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 likeRAINING OFF AND ON

  MARVIN

  andBRITISHER 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.”