Salad Oil Scandal, American Express, & Warren Buffett
In 1955, Tino de Angelis started the Allied Crude Vegetable Oil Refining company to take advantage of the U.S. government’s Food for Peace program. The goal of the program was to sell surplus goods in the U.S. to Europe at low prices to help them rebuild the economy after World War 2. By 1962, Tino’s salad oil company was big enough to be involved in the commodities market.
By then Tino had developed a cunning plan. He used his existing large pile of inventories of salad oil as collateral to get loans from Wall Street firms and buy Oil Futures so that he could drive up the price of his inventory. So, ships full of salad oil would dock in the port, inspectors from the banks would certify the quantity of the cargo, and then the banks would issue loans against these assets.
The inspectors just missed out on one simple thing - Oil floats on water.
Tino was fooling everyone by filling his tanks with water and then putting oil on top of it. If the banks had done even basic due diligence, they would have known that the total salad oil inventory reported by Tino was more than the holdings of the entire country. By the time Tino’s gig was up, they were supposed to have $150M in inventories but only had $6M1. The futures market crashed and wiped out the entire value of the loans that de Angelis had taken.
A massive portion of the loans was funded by American Express. When Allied filed for Chapter 11 bankruptcy, AmEx was on the hook for the loans issued. AmEx nearly went under and the stock dropped more than 50% due to the scandal and that’s when Warren Buffett came in. Buffett took a 5% stake in the company for $20M and played an active part in repaying the creditors and building back the trust in the company. His bet paid off with AmEx stock jumping from 94 cents in ‘63 to $5 in ‘68, and Buffett exited his position.
Even though Buffett’s investment was an incredible success, what’s interesting is that AmEx has increased another 17x since Buffet sold his investments. The company has returned a CAGR of 13% compared to the 10% returned by the market. Buffett did end up buying back into the company in 1998 and currently owns ~18% of AmEx. Even someone like Buffett, who is famous for holding on to his investments and loathe to sell ended up selling too early.
If you found this interesting, check out the Japanese Asset Bubble