After this point Ed Cowett, who had already preferred his resignation, took virtually no further part in the proceedings. He withdrew up the road to 119 Rue de Lausanne. His version is that 'someone had to go back and run the company'. Others suspected that his withdrawal perhaps had something to do with the rather critical responses he was now drawing from colleagues who had worshipped at his financial feet a very little time before. At some time during the week, a man who went briefly back to Bella Vista came back with a slightly awed word-picture of the great architect in retreat: 'It's incredible. There he is, the man who, single handed, has just about brought down the economy of the western world. And he's just sitting there, stroking his beard, and saying: "The fools - they won't listen to me". '
The 'fools' had a great deal on their minds, but business discussion broke off for a moment while Bernie and George Landau expatiated upon the wonderful support the board was getting from the humble employees. Immediately after this an accountant entered the meeting to ask if (a) there was any information that could be given to the staff, and (b) could he check that the executives who were firing people had the board's authority to do so? No information was given, either to employees or to the reporters who were now besieging Bella Vista. Firing of employees continued.
Discussion resumed. It emerged that doubts about King were spreading. Ira Weinstein returned to the suggestion that IOS should try to borrow some more money, without offering anyone control.
Then Martin Seligson, who had been dispatched to meet John King's plane, came back to report the great man's attitude. King, it appeared, had expressed much admiration for the 'mystique' of Bernie Cornfeld, which he felt was necessary to IOS, anyway for some time. But King had also made the point that nobody except himself was likely to give IOS any more money until an audit had been done.
Cornfeld made a speech about the need for the men who had built IOS to stick together in the face of disaster. From this category, he apparently excluded Ed Cowett, however. Cornfeld said that while no doubt Cowett was doing his best, and had everyone's interests at heart - that wasn't enough. Cowett, he thought, should resign. He, Cornfeld, should remain. If they wanted to chop his head off too, of course, they were most welcome to it. But what he suggested was that they should wait until they could get a really good price for it. This argument that they should only trade off his head for a good price was used heavily by Cornfeld over the next few days.
Cornfeld wound up his speech with an appeal to all the directors to follow the dictates of their own consciences, whereupon Wilson Wyatt moved successfully that John King should be asked to address the meeting.
The vast figure of John M. King now emerged from a black limousine outside Bella Vista, and strode into the long boardroom. In view of the fact that King Resources itself was virtually bankrupt within months of this meeting, and that there was a sharp liquidity squeeze in the us at the time, it may seem remarkable that King should have been able to scratch up the finance to answer Cowett's call for help. However, King Resources had increased its liquidity in several ways during the past few weeks. First, the company had conducted a thorough review of all the sums owed to it by the IOS funds, principally the Fund of Funds. Through what Ed Cowett called 'a strict and full interpretation of all obligations', King Resources had been able to obtain by the end of April a total of $20 million from the cash resources of the Fund of Funds. This money was earmarked for Arctic and other exploration costs, but even so it substantially improved the liquidity of King Resources. Secondly, King had just discovered an oasis in the American credit desert. Although rather exclusive, this oasis was frequented by his own companies, by Harry Trueblood's Consolidated Oil & Gas, and by that IOS investment favourite, Four Seasons Nursing Homes. It was refreshed by funds from the Treasury of the State of Ohio, and from the Disabled Workmen's Compensation Fund of the Ohio Industrial Commission, whose monies were handled by the State Treasury. King's access to this cash had been arranged via money brokers in California, Miami and Ohio; before the sec declared the loans to be 'illegal'
1
this seemed a promising source of cash. On April 17, King Resources borrowed $3 million from the Ohio Treasury, and on May 1, the day before King left for Geneva, the company borrowed another $5 million. And King, who was then being described by
Forbes
magazine as 'an American Croesus', was confident of getting more cash from orthodox banking and insurance sources. (King probably did not notice the
story that Forbes added, apropos his attempt to take over IOS. Croesus, about to attack the Persians, was told that he was about to bring down a mighty empire. The empire in question was his own.)
King now made a set-piece speech to the IOS directors. He counselled everyone to look to the future, and abjure negativism. His own companies, he said, had passed through hard times in the past, but had risen to higher things. He said that everyone should adopt a positive attitude, and work together. At the same time, he thought that he should be in control, because who else would lend any more cash? He could not submit to the rule of a committee, merely in order to get members of the financial Establishment involved in the rescue of IOS. To the extent that it was required, he said, King Resources was an Establishment company. He closed this wondrous address with an assertion that indecision was inherently evil.
John King then answered questions. He assured Eli Wallitt that King Resources was quite independent of Ed Cowett. He informed Henry Buhl that King Resources had indeed made substantial profits on deals with IOS. Just how substantial, it was hard to say. Allen Cantor, a member of Beta Foundation Equipment Associates, asked for information about that controversial concern. King said that he himself had only heard of Beta one week ago. With further expressions of optimism, King and his party left the IOS board to chew over the offer.
After James Roosevelt returned from Germany, where he was able to report that the Roosevelt charm had worked once more on the German Banking Commission, Cornfeld introduced an expert witness for his view that IOS was not in all that much need of money. This was Hugh Knowlton, from Smith, Barney
1
Further details of this are given later in this chapter.
& Co, who had been one of the six lead underwriters. What IOS needed was not money, Knowlton said: rather, it was credibility and reorganized management. A few million dollars, if needed, could always be raised, he thought, by pledging the stock IOS owned in its subsidiary, IOS Management. Of course, it would be necessary first to replace both Cowett and Cornfeld. With that, Mr Knowlton departed.
The realities of the situation were now painfully clear. A surrender to Rothschilds would mean that most of those present would be purged from the positions they held. John King, who was prepared to pay $4 a share, was offering rescue, or anyway some kind of alliance, on terms to which few except Cornfeld seemed unalterably opposed. Alternatively, it w
as possible that IOS might survive without King. But in that case, it would be necessary for Bernie to lay down his head, in order that his colleagues should have a decent chance of preserving theirs.
It was Cornfeld's old friend, Eli Wallitt, who faced the Emperor at last. Speaking slowly and sorrowfully, he proposed that votes of confidence should be passed upon both Bernard Cornfeld and Edward Cowett. Having done that, he said, the board must decide whether to negotiate with King alone, or whether to keep looking for other help while negotiating with King. Finally, in the event that Cornfeld and Cowett should be removed, a new, small committee should be set up to run the company. Wallitt proposed a bulky portmanteau resolution covering all these points. It was late Wednesday evening.
For the moment, Cornfeld remained cool and controlled. His innate tactical sense told him that Wallitt's vast, sprawling motion could not possibly be voted as it stood, and it would have to be broken up. Indeed, the idea of removing Cornfeld was too vast to be assimilated in one gulp.
The directors decided not to vote on Eli Wallitt's resolution at all. Instead, they voted on a new motion to negotiate immediately with King. They decided that they would not take King's offer as it stood, but would try to persuade him to share his rescue with at least one American and one European partner. The immediate effect of this was to eliminate Cowett. Anxious to assure themselves that there was no unduly close connection with King, the board voted that Cowett should resign from the board, and from all his other positions, as from the time that new management should take over. The directors, all of whom were showing signs of strain, dispersed.
The
evening session was not productive. Cornfeld launched a bitter tirade against King who, he said, was incapable of thinking of the operation as anything but a takeover. The man had no sense of partnership, Cornfeld complained. Allen Cantor, who was on the negotiating committee dealing with King, admitted sadly that King was steadfastly refusing to give up any more than 49% to any other participants. Hammerman, the deadliest opponent of King after Cornfeld, gave the same report. King, effectively, was saying they had to go all the way with him, or not at all. And although King was willing to offer $4 a time for IOS shares, the conviction was spreading that some more substantial participation would be required to restore confidence.
The vital step in the deposition of Cornfeld took place outside the boardroom itself. Before Friday's session began, Cornfeld was talking with Allen Cantor in Cantor's office at 119 Rue de Lausanne, when George von Peterffy, Richard Hammerman, and Henry Buhl came in with Eli Wallitt. The much oppressed Emperor turned at bay, to be confronted by the man he had personally dominated during the whole of the twenty years since they had met in the Norman Thomas campaign at Brooklyn College. Cornfeld had been warned that the old bonds were snapping two days before at Bella Vista: but this time it was no windy resolution in business language that faced him. Wallitt told Cornfeld, bluntly, that he must resign from the chairmanship of the board in order for the company to survive.
Wallitt's attitude to Cornfeld, on his own admission, is one of awe and 'terror'. It seems remarkable that he, of all people, should be the man to face Cornfeld down at last: but the case is explained by a visit to Eli Wallitt's house. This is a spacious and elegant mansion which overlooks the Lake of Geneva and the Jet d'eau, with a distant view of the Jura. It was a wonderful floor of multi-coloured woods, its walls are rich with pictures. Standing on the shaded porch of his house, while his children played with a large telescope, Wallitt told us: 'This is what I did it for.' He was referring, at that time, to the whole history of his association with IOS - but as, curiously enough, he was just completing the purchase of the house at the time of the IOS crisis, it seems fair to apply the same words to his confrontation of Cornfeld. 'If anyone tried to take this away from me,' said Wallitt, ‘I would fight like a tiger for it.' In May 1970, Wallitt believed that if Bernard Cornfeld stayed in charge of IOS, what remaining worth the company possessed would be destroyed.
Now he told Cornfeld that he must go, and the force of this, coming from Wallitt, was that all the power, all the control, all the reverence that Cornfeld had enjoyed for the last ten years was meaningless. Cornfeld, at the moment that he no longer represented wealth, became nothing.
There was a short, raw screaming match. Spouting obscenities, Cornfeld accused Wallitt of plotting against him in calculated disloyalty. No one previously had stood up to one of Cornfeld's famous rages, except those who had chosen to break with IOS. Cornfeld accused Wallitt of having been the cause of the whole crisis - it was Wallitt, he said, not the German bankers, who had sold IOS stock short. The accusation was untrue, but it had just enough plausibility to hurt. What had happened was that Wallitt needed some cash to buy his home. He had already sold as many shares as he was entitled to. He says he got permission to sell in advance shares that would fall free at a later date. It was not a short sale, but he did sell shares, at a good time for him and a bad time for IOS. What he did not know, perhaps, was that Cornfeld had unloaded nearly half a million shares in April and thus was in a poor position to complain. Accusations of mutual treachery mounted rapidly, until Cornfeld dashed from the room, shouting, ‘I made you, Wallitt!' among other less printable things.
'We said things to each other that no human beings should say,' was the version Wallitt gave later.
The board meeting began at 12.30 on Friday, and the directors had figures on the table which showed that IOS was now losing money at the rate of about a quarter of a million dollars a day.
Locked between King, who wanted a takeover, and the Rothschilds, who wanted surrender, the directors hesitated and bickered. Allen Cantor said that the Rothschild consortium required a firm answer, or they would withdraw. They regarded their offer to take up IOS shares at $1 each as speculative.
John Templeton's position was understandable in a large outside shareholder. He was in favour of the King deal. Richard Hammerman, who had to live with the City of London, thought they should negotiate with Rothschilds, not King, and try to get their price up somewhat. Martin Brooke said that the underwriters thought IOS ought to deal with Rothschilds. George Landau, who had no doubt been mulling over the cash flow that King had received from the IOS funds, argued that John King needed IOS at least as much as IOS needed King. Eli Wallitt and others wanted to enter the King deal, but to continue negotiations with Rothschilds. Barry Sterling advocated that they should do business with the first person who would put up any money.
It was, as Ossie Nedoluha observed, all internal politics. Cornfeld made a last, despairing attempt to find a deal that would reconcile all demands. He suggested that more directors should be brought in from outside, and that IOS should try once more to do a deal with King, having first got back the money King owed. At the same time, IOS should try to join the Establishment via a deal with Rothschilds - but should not surrender control of the company to anyone. John Templeton, he thought, could be temporary chairman of the board.
Cornfeld was asked to withdraw, so that the board could consider its opinion.
Sir Eric Wyndham White took the chair, and a discussion began which rambled on, in subdued but emotional mood, for about an hour. Wyndham White did not want to see a formal vote taken against Cornfeld. Others, like von Peterffy, thought that anything less 'would have repercussions, with a guy like Cornfeld'. It was clear enough that whatever the formalities of the matter, the majority now wanted Cornfeld to go. And at last, Malcolm Fox, the onetime tennis star, stood up and proposed that Bernie should be asked to resign voluntarily from the chairmanship, and from all his positions in fund management, and from all his posts in subsidiaries. One by one, Wyndham White went round the table. With the exception of Allen Cantor and Wilson Wyatt, every director assented to Fox's proposal. Cantor, with tears in his eyes, was sent to convey 'the feeling of the meeting' to Bernie waiting outside.
It was some minutes before Cantor came back. With him was Cornfeld, walking slowly, hands in his pockets, looking down at his feet. 'If that's what you want,' he told the assembled directors, almost inaudibly.
Those few muttered words counted, legally, as his resignation from the chairmanship of the board which was gathered before him. But something more was needed to convey Cornfeld's resignation from his posts throughout the other corporations of the IOS empire. Ed Coughlin had a brief, comprehensive letter of resignation typed out, and Cornfeld signed his familiar bold signature.
Silently, he took a seat as a rank and file member of the board, and the directors decided to call John King back in to talk to them. In the interval, while they waited for King, Cornfeld went up to Coughlin and said: 'Could I have that piece of paper I just signed?' Coughlin, whose impression was that Cornfeld had been so overcome with emotion that he could scarcely have known what he was signing, thought 'the guy had a right to see what he'd put his name to'.
Cornfeld took the letter, and went back to his seat. And then John King came in, and began to address the IOS men on the wonders of King Resources, and the prosperity and glory that awaited the two companies once they were linked together. Almost nobody, it seemed, was looking at Cornfeld. After King had been speaking for a few minutes, Cornfeld slowly, but with deliberation, tore his letter across once, then twice. Then he crumpled it up in his hand.
The directors had not noticed Cornfeld's action. Perhaps they were spellbound by the saviour? But when King withdrew, Ed Coughlin, the secretary, said:
‘I must draw the attention of the board to something. Has Mr Cornfeld resigned?'
Cornfeld now delivered a somewhat confused speech. He was bitterly certain, he said, that John King was a financial adventurer. King, he believed, would ruin IOS. As for himself, he was unwilling to resign from all his positions without taking legal advice. After all, simply to resign from everything might increase his legal liabilities - he didn't know. Would not the board at least let him talk to his attorneys?
His old colleagues were reluctant to remove him forcibly. His verbal resignation from the chairmanship still stood anyway: they told Cornfeld that he could delay his resignation, if he wished, until he had taken counsel. It was an unwise concession, and it led to a prolonged and damaging series of wrangles. But even so, the imperious authority which had ruled and created IOS was at long last broken, never to be restored.
The following day, Saturday, the IOS board unanimously voted to close a deal with John King.
The announcement that Bernard Cornfield had been deposed, and that John King was the appointed rescuer of IOS, was received with scepticism in financial circles. 'Who is going to rescue the pair of them?' asked one London banker coarsely. The point had been taken, with great clarity, that John King could not survive for long without the income he received from the IOS funds. And it was also apparent that without that income he would not have enough money to rescue IOS.
King made a brave try at dispelling this scepticism. He dealt with his difficulties by boldly denying their existence. Having spent one week examining the wreckage, he issued a statement which began with the pronouncement: 'IOS Ltd is in sound financial condition…'
'In addition to the company's financial strength,' King continued, 'the IOS sales force is the most uniquely effective sales force internationally.' The facts were, of course, that the company was flat broke, and that
one of the reasons for this was that its revenues were being eaten up by the sales force.