul. Now the stationery was different: it bore the bold words United California Bank in Basel, in the same type face used by the United California Bank in Los Angeles. It also had a familiar monogram: UCB, familiar to me because I had once lived in California, and the UCB had a very catchy UCB commercial all over the television channels.
“Now we can proceed with a number of projects,” Paul wrote. “You will see by our new stationery that we have changed our name and made a great step forward. The United California Bank has bought a majority interest in the bank. UCB itself is the flagship bank of Western Bancorporation, one of the biggest bank holding companies in the world. Frank King, the chairman of both the UCB and Western Bancorporation, has become our chairman, and I am vice-chairman. We have a number of very exciting plans.”
But for the next year, I was not in very close touch. We ran a seminar on American investments at the Savoy in London, attended by a number of European institutions, major banks, mutual funds, and insurance companies from Britain, Switzerland, France, the Netherlands, Belgium, Germany, and Italy. Paul and Louis came as invited guests, but I did not have much chance to speak to them.
In the spring of 1970 our Basel bank offered additional shares to its shareholders. I called Paul. He said things were going well, that the expansion was continuing, but that 1969 had been a disappointing year due to losses in the securities markets. That was not surprising; 1969 was not a good year anywhere. But now we had a new and additional important shareholder: the Vesta Insurance Company of Bergen, Norway, and through them, perhaps twenty Scandinavian banks. Scandinavia was to be a new and fertile field, and our Scandinavian shareholders would send us a lot of reciprocal business.
Bear-market gloom was upon Wall Street, and brokerage houses tottered. There wasn’t much time to think about Basel or the United California Bank, but presumably things were going well. That was all I knew.
The Basel bank was indeed one of the fastest-growing financial institutions in Switzerland. In the United States such an image would have been welcomed; in Switzerland it was considered not sound and a bit pushy. For one thing, it was not easy to find qualified, competent people. Hiring away from another bank is something not readily done in Switzerland. To manage the bank’s portfolios, Paul recruited Alfred Kaltenbach, an affable, nattily dressed Swiss with uncharacteristic long sideburns.
But the prize catch was Bernard Kummerli, an intense, near-sighted, rather olive-skinned foreign-exchange specialist. Kummerli was a native of Reinfeld, a small Swiss town near Basel noted for its spa and medieval old section. Kummerli’s father was the banker in town. Kummerli had been educated in the local schools and in a private Catholic school, and then had worked for the Crédit Suisse, one of Switzerland’s Big Three banks. Paul found him at the Bank Hoffmann, a smaller, private bank, where Kummerli was the head of the department that traded currencies. Kummerli was very ambitious. His reputation was that of a walking computer, a man who could transact millions in foreign exchange in his head, the essence of cool. Kummerli is described as emotionless, which can scarcely be true for someone with that kind of fire in his belly, but that was the description extant. Kummerli could effect $10 million trades without the flicker of an eyelash. Three or four young traders came with Kummerli from the Bank Hoffmann, one of them Victor Zurmuhle. The -li or -le suffix in a Swiss name is a diminutive; Swiss-German abounds in diminutives. When Paul’s trading department got going, Kummerli and Zurmuhle became known to the currency and commodity traders in Europe’s financial centers as the “-li boys” or “Lee boys.”
Paul had assembled a staff of young executives—almost all of them in their thirties—but not without some cost. The Big Three banks of Switzerland sent Paul a rather stiff, formal, four-page letter. It was not done to go raiding for employees, said the Big Three, and Paul was to stop it.
Kummerli arrived in mid-1968 and took a characteristic plunge into silver futures. The bank and some of its customers had already been into silver, and Paul had put out a letter in May suggesting that silver was a sale. But if his executives and his customers wanted to speculate—well, the customer was always right.
The rationale for the silver play was that the U.S. Treasury had stopped selling silver. Industrial uses of silver were growing. Therefore, with the U.S. Treasury no longer selling and industrial uses growing, silver had to go up. Right?
There was only one problem with that reasoning, and that was that the story was too old. Speculators had already anticipated all the events. I myself had culled out the dollar bills that came to me when breaking a ten or a twenty and saved the ones that said “silver certificate” on them, and in fact I had taken nineteen of them to the U.S. Treasury and traded them for a baggie full of silver. At this point there were no more dollar bills that were silver certificates, and the price of silver had in fact gone from 91¢ an ounce to $1.29, the price at the time that the Treasury had stopped selling, all the way to $2.50, the point at which the Basel geniuses discovered it. But so had all the people who had patiently bought silver for years, awaiting just such a rise; certainly the last 30 percent of the rise had been sheer speculation. By the end of 1968 the speculators had begun to cash in, and silver was down to about $1.80. In a commodity trade, the cash the investor puts up can be as low as 10 percent, so a drop of 25¢ an ounce on $2.50 silver would wipe out the account; long before that, there would be margin calls.
By June of 1969 silver had dropped further, to less than $1.60, but the bank had recouped some of the losses by quick trades on both sides. For its own account the bank made back its losses, but its customers who had been in silver were, needless to say, quite unhappy, and some of them complained to Paul.
Since May 1968, Paul had disassociated himself from the silver trades. He believed, he said, in giving his staff full rein, in leaving them complete autonomy. Paul felt badly about some of the accounts with silver losses. “Those guys,” he said of his staff, “put some people in who had no right to be in. Not exactly widows and orphans, but practically. That was wrong.” Especially after his form letter predicting just such a decline. So the bank did an extraordinary thing: it canceled some of the silver trades, taking the losses onto its own books. “We looked over the list,” Paul said, “and we figured if it was a sophisticated guy, he was big enough to take his own lumps. But some of the accounts weren’t, and we took the losses ourselves.” The losses on the silver accounts were more than two million Swiss francs.
If it had become known that my Swiss bank was guaranteeing its clients against loss, it soon would have become the most popular financial institution in the world. Yet the bank was to do this twice more.
Once it was in an over-the-counter stock called Leasing Consultants, Inc., a Long Island computer-leasing company which financed aircraft and computer equipment. There was a plethora of such companies in the late 1960’s; they based their existence on a bank loan for, say, an IBM-360 or a jet plane, something that could be readily leased. Then they sold the management of the company to the public. By the time Alfred Kaltenbach had found this company, it was already late in the game. Leasco, Data Processing, Financial General, and Levin-Townsend were on their way to Mr. Babson’s booby list. An analyst in Oslo, Norway, told our sideburned and nattily dressed Kaltenbach about Leasing Consultants, proving that distance from Roslyn, Long Island, lends enchantment. For the bank’s account, Kaltenbach bought letter stock, which was restricted and which the bank could not sell for a number of years, at prices around $12 and $13 a share.
Not only did the bank buy Leasing Consultants for its own account, it circulated a report on its own stationery recommending its purchase. Nineteen of the bank’s clients bought the stock through the bank. Unfortunately, Leasing Consultants went the way of many such companies. Its income had been overstated, and early in 1970 it admitted it. The stock dropped to 7. By August the company had filed for bankruptcy, and the stock was 37¢ bid.
Again, the bank was distressed at the losses of its clients. This time the major loss was in the bank’s own account—in fact, the loss was to total $2 million—but the nineteen clients got their money back. In The Wall Street Journal Ray Vicker reported that “one startled customer” had said “this was the first time anybody ever reimbursed me for a bum trade.”
Meanwhile, Kummerli had found a new field for his talents: cocoa futures. But by the time Kummerli was really rolling, our bank was part of the great United California Bank.
In 1968 Paul had been on a trip to the West Coast, and had looked up his friends from the Stanford Research Institute. Over drinks one night, Paul met Edward Carter, the chairman and chief executive of Broadway Hale, one of the nation’s major department-store chains. Carter, who was on the board of both the United California Bank and its parent, Western Bancorporation, later called Cliff Tweter, the vice-chairman, who set up a meeting for nine the following morning. Tweter was joined by the senior vice-president for international affairs of the bank, Victor Rose, then sixty-five. Within ten minutes, according to Paul, Rose had said, “Can’t we buy that bank?”
In October, shortly after my own visit to Basel, Paul had met Frank King, the chairman of the United California Bank, in the London Hilton. King, then seventy-one, had started as the assistant cashier of the first National Bank of Sparta, Illinois; he had been president of the United California Bank for twenty-four years. “We want to buy your bank,” King said. King had three prerequisites: first, that the United California Bank in Los Angeles have absolute control; second, that Charles Salik and his family retain no further interest; and third, that the management team stay on. In January King came to Basel to look over the bank. There seemed to be no question of his fascination with Paul Erdman. In March of 1969 there was a handshake agreement between King and Salik, and the lawyers went to work. The deal was complete in May; the Basel bank was valued at $12 million. What the UCB sought, among other things, was the Basel bank’s toe hold in Switzerland and Europe, and even more important, its dynamic young executives. “We bought the bank to get Paul Erdman,” said a UCB official at the time. And according to Ray Vicker of The Wall Street Journal, King regarded Paul “almost as a son.”
The United California Bank put two men on the board of its new acquisition. Frank King became the chairman of the board, and Victor Rose became a director. The California bank was quite proud of its acquisition. It changed the name almost immediately to The United California Bank in Basel. In its glossy annual report for 1969, it discussed the acquisition of the Basel bank as high among its achievements for the year, and listed it as a subsidiary.
Paul had thought the affiliation with a powerful bank would bring in new business, but apparently it did not. Paul was to report directly to Frank King, and in their discussions they went over a potential international program. In particular, now that he had Scandinavian stockholders, Paul had planned his end run around the dominant banks of Scandinavia. There were no American banks in Scandinavia; now, with his new Scandinavian connections, he could meet middle-sized businessmen in those countries and recruit their accounts before they moved from their country banks to the major banks of the Scandinavian capitals.
At the time the California bank took over, it had sent in its own auditors, who reported how the bank had taken over the customers’ losses on silver, and also that there was a substantial exposure on margin accounts. But this did not get in the way of the merger. In fact, according to Paul, there was little communication with the parent bank. “Occasionally,” Paul said, “a visiting fireman from Los Angeles would come through. He would ask where the good restaurants were, and whether we would get him a reservation at the two- and three-star places over the border in France.” There was no general plan, and no external budget, and only slowly did the Basel bank come on stream into the California bank’s reporting system.
Meanwhile, Bernard Kummerli was on his way to buying half the cocoa in the world.
Even to this day, I find the incident which brought down the bank totally and personally incredible. I had received the write-up on Leasing Consultants, and in fact had asked Louis Thole where they had come up with such a turkey at such a late date. But no one ever told me our bank was going into cocoa. What was to follow was as bizarre an example of nature imitating art as could ever be found.
For, after all, I had been into cocoa a bit myself. That was back when the Great Winfield discovered cocoa trading. Occasionally in those more leisured days I would sit with him lazily watching stocks move, like two sheriffs in a row-boat watching the catfish in the Tennessee River. There was a lull in the market, and everybody was fatigued from some slide or other, and somehow the Great Winfield had figured that the world was about to run out of cocoa.
“And, my boy,” I remember him saying, “when the world is just about out of something, the price goes up. The Cocoa Exchange is unregulated. A three-cent rise in cocoa doubles your money. It’s going to be wild. Come along for the party.” The cash you had to put up for a cocoa contract was small.
Why was the world about to run out of cocoa? Well, the African states that produced cocoa were having political troubles, and there was supposed to be an outbreak of Black Pod, a Dreaded Cocoa Disease. The farmers had been leaving the farms, and hadn’t sprayed the plants. So I bought some cocoa contracts and began to root for everything that would bring about a world-wide shortage of cocoa. Was there an unconfirmed report of Black Pod in the far interior of Ghana? We cheered. Was Nigeria breaking up into civil war? That was good for cocoa prices—maybe they wouldn’t get the cocoa to market. Cocoa was selling for 25¢ a pound, and all we needed was the farmers leaving the farms, riots, chaos, no spray for the cocoa, and some torrential rains to encourage the Black Pod, and cocoa would be at 60¢ and we would all be rich.
We even sent Fat Marvin from Brooklyn—five-six, two forty-five—to West Africa to find out what was going on. Marvin knew pieces of paper in the commodity markets; in fact, he had just recently gone busted trading the same. I had gone to Abercrombie with Marvin while he outfitted himself in a safari suit and tried on an elephant gun, because you never knew what you would need in Africa. We waited breathlessly for word from Marvin about our speculation, and got telegrams like
RAINING OFF AND ON
MARVIN
and
BRITISHER IN HOTEL HERE SAYS SAME NUMBER OF COCOA TREES AS LAST YEAR AND CAPSID FLY UNDER CONTROL
We did not know a capsid fly from a horse fly, but anything that ate cocoa trees was all to the good.
Eventually they brought in a nice medium cocoa crop, same as most always, in spite of civil war, chaos, riots, no spray for the cocoa trees, and the Dreaded Black Pod. Marvin returned, having had one adventure where he was dunked naked into warm oil by some of the locals. Cocoa prices did not go up and we lost our stake. I wrote that story and it was not only in The Money Game, it was also in Das grosse Spiel ums Geld (more or less the same thing in German), and in fact, Paul and I had taken those pictures with the cocoa pod in front of the Bank for International Settlements.
The problem—or one of them—with our cocoa venture was information and its interpretation. There were some serious players in the game—Hershey, Nestle, and M & M—and they bought real cocoa and knew a capsid fly from a Black Pod, and I have to assume they knew more than we did, because they are still in business. So I wrote that the next time the feeling came over one that there was money to be made in commodities, one should go to a nice beach and lie down until the feeling went away.
But Bernard Kummerli hadn’t read that cautionary tale.
When I was trying to find how my bank could have evaporated into the soft summer air so quickly, a vice-president of the United California Bank in Los Angeles said, “You know, this is all just like your own story about cocoa.”
It was, and in spades. Unfortunately, I do not have all the pieces, because they take their time about trials in Switzerland, and Kummerli was still in the Basel jail and the authorities there showed absolutely no interest in letting me swap yarns with him. For Kummerli followed the trail of Fat Marvin, at a distance of a couple of years, even though the admonitory and avuncular lessons were already in print.
Paul had not changed his policy of letting his staff have free rein, even after the stubbed toes in silver. “Everybody makes mistakes,” he said.
Our bank had already dabbled in cocoa for the accounts of some of its customers. “A few contracts, nothing more,” Paul said, and in the noble tradition of our bank, when the market went against the clients, the bank, of course, took over the losses. “Small stuff, only a hundred thousand dollars or so,” Paul said. “I thought we had only a few contracts.” All that, according to Paul, had been audited by the United California Bank’s own auditors when the Los Angeles bank bought the majority interest.
The bank, of course, was eager to have a coup. It had a reputation for brilliance and aggressiveness, and Paul’s own style was the kendo stroke. The mistakes in silver and the securities market needed to be made up.
Somebody must have told Kummerli the world was about to run out of cocoa. With Fat Marvin’s trail scarcely cold, Kummerli took off for Ghana to become an expert. Later I asked Paul what Kummerli had done in Ghana.
“Damned if I know,” he said. “Drank a lot of beer. I think he got to know some of the fellows who were experts, commercial attachés, people in the cocoa trade, and so on.”
In mid-July of 1969, there was some sort of interdepartmental intrigue going on in the commodity department of our bank. Kummerli was on vacation, and the other one of the Lee boys, Victor Zurmuhle, came to Paul to report that Kummerli had been speculating. According to Paul, Zurmuhle discovered three thousand cocoa contracts, all betting on chaos, riots, no spray, and Black Pod. What did they do? “We traded them out.” Heretofore there had been no limits on the commodity traders; now Paul told the young Swiss accountant on his staff, Helmut Brutschi, to set controls. Apparently Brutschi never got started, and even Paul, out on the frontiers wooing the Scandinavians, began to realize that better operational controls were needed. He hired such an officer from a Swiss unit of National Cash Register, but “he didn’t work out.” And by the time another such officer was brought in, this one from the Volkesbank, the books had been doctored.
When Kummerli returned from vacation in August 1969, he promptly fired Zurmuhle. Zurmuhle, he said, had been speculating without authorization.
What follows is perforce a bit hazy, and it may safely be said that probably no one knows exactly what happened. Since the bank closed its doors teams of auditors have been sorting out the Byzantine mess, and to compound the usual Swiss secrecy, a trial is impending and much of the information belongs to the prosecuting attorney, who is tight-lipped even for a Swiss and a prosecuting attorney.
Somewhere along the line the United California Bank in Basel bought 17,000 cocoa contracts—seventeen thousand cocoa contracts—with a face value of $153 million. That is quite a chunk for a bank with a net worth of $8 million or $9 million. The contracts were sold by major commodity brokers: Merrill Lynch; Hayden, Stone; and Lomcrest of London. Normally, brokers would not extend a total of $153 million in credit to an institution with $8 million in assets, but our stationery did say that we were the United California Bank in Basel, and the United California Bank itself had assets of more than $5 billion.
Our bank’s exquisite timing extended to cocoa. It managed to buy at the highs, something like 48¢ a pound, and the market promptly began to erode. By June of 1970 it was close to 30¢ a pound, and on 10 percent margin, the bank had lost three or four times its stake, maybe more, and was desperately insolvent, except for whatever its California parent cared to put up.
Only, nobody knew it, since by now the books were really doctored. “The balance sheet was undeniably falsified,” said Max Studer, an auditor from the Swiss Society for Bank Inspection. But the chicanery had begun before. The bank had not exactly taken all its loss on the Leasing Consultants fiasco. “That was just too big a loss,” Paul said. “No one writes off five million Swiss francs in one quarter. That was too big a hunk. You spread it over a longer accounting period. It would have looked very bad.” What Kaltenbach did was to get a letter from the Norwegian firm that had first recommended the stock, promising to buy it at its $25 cost, even though by then the stock was down some 40 percent. In return, the bank promised to make good the Norwegian firm’s purchase so that they would lose no money on it. In other words, the two institutions would trade worthless pieces of paper. “The Norwegian guarantee is meaningless,” Paul told the California bank. “As long as it keeps the auditors happy,” said L.A. Apparently that was all right with the California bank.
The auditors were a company called Gessellschaft für Bankenrevision; the auditing firm itself was owned by two of Switzerland’s Big Three: the Swiss Bank Corporation and the Crédit Suisse. Not only were the auditors happy, but they approved and certified a balance sheet that was already short by about twenty million Swiss francs.
Kummerli and crew rather desperately tried to straddle cocoa as it fell; some auditors, that is, tried to minimize losses by contracts covering short-term fluctuations with different delivery months, but even the straddles misfired. On the rare occasions there was a cocoa profit, that went onto the books. When there was a loss, the confirmations went into Kummerli’s desk drawer.
Later—in fact, the day after Paul got out on bail—I asked him how, in an age of computers and organized recordkeeping, all this had been possible.
One mistake, he said, was that the commodity department ran from under the same roof as the foreign exchange trading and the money desk, where interbank deposits were made and accepted in a multiplicity of currencies. “The Big Three banks controlled the foreign exchange market,” Paul said. “We were very aggressive. We had built up until we were fifth in Switzerland, and we were turning over five billion Swiss francs a day in exchange. The bank’s own positions in currencies, forward and spot, added up to more than two billion dollars. When you have that much out, nobody cares much about a few million dollars.” The brokers who sold the UCB cocoa contracts were paid out of the foreign exchange department. The California bank had spot-checked its bumptious subsidiary, and suggested that maybe a position of $2 billion in foreign exchange was a bit much for a bank that size; it suggested that perhaps only $1 billion in foreign exchange be held.
Paul and I sat there on an apartment terrace in Basel discussing this just as if we were management consultants analyzing the process.
“Say,” I said, “you remember the thing I wrote about cocoa?”
“Sure,” Paul said. “That was good.”
“You remember you gave me a diseased cocoa pod as a present when I first came to Basel?”
“Sure.”
“You remember what it said at the end of the story? That there are serious pros in cocoa? Hershey and Nestle and like that? When you are tempted to speculate in cocoa, lie down until the feeling goes away.”
Paul shrugged. “These fellows said they knew what they were doing.”
“How about Kummerli? Did he read that story?”
“No, it wasn’t out as Das grosse Spiel ums Geld yet, and Kummerli didn’t read English.”
For the first time, I lost my temper.
“He bought the cocoa in English, didn’t he?” I said.
There was an awkward silence and the cordiality dropped away.
“He bought the cocoa in English.” Paul shrugged again. “I’m sure he never read the story.”
We went back to discussing the decline and fall.
How could it happen, I asked, in a modern, twentieth-century Swiss bank that so much money could disappear unchecked, simply by putting the losses into a desk drawer? After all, this was not a robbery, not an embezzlement, and as far as was known, no money actually went in anyone’s pocket.
“We should not have combined the commodity money market and foreign exchange departments,” Paul said again. “That made it too easy to cover by simply listing a time deposit from another bank. And if a department gives an order, the confirmation should go somewhere else, to be double-checked. Every position in the balance sheet should be verified, and it wasn’t.”
“Shouldn’t the outside auditor come in and check, at least once or twice a year?”
“They should, but Swiss auditing firms only care that the numbers you give them match up, not that there is anything behind the numbers. There’s one more thing.”
“What’s that?”
“The chief executive of a bank should know the operations side of a bank—all the procedures, the accounting processes, and so on. I thought I had people covering that, but I didn’t, and I certainly didn’t do the job myself.”
I wanted to know what Kummerli’s motivations were. I could see how anyone could bite on the cocoa story; I had myself. After all, in any given year, the world can run out of cocoa, although it has never happened yet. But from there to putting the losses into a desk drawer, and thence to busting a bank, is quite a step.
“I think at first he wanted to impress his own traders. He had a big ego, a reputation for being very smart. When the losses were a million or two, he just couldn’t admit it. He was like a man at a roulette table, doubling up and doubling up again, waiting for the final double up that would break him even. Finally—I don’t know, maybe he saw the handwriting on the wall and decided as long as he was going to get nabbed at some point, he would put something away for the day he got out of jail. I don’t know. To do that he would have had to have confederates somewhere else, someone working in one of the commodity houses.”
One day in the summer of 1970 Paul was preparing to go on vacation. At that point, he had condoned the jiggle of Leasing Consultants, and knew that there was speculation going on in commodities, but the depth of the trouble lay ahead. He stopped by the office of the bank’s chief accountant, who said he had a question. It was a small piece of pink paper with a debit of twenty-five million Swiss francs. The accountant said it must be a mistake; Paul hadn’t a clue.
“I knew something was wrong,” Paul said. “I knew I should stay and sort it out. But the family hadn’t had a vacation in a long time.”
One of the items on Paul’s desk was a partial translation of the annual report, done internally. Foreign exchange, foreign currency and margin positions for commodities had been lumped together in one big number. There was that mysterious pink slip for twenty-five million Swiss francs, apparently a realized cocoa trade. Paul deleted the reference to “margin,” in the report, even though it had already circulated in German and had been approved by the Swiss Banking Commission. “Why wave a red flag if you don’t have to?” Paul said. “We needed time to clear things up.”
The family took off for Marbella, Spain, but Paul did not enjoy his vacation.
“I didn’t sleep very well,” he said. “I had a tummy ache.”
Paul decided that the vacation just wasn’t going to work, with unanswered questions floating around. Why had that accountant given him a chit for twenty-five million Swiss francs and then asked what it was? What else was wrong?
“Something wasn’t right, and I wasn’t facing it,” Paul said, a bit belatedly. Back to Basel went the family and behind Kummerli’s back, Paul started a low-key investigation. There were, it seemed, huge losses in the commodity department. So, according to Paul, he called Kummerli in, and something like the following dialogue took place:
Paul: What’s going on?
Kummerli: Losses, losses.
Paul: I know losses, but how much?
Kummerli: I don’t know.
Paul: Why not?
Kummerli: I lost control. I just lost control.
Paul: How much are the losses? Five million?
Kummerli: More than that. I lost control.
Paul: Ten million? Fifteen million?
Kummerli: More than that, I think.
Paul: Twenty million?
Kummerli: Somewhere around there, I think.
And Kummerli kept muttering “Losses, losses” and “We lost control.”
At twenty million, not only was the bank gone but so were one and a half more banks the same size. Paul decided that he had better carry the message to Los Angeles personally, and he caught the daily Swissair early bird from Basel to Paris and then an Air France flight over the pole to Southern California.
Paul and Helly checked into the Century Plaza in Los Angeles. Neil Moore, a senior vice-president of the UCB, met them. “Don’t give me the details,” Moore said. “Just tell me the loss, down to the penny.”
On Sunday, August 30, Frank King led the group of UCB officials who met with Paul in a conference room at the Beverly Hilton. The president of the bank, according to Paul, was philosophical. “Win some, lose some,” he said. The one concern everyone seemed to have was to keep the affair secret to avoid a run on the bank. “How many people know about this?” Paul was asked. “Can we keep it all a secret?”
The bank’s chief auditor was worried about the extent of the loss. “We could handle five million dollars,” he said. “But twenty million—twenty million could mean trouble even for Frank King.”
Two days later, Paul and Helly and Neil Moore and an attorney for the bank flew back to Basel. “Nobody said much across the Atlantic,” Helly recalls. Outside auditors went to work on the bank’s books; the losses seemed to be closer to $30 million than to $20 million. In Los Angeles, Paul had tendered his resignation, but he was to remain as an executive and consultant to “straighten the mess.” The idea was that the bank would remain open, still the United California Bank’s Swiss unit; the parent would work out a scheme to protect depositors and creditors.
On September 6 there was a board meeting of the United California Bank in Basel, but Paul did not stay long. He was asked to leave the room and told that he was fired. “I went home and had a Scotch.”
The UCB officials went to the Swiss Bank Commission in Bern, and presented their plan to reimburse the depositors and creditors. The Swiss Bank Commission naturally was worried about the reputation of Swiss banks; the word around Basel was that once that was protected, they were glad to see an American-owned bank get a black eye; now it would be easier to keep the foreigners out of Switzerland. The details of what went on between the UCB officials and the Swiss Bank Commission are not known; again, there were rumors that the commission told the UCB that if it would make good and get out of Switzerland, it would be kept out of the trial to follow as much as possible. On September 10 the bank suspended operations, and on September 16 at 2 P.M. it posted notices on its doors saying it was bankrupt.
The United California Bank in Basel AG was by no means the first Swiss bank to go broke. In the Depression of the 1930’s, three of the top seven Swiss banks folded, just as banks everywhere did. Swiss banks were overinvested in Germany, and suffered from the German inflation of the 1920’s and the rise of the Nazis, and then from the impact of World War II on their German investments. In more recent years, the German Bank had folded because of bad loans, and the Aeschen Bank and Arbitrex on speculation, and the Seligman Bank had bought a huge tract of land south of Rome without clearing the building permits, and expired, suffocated by illiquidity. So busted banks were not new to Switzerland.
But my bank goes in the almanac. That is the biggest Swiss bust ever.
Paul was about to come down to breakfast on Wednesday, September 9. He was wearing loafers without socks and was in his shirt sleeves when two Basel policemen appeared at the door. They said he was wanted for questioning. Paul expected this; he would be there, he thought, two or three days. The Basel police also picked up the Lee boys, Kummerli and Zurmuhle, as well as Helmut Brutschi, the accountant Beat Schweitzer, Louis Thole, and Alfred Kaltenbach.
Paul was shown to a cell with a toilet, a fold-up bed and a table. The schedule went like this: lights on at 6:30 A.M., and a broom handed through the door. At 7:00 A.M., a mug of cocoa and some bread, the mug reached for at 7:30. Occasionally a half-hour in the exercise yard was offered; then lunch through the door at 11:00. “Lunch was not so bad,” Paul said. Dinner—soup and black bread—came through the door at 5:00, and the lights went out at 9:30 P.M.
At 8:00 A.M. every morning, the warden came by and asked through the door if everything was all right.
The Basel prison itself is a grim seventeenth-century building, downtown, with small windows high above the floors. Even though no charges had been brought against him, Paul was not allowed to see a lawyer. He was permitted to write two letters a week, and allowed one visit of about fifteen minutes per week from his wife. The expected questioning did not materialize for weeks.
Then there would be a key turning in the door, and a guard would escort him to another building for interrogation. I asked if the guard was armed. “He was armed with a dog,” Paul answered, but that was all. Paul faced the investigating magistrate across the table.
“What happened?” asked the investigating magistrate.
For Helly, life was, if anything, even more difficult. She was, first of all, without means, since the family’s assets were all in the bank. She got a job as a secretary with a pharmaceutical firm, and moved the girls and her Alsatian help—who volunteered to stay without pay—to a small apartment.
“I was scared,” Helly said. “Because no one in Basel would talk to me. I thought the house was watched. People were afraid to call me on the telephone. It was like a bad criminal show on TV.”
Later, some of Helly’s Basel friends were to say that it served her right for marrying an American, and that an American so aggressive had to have unsound practices and was therefore getting what he deserved. Some of the Baselers suggested this was a good time for a divorce. “Basel,” Helly said, “is not a pleasant place for a woman alone with children, especially one whose husband is in trouble.” When Helly was not working, she was trying to get Paul released on bail and talking to lawyers, but it looked as though, if bail ever were to be set, it would be one million Swiss francs, or about a quarter of a million dollars. That would be far beyond anything she could raise. The general feeling was that Helly’s husband had committed a crime so unspeakable it could barely be discussed. Murder, at least, was comprehensible. But Paul was still not charged. In Switzerland a citizen may be held on suspicion for three weeks, with the three-week periods continuously renewed if the authorities feel they need additional investigation. Paul was to spend ten months in the Basel prison—most of it in solitary, all without bail and without being charged. When his lawyer inquired, he was told that the charge would probably be Verdacht der ungetreuen Geschäftsführung, which turned out not to be Crimes Against a Bank but Suspicion of Untrue Management. To which Urkuendenfälschung, Falsification of Documents, was added.
Later I asked a Swiss lawyer about the process. “This is not an Anglo-Saxon country,” he said. “We do not have the doctrine of habeas corpus, nor the underlying idea of innocent until proved guilty. The job of the investigating magistrate is to determine as far as possible the truth, and if you hold a citizen in jail and permit him to talk to no one, only the investigating magistrate, that is quite efficient.”
What, I asked, if the citizen were innocent?
“If he is innocent, then he receives justice,” the Swiss lawyer said. “He is paid his former salary for his jail time. If his salary is sixty thousand dollars a year, then he is paid that. And of course, if he is guilty, the time he serves counts, and for good behavior it counts half again, and the sentences are not as long as in the United States.”
“At first, I was glad it was over,” Paul said. “And I really thought I would be there only a week or two. I was guilty of negligence. No doubt about that. But that doesn’t mean I should spend years in solitary, eh? After a few weeks I could see if I just sat in that cell I would become a vegetable. So I established a strict discipline. After sweeping my cell, I did half an hour of calisthenics. Then I asked for a typewriter. I decided that as long as I was in jail and in solitary, I would write a novel.”
Paul, of course, was not an ordinary prisoner, he was an uncharged bank president. And the Basel prison was no Attica. Spartan it might be; but it was also Swiss. In Switzerland you get what you pay for. Paul paid for subscriptions to The Wall Street Journal, the Financial Times of London, the Economist, and the Neue Zürcher Zeitung, the leading Swiss newspaper. He also paid for the rental of a television set.
“Within a short time,” he said, “I was as well informed as I have ever been in my life. Except for the uncertainty, I enjoyed the rest.”
It was not only a seventeenth-century jail, it was a seventeenth-century prison life, like Captain MacHeath in The Beggar’s Opera, who could send out to the best restaurants for his meals and even for Polly.
“You can send out for meals only on occasion,” Paul said, “if you pay for them. In Switzerland, you can have what you pay for.”
Meanwhile, back at the ranch in New York, I did what any aggrieved citizen would do. I called a lawyer. Several, in fact. It should, I figured, be interesting. After all, this was not just a sour investment, a stock that went down. This was a crime. The management of the bank was all in jail. For crimes there is some sort of justice.
The reaction of the great Wall Street law firms was very interesting, enough to inspire a certain amount of cynicism, if you are inclined to be cynical about lawyers. They acknowledged there was a case, but scuttled away like rabbits through the brush because of their own banking connections. I was as popular with the Wall Street lawyers as a Black Panther.
One friend said, “Listen, don’t think we don’t take unpopular cases. Why, we represent ex-Nazis out of Spandau—rich ex-Nazis, I grant you. We represent Greek shipowners who are so far beyond any national laws they think a law is an insult. But you’re talking about an action against a bank. We represent a major New York City bank. This is a major West Coast bank. They do a lot of business together. Our New York City bank pays a lot of the bills, and they wouldn’t like us in this. Sorry, baby, but go away.”
I called Abe. I should have done that first anyway. Abraham Pomerantz is sixty-nine, portly, and has a nice white mane. He is also the name that scares banks most, not to mention mutual funds and other financial institutions, because Abe is the Ralph Nader of the investment business. There are differences, of course. Ralph Nader lives in a boarding house and operates from a pay phone down the hall. Abe lives in a penthouse and operates from the senior partner’s corner suite of a prosperous midtown law firm. Ralph Nader burns with righteous zeal; Abe thinks there are many defects in the society which can be corrected through legal action, and he gets enormously well paid for the corrections when they work.
One day in the early 1930’s, when Abe was a struggling young lawyer, the widow of his high school gym teacher came to see him. The widow Gallin’s husband had left her twenty shares of the National City Bank. Once they had been worth $400 a share, and now they were worth only $20 a share. “I remember telling her there was no law against losing money,” Abe said, and the widow Gallin went away. Then the Senate Committee on Banking and Currency, identified usually by its counsel, Ferdinand Pecora, began to investigate the skulduggery that had gone on in some of the nation’s board rooms: the excessive compensation, the dealing in corporate assets, and so on. Charles Mitchell and some of the directors of the National City Bank seemed to be high on the list, in a famous case adequately chronicled elsewhere. Abe filed suit on behalf of the widow Gallin against National City Bank—and hence its stockholders—in a derivative action, so-called because the stockholders derive their rights from the shares in the corporation they own. The stockholder who brings the suit brings it on behalf not only of himself but of his class—that is, his fellow stockholders.
The courts awarded the widow Gallin $1.8 million, of which Abe—and the lawyers and accountants who worked on the case—took $472,500. Abe became a champion of the minority stockholder. The Chase Bank was next; that was $2.5 million for a Mrs. Gertrude Bookbinder.
Abe went on to test the way mutual funds used the commissions derived from buying and selling their portfolios to pay for the selling of their funds; excessive sales loads for mutual funds; using the commissions to buy research, and so on. In the courts, he questioned the way banks use the commissions from their trust departments to gain deposits for themselves. Eventually he even got to the drug companies on the price-fixing for tetracycline, which resulted in a judgment against the drug companies of $152 million. Since it was impossible to pay back the individual consumers of the drugs, that amount was spread out among the health departments of the fifty states. Most of Abe’s efforts, though, were in the securities and investment fields, and the structure of that industry was hardly the same for having known Abe.
So I called Abe. Normally, and at this stage of his career, Abe does not take phone calls from private citizens, however grievously wounded, but in our peregrinations through the securities business, our paths had crossed. Abe had already read about it in the papers. He told me to come right up. “Makes me feel young again,” Abe said.
I had made up a list of questions. If a big bank bought a little bank, and hence had the power to hire and fire people, and in fact the right to name the whole board, weren’t they responsible for proper procedures? They did have that power; they had, in fact, fired the president in ten minutes one Sunday, without even telling us junior partners. So wasn’t the big bank guilty of ungetreuen Geschäftsführung, even if they weren’t guilty of Urkundenfälschung? And the outside auditors certified all the Urkundenfälschung and the ungetreuen Geschäftsführung; Price Waterhouse and Peat Marwick had gotten into a lot of trouble for less. Weren’t the auditors liable too? And the board: naturally, the board.
But when I went to see Abe, he was in a sober mood. He had read through some research, and he looked up from the papers.
“If this had happened in this country,” he said, “this would be worth a hundred million dollars as a class action. But it happened in Switzerland and everything in Switzerland is a secret. We don’t even know who the stockholders are. Switzerland is a very backward country. They have never heard of a class action. So the answer to all your questions is yes. Yes, the board is clearly liable, but the management of the bank is in jail and clearly busted, except for the two Californians from the parent. And yes, if it were here, the auditors would be culpable. And yes, if it were here, the controlling bank would have a liability. But it wasn’t here. So I can’t take the case, but I like you and you like me, and out of all the people that the UCB doesn’t want to have overhanging the cleanup of this, the two of us have to be at the top of the list. I have a reputation as an ogre in this field, and so I will write them on my ogre stationery, and we’ll offer them your stock, at cost. Maybe they’d like to buy out a partner, just to clean things up. Their name was all over the prospectus, after all.”
But the United California Bank didn’t seem eager to buy any more stock. We got a stiff letter from O’Melveny and Myers, the lawyers for the United California Bank. The entity to which we referred, they said, was a Swiss bank. Funny it had the same name, but clearly, how could they be involved?
“I was afraid of that,” Abe said. “You see, that’s the trouble. This whole damn thing is in Switzerland. The Swiss won’t even tell you the telephone number. You’ll have to sue in Switzerland, and the trouble with that is, there is no bank left in Switzerland, so there’s nothing left to sue. And the United California Bank itself is in Los Angeles.”
“Is there no justice?” I asked.
“That’s a metaphysical question,” Abe said. “I don’t know if there is or isn’t justice, but I do know one thing: there’s no class action in that damn backward country over there. You know, I had a client once who put me into a sure thing in commodities.”
“What happened?” seemed to be the proper inquiry.
“I lost my shirt,” Abe said. “I’ve never made a penny on an investment. It’s good I’ve been lucky in the law.”
While I was pondering the fickleness of justice, and its limitations at natural boundaries, Paul was typing away in his cell.
After a while, the stringent regulations relaxed a bit. Paul was allowed to go to the prison library. But he found it disorganized. He got permission to use some of the other prisoners in reorganizing and cataloging the library. “Furthermore,” he said, “there are people of other nationalities in the Basel jail—Yugoslavs, Spaniards, Englishmen. There’s nothing for them to read.” Paul wrote to the ambassadors of thirteen countries and asked them to donate old books to the Basel prison. Some of them did. When the reorganization of the library was complete, the warden of the prison gave a dinner for the library task force.
“He and his wife served it themselves, and we had a very acceptable wine,” Paul said.
One by one, the bank’s management was released from prison on bail. Louis Thole had a nervous breakdown, was released, and went to Belgium. In the early summer of 1971, Paul was released on bail of half a million Swiss francs, raised from Harry Schultz, Helly’s family and some friends. Paul went to England to work for the Harry Schultz letter. All the prisoners were out on bail except Kummerli, and the word was that Kummerli—pending, of course, his guilt or innocence at trial—would be in custody a long time. Paul had had one confrontation with Kummerli before the investigating magistrate. Kummerli said that everyone knew the books were doctored, and that he got his orders from Los Angeles. “He might as well have said from Joan of Arc, or Jesus,” Paul said. There was some speculation around Basel as to whether Kummerli had really gone off the deep end in jail, or whether this was a foxy act so that he would be allowed to serve his time in a mental institution rather than in prison. There was also some talk about Frau Kummerli, who was bombing around town in a flashy Mercedes. There is a phrase in Schwizerdütsch which translates as “green widow.” A green widow is one who obviously knows where some of the green is for which her husband is serving time.
The investigating authorities sent questionnaires to all the commodity brokers who dealt with the UCB Basel in cocoa. All were returned except the one from Lomcrest in London.
I went over the prospectus once more, masochist that I am. There it was, “the bridge between conservative Swiss banking and modern corporate and financial techniques, usually identified with the United States.”
The present situation, then [it said], is that the Bank is a subsidiary of United California Bank of Los Angeles, a bank with total assets of $5.2 billion at the end of 1969. United California Bank is, in turn, affiliated with Western Bancorporation, the world’s largest bank holding company, embracing twenty-three full service commercial banks located in eleven western states of the United States. United California Bank itself is the full owner of an international bank in New York City, and has branches, representatives or affiliates in England, Belgium, Switzerland, Spain, Lebanon, Japan, Mexico and Greece. It has direct correspondent relations with important banks throughout the world.
The music began to rise again. The sun would never set on our fast-growing Swiss bank. I was trying to abstract some lesson from the experience, but I knew that if tomorrow someone brought me the fastest-growing financial institution in Switzerland, with that kind of affiliation, and with a dynamic young management, I would probably do it all over again. There was one thing that bugged me above all others.
“When I called you,” I asked Paul, “and asked you how the bank was doing, at the time the bank was raising more capital, you knew that all was not well, and you didn’t say a word.”
“We were opening new branches in Zurich and Geneva,” Paul said. “We were going to have banks in Brussels and Luxembourg. We had a little problem with the balance sheet, but who would have thought we couldn’t work things out?”
I asked Paul what he was going to do next.
“I don’t think I’ll be the president of a bank,” he said.
I didn’t think so either.
“I’m going to finish my book,” he said.
I read the first sixty pages of Paul’s novel. Belatedly, maybe I did learn something. It was set in the near future. The world was involved in a financial crisis. Treasury officials from various countries were flying from capital to capital. Among the characters were a Russian from the Narodny bank, a titled Englishman from the Bank of England, a bluff American, a safe-cracker named Sammy, the Basel police, and a stiff, austere Swiss banker who was about to pull off an audacious and entirely legal currency coup which would result in a profit to his bank of one billion dollars. One billion dollars. The greatest kendo stroke of all time.