The Salad Oil crisis of 1963
This cautionary tale involves a notorious conman, Anthony De Angelis, American Express and Warren Buffett, amongst others. Tino, as he was known to his mates, had previous having taken advantage of the National School Lunch Act and supplying 2 million pounds of uninspected meat to the Federal Government, overcharging them along the way. When the con was discovered, De Angelis went bankrupt but he brushed himself down, picked himself up and started on his next con.
Taking advantage of the Government’s Food for Peace programme designed to supply surplus goods to a Europe recovering from the ravages of the Second World War, from 1955 he traded in vegetable oil products, cotton and soybeans. By 1962 Tino was sufficiently established that he felt that he could corner the soybean market, by buying soybean oil on the futures market. His plan was to drive up the price of vegetable oil, increasing the value of his contracts and enhancing the profits available to him from the futures market. Of course, Tino didn’t have the financial resources to support his ambitious plans so he used his large inventories of commodities to collateralise loans from banks and finance companies.
American Express now enters our story. They had just opened up a new division providing warehouses and eager for stuff to store in them wrote receipts for millions of pounds of vegetable oil which de Angelis took to a broker who promptly lent cash on the back of them – an easy way to get a pile of cash. Naturally, American Express would want to satisfy itself that De Angelis actually had the vegetable oil that was collateralising the loans but the resourceful conman had thought of that.
Many of the tanks sitting in the Amex warehouse were full of water with only the minimum of oil floating at the top to satisfy auditors who were doing spot samples; an old trick that I as a greenhorn auditor with a fresh set of coloured pencils was warned about in the late 1970s. The other stunt Tino pulled was to connect each of the tanks with pipes so as the auditors made their way along the line, the oil was pumped from one tank to the other. By the time the con unravelled De Angelis had loans from some 51 companies.
And unravel it did. At its heyday de Angelis was claiming to have more vegetable oil than the Federal Government reported for America as a whole. Instead of inventories of $150 million, his company, Allied Crude Vegetable Oil Refining Co, had just $6m. The dozy auditors were tipped off and found that most of the tanks contained just water. In November 1963 the bottom fell out of the futures market – the price of soybean oil falling from $9.875 to $7.75 in two days of trading, wiping out the value of de Angelis’ loans. Instead of selling out at the top of the market and making good the deficiency in cash, Allied Crude had no alternative but to file for bankruptcy.
The market turmoil coincided with the assassination of JFK and the market went into freefall. One of the brokerages de Angelis used, Ira Haupt & Co, was left holding $450 million in securities and debts of $37m it couldn’t pay and folded. Another, Williston & Beane, was bailed out by the New York Stock Exchange. De Angelis was declared bankrupt again and ended up in chokey.
And where did the Sage of Omaha come in? He bought a 5% stake in Amex at the bottom of the market for $20 million, one of the first investments that made his fame and fortune. One man’s ill luck is another’s good fortune, I guess.