Number one in the 1964 contest was Lothar Schwabenbauer, a master baker by trade and a former cinema owner. By 1969 he was the manager of a whole region known under the code name 'mc' with his base at Regensburg. (m for Munich was the code for the whole of Kunkler's territory.) In five years, Schwabenbauer had built up a sales force of three branches and eight sections, with 128 salesmen all working for him - almost as many as there had been in the whole of Germany in 1964.
The man who had been number three in 1964 had done best of all. This was Egon Schneider. His headquarters were in Offenburg, in Baden, and most of southwest Germany was his territory, known as Europe iv ma. Schneider had worked with Kunkler for the same insurance company before they joined IOS. At the peak, in April 1970, after only six years with IOS, he had two general managers, three divisional, nine regional, and 23 branch managers under him, with more than 500 salesmen under them. With $16 million in face volume a month, Schneider was the top manager in all Germany for the whole of the last year of the great bonanza. Another of Kunkler's proteges, Rudi May, a former industrial salesman whose mb region was centred on Wurzburg, was not far behind. Managers like Schneider, May and Schwabenbauer were taking an override on all the volume in their regions. And Kunkler was taking an override on them.
In Germany the pyramid structure of the IOS sales organization reached its most refined form. The aspiring recruit started as a trainee, hoping to progress to 'basic' and then to 'advanced' schedule.
The crucial step was the next. When a man had sold $300,000 worth he became a 'senior' salesman. Then two good things happened for him. He joined the stock option plan, with options on fifty shares. And he acquired the right to hire salesmen of his own, and to start to build his own pyramid.
Above senior status, the steps were from branch to regional to divisional to general manager. To become a branch manager, for example, you must be able to show ‘$500,000 of your own volume, plus three active associates on Advanced, or $300,000 of your own volume plus six active associates on Advanced, and group volumes of $3,000,000.'
And so on up the steps of the pyramid to general manager. To qualify for that title, you had to put in six unbroken months of more than $1 million in business, or $10 million in twelve months. A general manager got options on 800 shares, and override of 0.5 on all the business done lower down in his 'structure'.
There were therefore several different pressures all working in the same dangerous direction: all tempting the managers to build up the numbers, as opposed to the quality, of the sales force under their control. To start with, the more salesmen a manager had under his control, the more he made on his own sales: the salesmen in his group pushed him up the schedule ladder. More important, the more salesmen amanager controlled, the more money he made because he was getting an override on their business. Thirdly, the less experienced the salesman, the lower the proportion of the total commission that went to him,
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As we shall see, this 0.5% came to be divided between more than one gm in some structures, with important consequences.
and therefore the more the managers on the structure above him made. Lastly, a 'new man bonus' was paid in cash for every new salesman taken on.
It might be, as one Hamburg manager said, 'the most perfect system of slavery ever devised.' But like most systems of slavery, it had the seeds of destruction in it. It takes no exceptional acumen to guess what is likely to happen at the lower echelons of an army recruited on this system, however sincerely the men at the top try to maintain discipline.
Inevitably, both sales ethics and the quality of some of the sales force deteriorated sharply under the temptations and pressures of breakneck expansion. The early sales tended to be made to relatively sophisticated investors, such as doctors and lawyers.
But more and more, as the sales force snowballed, there was a tendency for less and less scrupulous salesmen to confront more and more innocent prospects. A farmer, for example, was persuaded to borrow money from the bank (to build a new barn), and then divert it into an IOS fund. The farmer, according to a West German newspaper which reported the case in detail, lost 60,000 marks on an investment of 200,000.
One salesman got hold of a list of lonely ladies from a marriage bureau, and systematically worked his way through the lonely hearts. Instead of marriage, he proposed an IOS capital accumulation plan.
One admittedly extreme case shows just how little IOS cared what sort of people it had as 'associates' and 'financial counsellors'. For three years IOS had a man working for it in Germany with a criminal record, which included fraud. Yet when the man's supervisor tried to warn top management about him, he was met by studied indifference over a long period.
The man used two
names; sometimes he called himself David Crawley-Boevy, sometimes Ernest Richard Garnett-Smith. Tall, forty when he left IOS, with an English public school manner and accent, Crawley-Boevy spoke no German, but sold IOS programmes successfully under Ossi Neduloha to the diplomatic community in Bonn and later to British Army of the Rhine personnel all over North Germany.
Crawley-Boevy's nominal supervisor - nominal because
Crawley-Boevy was a hard man to supervise - found out that he had a criminal record. The supervisor went first to Neduloha, then to Wallitt, to warn them of what he had found out, and to complain of Crawley-Boevy's sales methods. Neither could be persuaded to take any interest. Finally the supervisor went to Geneva and after several weeks got to see Cornfeld himself, who was charming, but equally unconcerned.
In the end Crawley-Boevy was only terminated by IOS after he had been arrested more than once in Germany, taken back by IOS, and then re-arrested for fraud by Swiss police in the Intercontinental Hotel in Geneva.
It turned out that he had been convicted in Britain for fraud, gross indecency and other offences. He had been in trouble with the police in four or five other countries. In 1967 a London divorce judge found that two years before - while he was selling for IOS - he had abducted a girl with a mental age of thirteen, gone through a marriage ceremony with her, and then asked her father for money.
An IOS salesman called Muller sold a programme for dm 4,000 to a German holidaymaker on Lake Maggiore, in the Italian Lakes. He then wrote out two contractual policies for a total of DM240,000 ($72,000) and put the 4,000 marks in as the down payments. Unluckily for Muller his client was the well-known writer Henry Jaeger, who once did time in prison for robbing a post office. Jaeger redeemed his investment but only got 2,600 marks back. Jaeger made so much fuss that Bernie Cornfeld personally arranged to have him paid back in full.
If you recruit more than six thousand people in a few years, paying head-money to those who take them on, and asking as their principal qualification that they should sincerely want to get rich quick, then you must expect to find among your recruits a certain number as little qualified to act as financial counsellors as Crawley-Boevy or Muller. But what contributed even more in the end to the instability of the German sales force was the widespread prevalence of practices that were relatively innocent in themselves.
For example, in their hurry to build up their own sales groups and so climb up the pyramid, salesmen would not only sell programmes to their own family, they would hire their own relatives as salesmen. Even more serious, they would lend money to clients to invest in IOS.
Even $5,000, split up as the down-payments on five $60,000 capital accumulation programmes put in friends' names, would not only bring the salesman $1,500 in commission, it would take him straight to senior salesman rank, which would allow him to hire his own salesmen under him. It would increase his personal rate of commission from 3.5% to 4.5% on his own sales. And it would win him options on fifty IOS shares. At that rate, he could well afford to redeem his friends' programmes, pay them back the front end load, and possibly pay them something for their trouble. Volume, everyone at IOS always insisted, was the name of the game. But volume and recruitment were interchangeable. The more volume you could get, the more people you could have working for you. The more people you had working for you, the greater the volume on which you shared in the commission.
Every few years, the world's teenagers get caught up in the chain letter craze. An ill-written dog-eared letter arrives through the post covered with unknown names and far-away addresses. 'Send a dollar' - or a pound or ten francs - 'to the undersigned, then write to six of your friends and they will each send you a dollar.' It sounds too good to be true, even when you are fourteen. It takes only a moment's thought, even at that age, to work out that the only people who are sure to do well out of a chain letter are the people who get into it first.
IOS Germany was a beautifully refined version of the schoolboy chain letter. It lasted as long as new people kept joining the chain, and sending in their dollars.
It was in 1967 that Wallitt's planning, Kunkler's recruiting, and the missionary zeal of Ossi Neduloha and Raimund Herden began to show visible signs of success. Sales in Germany for that year reached 31 % of IOS's world volume - a contribution that was doubly useful because it came in time to replace the markets that had been lost through the sec settlement and the troubles in South America.
But 1967 was also the year of James Roosevelt's drive to make IOS respectable by recruiting as many eminent politicians as he could persuade to join the colours. Naturally, this form of public relations was put into effect in Germany too.
We have seen how Bernie Cornfeld tried to recruit perhaps the most eminent available politician in Germany, Ludwig Erhard, and in fact did not give up hope of getting him to join IOS until 1969. Attempts were also made to recruit that other German political heavyweight, Franz-Josef Strauss, whose wife was an enthusiastic IOS client; and former finance minister Fritz Schaffer, who died, however, in March 1967.
As a fourth choice, IOS had to make do with a political figure who could not be called a heavyweight, but who had nevertheless through an accident of party politics come very close to the apex of the German political system. Erich Mende was one of the founders, in 1945, of the Free Democratic Party, the small third party in the middle between the two giants of German politics. In 1963, because Ludwig Erhard's Christian Democrats needed the fdp's small block of seats to give it a working majority in the Bundestag, Mende became Vice-Chancellor, and nominally the number two man in Erhard's cabinet.
Mende lost that eminence in 1966, when the Christian Democrats got together with the Socialists in the so-called 'Grand Coalition'. At the same time Mende's standing in his own party was threatened by the fdp's shift to the Left, IOS came along at the right time for Mende, just as Mende came along at the right time for IOS.
Like so many before him, Mende first got involved with IOS because he bought an IOS programme. It was sold to him by an fdp colleague called Dr Reinfried Pohl. In the end IOS recruited not only Mende and Pohl, but also another former fdp minister, Viktor-Emmanuel Preussker, partner in the small Bonn bank of Preussker & Thelen, and General Josef Moll, Inspector-General of the Bundeswehr under the Erhard cabinet. Preussker became the head of the IOS bank in Munich, Orbis Bank.
All in all, Mende's association with IOS was not a happy experience. Although he was the chairman of IOS Deutschland GmbH,
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the main German sales company, he had been hired to be a figurehead. Wallitt and the other sales bosses had no
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The letters 'GmbH', stand for the German words for 'private limited liability company'.
intention of letting him discover what was really going on. They were often brusque with him to the point of rudeness: Werner Kunkler once reminded Mende in a restaurant that he, Kunkler, earned as much in a month as Mende earned in a year, which was probably a slight exaggeration, as well as being bad manners.
The inner circle in Geneva never liked him much. They found him too good-looking, too smooth, too 'German': surely an illogical objection in the cir
cumstances. Poor Mende had to endure being shouted at by Bernie Cornfeld in his own home in Bad Godesberg. And after he left IOS, the whole episode left a bad taste in his mouth. He busied himself with lobbying the government in Bonn for tighter regulation of mutual funds, and with organizing an association of former IOS employees, some of whom, he told us, had 'suffered personal tragedy and hardship', and for whom he felt a sense of responsibility that does him credit.
Yet surely Geneva did Mende an injustice. For he served IOS well, and with an almost naive enthusiasm. For two and a half years he zig-zagged back and forwards across Germany. He was ready to speak at any hall where the local manager could get together an audience to
hear him preach the gospel of the mutual fund revolution. He opened 200 IOS branch offices, and made more than a hundred public speeches a year. It was calculated that in 1969 he had met more than 60,000 Germans on IOS business. No gathering was too humble, too provincial or too remote for him. Like a politician on the stomp for votes (and after all perhaps that is what he was at the same time) Mende went to cocktail parties, football matches, wine tastings, press conferences, lunches, dinners and any other functions where two or three were gathered together in the name of IOS.
The result was that Erich Mende achieved, for a while, what IOS had never really been able to achieve anywhere else, certainly not on the same scale. He made IOS, as Manfred Birkholz and Wolf Sailer
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put it, 'salonfahig' - 'drawing-roomable', respectable.
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Two IOS public relations men to whose book, Senkrechtsstart und Absturz einer Erfolgsidee, we are indebted for this adjective and for other details about IOS in Germany.
Erich Mende did not achieve all this by himself, naturally. But it was he who did more than anyone to establish the precondition for the sales boom by making IOS not merely respectable, but fashionable. Mende and the Germans came close to actually achieving what Geneva's publicity claimed for the company as a whole. For in Germany, in 1968 and 1969, IOS for the first time came close to breaking into a genuine mass market of small savers.
Monthly sales figures tell the story. In mid-1967 they were running at around $25 million a month. That was before Mende began his itinerant preaching. By mid-1968 they had jumped to around $70 million a month. In the single month of June 1969 they hit $150 million.
That was the true high point. Sales went on rising after that: face volume sales, that is. The armies of salesmen went on swelling. But by mid-1969 the signs of danger were already there to be seen by anyone who could keep a cool enough head in the middle of all the rhetoric and the excitement.
On June 26, 1969 the Bundestag passed a new law to regulate foreign mutual funds, to become effective as from November 1, What was noticed at that time was that it meant that the Fund of Funds could no longer be sold in Germany, though IIT could. That did not matter too much, IOS had founded its own national fund, Investorsfonds, in Germany, at the end of 1967, and the sales force should have no difficulty in getting most of the investments that would be redeemed from the FOF reinvested in Investorsfonds.
What was far more serious for the salesmen was the fact that as from November the proportion of the commission that could be charged on the down-payment of an investment programme dropped from one-half to one-third. Given a constant level of business, that meant a one-third cut in the average salesman's income. The salesmen were not pleased at this. But even more dangerous tendencies were built in to the situation.
The managers were, after all, professional optimists. They therefore invested heavily in the shares of IOS Ltd itself. Their holdings were like an unexploded bomb in the basement. So long as expansion went on, all might be well. But at the first hint of serious trouble, those salesmen who had borrowed to buy IOS shares were likely to become bitterly disillusioned.
Again, it is worth underlining the contradiction between what IOS claimed to be, and what it was.
The most fundamental idea of IOS, indeed of mutual funds in general, is the idea of safety in diversification. These same salesmen and managers were persuading the clients to part with their money by preaching the advantages of having your money in as many different baskets as
possible. And here they were ploughing every penny they could lay their hands on, not into IOS mutual funds, but into the shares of IOS Ltd. They were hoping, of course, that they would 'cash in' when those IOS shares became saleable on the market.
Expenses in the meantime, rose crazily. All over Germany, managers competed with one another for those intangibles which usually have English names in German - 'prestige', 'standing', 'image' - but which cost millions of all too tangible D-marks. Managers built or rented luxurious office space. They furnished it with the most expensive antique furniture. Others invested in Ferraris, Maseratis or Rolls-Royces.
Ossi Neduloha bought the most expensive car of all, a bright yellow Lamborghini. Kunkler, who had a hotel on the Sorrento peninsular already, started building a luxurious villa in Rome.
So long as managers spent their own money, they were not hurting IOS. But several major projects started with corporate money at this time were conceived in the same lavish spirit. Perhaps the most disastrously expensive was the computer 'preprocessing centre' in Munich. In that city IOS had eight office buildings. And plans went ahead for a stupendous complex which was intended to be the headquarters for the 1972 Olympic Games.
In that last wonderful year, it must have seemed as if it was raining money in Germany, and would never stop. In 1969 alone, Wallitt and Neduloha both earned more than a million dollars each in override.
It was in Germany that IOS first had to face a problem that was a direct result of the speed with which sales and the sales force had expanded. It was a problem that IOS eventually had to face in every successful market, because it was an intrinsic flaw in the arithmetic of the commission structure itself. The solution the company found contributed in the end to the fatal shrinking of its profits, and to the instability of the sales force.
Over the years, the 8|% commission
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which the clients paid had always been split between IOS Ltd and the sales force in the proportion of 2% for the company, and 6f % for the whole of the sales force. Roughly half of that 6| % went to the man who had actually made the sale and the other half was divided between the different managers.
For many years this was the scale. But a close reader of the 1969 IOS Ltd prospectus would have noticed different figures. There the maximum commission payable by the client was still given as 8£%. But the maximum percentage that could go to the sales force had risen from 6% to 7%. Half a per cent, in other words, had been taken from the company's share of commission income, and given to the sales force. Half a percent does not sound like very much. But it is one quarter of 2%. IOS Ltd therefore handed over up to one quarter of its income from sales charges, the most fundamental source of its corporate revenue, as a mutual fund sales organization, to the salesmen.
This happened company-wide, as a matter of corporate policy. But the situation which brought it about arose first in Germany.
When, because of the volume of his group's sales, a man rose to be a gm in a structure which already had a gm at the top of it, t
he existing gm was bumped up and became a 'Super-gm'. That, for example, is what happened in Germany when Ossie Nedoluha first reached gm status under Eli Wallitt, in 1967.