Glencore's Murky Past and Uncertain Future

The story of the man who started Glencore Plc. (LON: GLEN) - and why he fled the United States (and needed and got a presidential pardon) - is a crazy one.

But it pales compared to the ongoing story of Glencore itself - how this Swiss firm grew from one of the most powerful private commodities companies in the world to one of the globe's most powerful publicly traded commodities companies... and how relentless growth in pursuit of staggering personal wealth drove Glencore's existence and global markets to the edge of an abyss.

It's a story I know well: As a trader, I followed the company closely for years. And I actually chronicled the Glencore saga for Forbes several years back.

So no one is better-positioned to bring this tale to you.

That's why you should listen when I say that if Glencore can't survive over the next few months, the company's collapse could splatter the markets in a manner that's every bit as gruesome as the Lehman Brothers collapse of 2008.

glencore (1)First, I'll relate how Glencore came into existence.

Then, I'll detail how the company could easily implode.

Finally, I'll let you know what to look for so you'll know Glencore's brakes have failed and it's heading over the cliff, taking global markets with it.

Plus, I'll show you some ways you can make some big money on this potentially horrific crash...

The Brassy Bandit

Everyone loves a good story, and the story of Glencore starts with Marc Rich (born Marcel David Reich), the most colorful, controversial, crooked, and fabulously wealthy commodities trader the world has ever known.

In the winter of 1974, Rich jetted to the Swiss Alps - not to ski, but to "accidentally" bump into the CEO of Philipp Brothers, at that time the world's biggest commodities-trading house.

Rich was an oil trader with Philipp. And he was determined to get a huge bonus for the extraordinarily profitable trading he engaged in on behalf of the company. After bumping into his boss on the slopes - and feigning surprise at the "chance" meeting - Rich boldly asked for a $1 million bonus.

Retorted his boss: "Phillipp Brothers has never paid a million dollar bonus to anyone - and never will."

Rich found the nearest telephone and put a call through to Pincus "Pinky" Green - his right-hand man at Philipp's New York offices.

"Take everything out of the office now," Rich told Green.

Marc Rich + Co. - later Marc Rich AG - was launched the very next day. Rich had one goal: to crush his former employer - and former boss.

As you'll see, Rich succeeded - by founding the most powerful privately held commodities trading house in the world.

Meanwhile, Philipp Brothers - now renamed Phibro Corp. - rallied back and acquired Wall Street's then-most successful trading house, Salomon Brothers, to form Phibro-Salomon Inc."Phibro" was dropped from the name, and Salomon Brothers was later acquired by Travelers Group, which merged in 1999 with Citicorp to become Citigroup Inc. (NYSE: C).

Ironically, Andrew J. Hall, the head of Citi's Phibro unit, demanded a $100 million bonus from his bosses in 2009 for the division's contribution of $2 billion to Citi's pretax revenue. He didn't get it.

Charged Up

The Arab oil embargo of 1973-1974 spawned an array of oil-pricing regulations in the U.S. market. One of those regulations drew a distinction between oil drawn from old wells and the "black gold" pulled from new ones.

Because Washington wanted to spark an expansion in oil and gas exploration, production from new wells commanded much higher prices.

Now his own boss, Rich seized the opportunity. He infamously "daisy chained" millions of barrels of oil from old wells out to sea in tankers and then, through a dizzying maze of transfers, on-shored the oil as "new oil" and sold it at prices allegedly marked up four times. He reportedly netted $100 million in the scheme.

But oil wasn't the only commodity Rich + Co. was trading. The company was trading everything - and almost "cornered" several markets.

Rich was becoming fabulously rich and partnered with his friend, Denver oil billionaire Marvin Davis, known as "Mr. Wildcatter," to buy 20th Century Fox. (Rich later sold his 50% stake to Rupert Murdoch for $250 million. Murdoch would end up buying out Marvin Davis, who died in 2004, reputedly broke.)

In the meantime, Rich's oil trading was getting out of control. Not only was the master manipulator daisy-chaining (artificially bolstering) oil, but he later bought massive quantities of crude from Ayatollah Khomeini's Iran while that country was holding U.S. citizens hostage in Tehran. Much of that oil was subsequently sold to apartheid-era South Africa.

In 1983, Rich was indicted on 65 federal charges - including racketeering, tax evasion, conspiracy, fraud, and trading with the enemy (Iran).

He faced 300 years in prison.

[epom key="ddec3ef33420ef7c9964a4695c349764" redirect="" sourceid="" imported="false"]

The day the indictments were handed up, the "King of Commodities" abandoned his lavish Fifth Avenue offices - in favor of Switzerland, where he believed he'd be safe from extradition.

Incidentally, infamous arbitrageur Ivan Boesky moved into Rich's abandoned New York offices. And in keeping with $100 million profits and $100 million bonus requests, Boesky paid a $100 million (cash) fine after being convicted for insider trading in 1987. He also served two years of a three-and-a-half-year sentence in prison.

Comfortably ensconced in Switzerland, instead of slowing down, Rich amped up his trading. With "Pinky" still serving as his right hand, Rich exerted absolute control inside his company - and flexed his muscles out in the marketplace.

Rich eventually retired in 1994 after a management-led buyout of his interests spawned Glencore.

Expatriate Extraordinaire

Although Rich was born in Antwerp, Belgium, he was raised in New York - and it was the United States that he loved.

But he never dared to return.

Not even after his ex-wife - songwriter Denise Rich - gave more than a million bucks to Democrat Party causes, including $450,000 for the Clinton Presidential Library. Not even after he was pardoned by Bill Clinton - in the president's final hours in office.

In June 2013, Rich - a man who'd escaped the Holocaust with his family, and who was known as "El Matador" for his swashbuckling style - passed away at age 78 from a stroke.

The legend of Marc Rich will be told and retold - and will undoubtedly grow.

After all, there are stories about his backing Israel's Mossad and how that intelligence service protected him - about his close contacts with Henry Kissinger, the King of Spain, Israeli power politicians, and the Mafia.

But even after Rich was out of the picture, Glencore kept on growing.

Under CEO Ivan Glasenberg, who engineered the buyout of Rich and took Glencore public in 2011, the company would leverage itself up to the point it's reached today.

The company's debt load - compounded exponentially by the price collapse of all the commodities the firm controls and trades - endangers not only the company, but the global financial markets, too.

It's no exaggeration to say that the "Lehman Moment" of 2008 could be reprised as a "Glencore Moment."

That's why - in my next report - I'll show you just how bad things really are at Glencore.

I'll tell you what to watch to determine if Glencore is headed over the cliff - and likely to take global markets with it.

And I'll show you a few moves to make to protect yourself and profit if Glencore ends up on the rocks.

Follow us on Twitter @moneymorning.

Mark Your Calendar: Money Morning Capital Wave Strategist Shah Gilani thinks we can expect a bear market before Halloween. But even when stocks are down, there's "easy money" to be made. This is what you need to know to protect yourself in a bear market - and perhaps even make some serious profits...

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

Read full bio