Leverage Is Still the Best Way to Grow Money
August 15, 1992.
By then I was a sophomore at Harvard, and for summer break I had come back down to Garden Queens.
“...This place has changed a lot too.”
I parked my father’s old truck and looked out toward the oil fields beyond the horizon.
Just a year ago, this had been a dying rural town.
Along the highway, all you could see were shuttered gas stations and rusted signs, and even on the street they called Main Street, tumbleweeds rolled by more often than people did.
But now?
The two-lane state road was choked with long lines of massive trailers.
Peterbilt, Kenworth, Mack... trucks carrying oil tanks and wearing coats of black dust stretched on and on without end.
New buildings had sprung up like weeds along the roadside.
Motel, inn, twenty-four-hour diner, bar, strip club, equipment rental shop, tire store, auto repair garage, welding shop, workwear outlet, safety supply store, hardware store, truck parts dealer, laundromat, barbershop, convenience store, pawn shop, real estate office... an entire commercial strip built from every sort of business and convenience you could imagine.
And a great many of them were directly operated by Lee Energy itself, while the rest were subcontractors and partner companies.
People crowded every block of the artificially planned downtown district.
Drillers in oil-stained coveralls, pipeline workers in fluorescent vests, truckers who looked as if they had just climbed down from their trailers covered head to toe in dust.
Their pockets were full of cash, and every shop owner wore the same broad smile.
Outside town, rows upon rows of aluminum-sided trailer homes had been packed tightly together, an improvised settlement that had appeared because the existing hotels and motels couldn’t possibly absorb the sudden influx of people.
Old TV antennas jutted from every trailer roof, and between them, work shirts and jeans snapped on the clotheslines.
Faintly, music drifted out from the bars and strip clubs.
Garden Queens had transformed into a textbook oil boomtown in western Texas.
And at the center of all that change stood my father’s gas station—or rather, Lee Energy now.
...
I let my eyes travel past the bustling downtown and out toward the horizon beyond town.
What I could see there was a vast forest of steel.
Eighty-seven giant pumps were linked by 120 miles of pipeline.
Between them, twelve storage tanks with a 500,000-barrel capacity stood on the plain like giant sentinels in the valley of the wind.
And the pumpjacks—those called Nodding Donkeys—were endlessly bobbing their heads as they drew crude from deep underground.
They were named that because the way they moved up and down to haul oil from below looked like a donkey nodding its head.
Thud. Thud. Thud. Thud. Thud. Thud. Thud.
The steady mechanical rhythm and the faint vibration made the truck shudder up and down.
I compared the blueprint to the scene before me.
“It’s a little different from the plans... but this actually looks better.”
Silvery pipelines twisted around the immense structure, and at its center a distillation tower rose proudly toward the sky.
This wasn’t just a place to pump crude. It was a refinery built to squeeze every last ounce of added value from it.
The above-ground facilities were connected far more efficiently and cleanly than they had been laid out in the original blueprint.
I cranked the window down with the door’s handle.
Whoooosh...
A lukewarm wind swept in and filled the cab with the smells of the outside world.
The heavy hydrocarbon stench of heated crude, the iron smell of hot metal, and the greasy scent of lubricant.
Those must have been coming from the atmospheric distillation tower—the giant kettle—and the state-of-the-art upgrading equipment attached beside it.
They fed raw crude, just hauled up gurgling from underground, straight into the desalter, stripped out the salts, and then boiled it at a searing 350 degrees.
And that wasn’t all. The leftover residue was sent to the fluid catalytic cracking unit, where it was chemically broken down as well.
Gas came out at the top, gasoline and diesel in the middle, heavy oil below that, and beneath it all the leftovers—tar, wax, asphalt, and the like.
The yield was top-notch, of course.
Thanks to the lavishly funded, cutting-edge upgrading facilities we had built, the crude pumped from the Garden Queens fields produced gasoline and diesel at a combined extraction ratio of well over 70 percent.
It was probably among the best in Texas.
Vrooom—BANG!
A truck behind me laid on its horn.
I quickly pulled over and gave it room to pass.
As it went by, the driver shouted an insult at me.
“What the hell, man? I’m busy as hell—why the fuck are you blocking the road?”
“Ah, sorry about that.”
I had been cursed at, but I wasn’t angry in the slightest.
That trucker was one of the men hauling refinery waste from Texas all the way into the south-central states of the U.S.
I wasn’t petty enough to get upset because a valuable business partner who made money for me had tossed out a few rough words.
Whoooom-
Once I moved aside, a few more trucks rolled past.
Some of the drivers recognized my face, and their eyes went wide. They stopped, took off their hats, and gave me a respectful nod.
When the men up front kept pulling over one by one to greet me, the rookie truckers behind them, not knowing what the hell was going on, copied them exactly—pulling over, tipping their hats, and greeting me as they passed.
I returned their greetings and thought,
‘...Let’s see. At this rate we’re producing an average of 40,000 gallons of gasoline a day, right? And 25,000 gallons of diesel. Add in aviation fuel and kerosene, and total daily output comes to around 70,000 gallons. Since we’ve swallowed up the whole middleman network through vertical integration from production to refining to distribution, the pure margin we keep per gallon is about seventy-five cents. That gives us $52,000 in net profit a day. A month comes to $1.5 million, and a year, more than $18 million in clean cash.’
Of course, not all of it was sold.
That was because the real use for the oil extracted from the fields and the gold bars pulled from the mine was something else entirely.
Still, even if most of the production was sealed into drums and stockpiled while only a portion was sold, demand for cheap fuel in a recession like this was enormous.
Lee Energy’s franchise gas stations already numbered 127 in Texas alone, and if you added Oklahoma and New Mexico, the total came to 203.
They were expanding by an average of fifteen locations a month, and with each station bringing in around $80,000 in monthly sales on average, the chain as a whole was pulling in roughly $16 million a month—nearly $200 million in annual revenue.
“Good. This is a pretty solid flow.”
I had finally confirmed that the system was running exactly as it should.
An energy business vertically integrated from production to refining to distribution.
Instead of sitting in a Harvard classroom learning the principles of management, I was standing here at the front line of the real economy, listening to the vast gears of industry turning.
* * *
After I finished everything I had scheduled in Garden Queens, I headed straight to the airport.
I flew across the continent to Boston, then drove west into Wishville, in Massachusetts.
From there, after another three hours or so on the road, I reached the mine entrance and found a landscape utterly different from the Texas oil field.
The moment I opened the car door, a blast of heat hit me.
Not the smell of crude oil, but the sharp, scorching stink of metal—thick enough to sting the nose.
Gray smoke streamed from the towering chimneys of the huge smelter, and below them bulldozers and excavators moved without pause.
Once I put on a hard hat and stepped inside the smelter, I could see gold ore dug from the depths of the shafts arriving nonstop along the conveyor belts.
The site manager, Armstrong Coleman, recognized me and came running at once.
“Chairman! The current! grade! per ton! is averaging! more than! forty grams!”
His voice was so loud it could have drowned out the machinery around us.
“This is a number! you’d only have seen! in the heyday of! South Africa’s Witwatersrand mines! Normally, a gold mine! only needs! five grams per ton! to break even, but! we’re getting! eight times that! It’s a real! jackpot, sir!”
Armstrong looked as if he meant to bore through my eardrums with the same skill he used to bore through strata and dig up gold.
“Armstrong! Chief! Your voice! Is louder! Than the machines!”
“Hahahahahaha! Is it now! I’ve always! had a big! set of lungs!”
The two of us traded lines back and forth as we walked toward the final processing line.
Inside crucibles that could withstand 1,064-degree heat, the molten metal, stripped of impurities, poured into the molds.
At first it was red, but as the temperature fell, it gradually shifted to orange and then to yellow.
...Ssshh! ...Ssshh! ...Ssshh! ...Ssshh! ...Ssshh!
As the liquid gold hardened into a solid, ripples like tiny waves ran across the surface and vanished.
An exquisite golden radiance, as if it were swallowing every bit of light around it, filled my vision.
Before long, one Gold Bar, cooled and washed, was set in front of me.
I lifted the gold bar with a gloved hand.
12.4 kilograms of weight.
Perhaps because it had only just come out of the crucible, a faint warmth still seeped through the glove.
On the mirror-smooth surface, the words LEE ENERGY had been stamped alongside the LBMA standard specification—400 troy ounces—and the purity mark FOUR NINE, meaning 99.99 percent pure, was engraved in relief.
I stared at the gold bar and fell into thought.
Right now, this one bar was worth about $140,000.
But I knew better.
At the time I regressed, gold had been far more expensive than this.
If I sold it now, I’d have cash in hand, and through leverage I could turn that into several times, dozens of times, even hundreds of times more.
But I also didn’t like the idea of selling off gold that would only rise in value if I simply held on to it.
So I had come up with a very good method.
A way to get usable cash without dumping my gold bars onto the market at a bargain price.
‘And after that... yeah, that event is the answer, isn’t it?’
As a regressor, I remembered exactly what would happen just one month from now.
September 16, 1992—what would come to be known as Black Wednesday.
Up to now, I had done everything I could to hit that date at precisely the right moment.
‘One day only. The day I can multiply the cash in my pocket a hundredfold. There’s no way I’m missing it.’
To do that, I needed cash of equivalent value without losing ownership of the gold bars and crude oil.
Ordinary people might wonder how anyone could possibly turn gold and oil into cash without selling them.
But capital markets were full of all sorts of loopholes.
I knew how to keep my gold and oil as mine without selling them, while still pulling out cash equal to what the market said they were worth.
‘...One month. Exactly one month.’
In one month, not just Texas, but Wall Street itself—no, all of America—would know my name.
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