The Great Salad Oil Swindle
Pulitzer-winning account of the warehousing fraud that nearly broke Amex.
Summary
Miller, a Wall Street Journal reporter, covers the 1963 collapse of Anthony De Angelis's Allied Crude Vegetable Oil Refining Corporation, which had borrowed against warehouse receipts for soybean oil that did not exist.
The mechanism was simple and worked for years. American Express Field Warehousing, a subsidiary of American Express, issued receipts certifying the quantity of oil in tanks at Allied's Bayonne facility. Banks and commodity brokers lent against those receipts. The inspectors were paid by Allied, the tanks were connected by pipes so oil could be moved between them during inspection, most tanks contained water with a layer of oil floating on top, and some tanks had no oil at all. Since oil floats on water, dipping a tank showed oil at the top regardless of what was beneath. At the peak the receipts covered more soybean oil than existed in the entire United States, a fact that was checkable against Department of Agriculture statistics and that nobody checked.
The collapse bankrupted two brokerage houses, threatened the New York Stock Exchange, and exposed American Express to claims that drove its shares down sharply, which is the transaction Warren Buffett is known for, buying a large position on the judgement that the card and traveller's cheque businesses were unaffected.
The book is contemporaneous reporting and the detail is reliable. Its lesson for investors is direct: collateral that has been certified by an inspector paid by the borrower has not been verified, and an aggregate cross-check against public data would have exposed the fraud at any point.
Key takeaways 7
- Warehouse receipts certified by inspectors paid by the borrower are not verification, since the inspector's income depends on the relationship rather than the accuracy.
- The outstanding receipts covered more soybean oil than existed in the entire United States, which was checkable against public Department of Agriculture data.
- Oil floating on water shows oil at the top of a tank regardless of what is beneath, and the physical inspection method was defeated by a property of the commodity.
- Multiple lenders each relied on the same certification and none conducted independent verification, which concentrated a single point of failure across the system.
- An aggregate cross-check of a borrower's claimed holdings against total market supply is the cheapest available fraud test and is almost never performed.
- The fraud's collapse destroyed brokerage firms that had extended credit against the receipts, which shows collateral quality is a counterparty risk rather than a documentation matter.
- American Express's share price fell on a liability that did not affect its operating businesses, which created the opportunity Buffett acted on.
Who should read it
Investors and credit analysts who want a concrete case in how collateral verification fails and how a market-wide cross-check would have caught it.
Who recommended it 1 · 1 direct
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