Diamonds as an investment? Not really and this story proves it!

Have you ever tried to sell a diamond?


In the fall of 1978, a thirty-two-year-old Californian computer wizard named Stanley Mark Rifkin discovered an ingenious way to become a multimillionaire overnight. While working as a consultant for the Security Pacific National bank in Los Angeles, he had learned the secret computer code that the bank used to transfer funds to other banks telegraphically at the end of each business day. With this information and his mastery of the bank's computer, he realized that he could transfer tens of millions of dollars to any bank account in America. The problem would be withdraw the money from the system. In early October, he devised a plan for siphoning this money out of the bank and converting it into Russian diamonds.

The first step was establishing an alias identity. Under the pseudonym "Mike Hanson," Rifkin opened a bank account at the Irving Trust Company in New York, arranged a phony passport and other. documentation and retained a respected diamond broker, Lou Stein, to acquire for him a multimillion dollar consignment of diamonds from Russia. The Russian diamond organization, Russ Almaz, agreed to sell "Hanson" at its fixed wholesale price 115,000 perfectly cut, round, brilliant stones for $8,145,000. For arranging this low price, the broker took a standard 2 percent commission, or $162,000. For the deal to be consummated, Rifkin only had to wire the money to Zurich.

On October 25, Rifkin coolly entered the bank's transfer room under the pretext of inspecting the computer. He picked up a telephone connected to the computer and dialed in the necessary digits. Instantly, the computer withdrew $10,200,000 from a non-existent account and transferred it to the account of "Mike Hanson" at the Irving Trust Company in New York. Rifkin then had the New York bank transfer $8,300,000 to the Zurich account of Russ Almaz.

A few days later, using his phony passport, Rifkin flew to Switzerland, took delivery of the diamonds, which weighed under five pounds, and smuggled them through customs into the United States. He then began contacting dealers in Los Angeles, but none was willing to buy the diamonds.

Meanwhile, the Security Pacific National Bank discovered that more than ten million dollars was missing. It was one of the largest bank robbery in history. The FBI, investigating the loss, received a tip about Rifkin, and arrested him in Carlsbad, California and found on him the Russian diamonds, as well as the remaining cash.

Initially, bank officials assumed that most of stolen money prudently invested in diamonds would be easily converted back to money. Only a few weeks earlier Newsweek had reported in a cover story, "The Diamond Boom," that diamonds were "the ideal asset" and that quality diamonds were soaring in price. While the diamonds that Rifkin had bought were commercial-grade stones used in jewelry. the London-based Economist Intelligence Unit had such diamonds, which had increased by at least 50 percent that year, were still increasing in price. Independent appraisers estimated that the diamonds, which Rifkin had bought at a low price, were worth at least $13 million at the retail level, and so the I bank foresaw that it might make a profit of some $5 million with the reported appreciation in value of the diamonds. In anticipation of this windfall, they agreed to pay the ten percent custom tax on the diamonds which Rifkin had evaded, as well as part of the cost of the FBI investigation. Before this expected profit could be realized, the bank had to await the outcome of the trial, since the diamonds were important evidence.

Finally, in September 1978, the bank announced that it would sell its hoard of diamonds to the highest bidder. Twelve major dealers were invited to the bank's vault to inspect Russian diamonds. They were instructed to submit sealed bids by the end of the business day on September 18. A minimum price Of $7.5 million was established to encourage high bids, though independent appraisers assured the bank that the diamonds would fetch far more.

On the day of the auction, bank officials anxiously waited to see how much profit they would garner from the diamonds. However, only a single bid had been submitted, and when it was opened, it was for several million dollars less than the minimum. The bank officials were disappointed at this turn of events. Even though the diamonds had been purchased through a reputable broker at wholesale price, no American dealer would pay anywhere near this price nearly a year later.

The bank offered to sell the Russians back their own diamonds at the original 1978 Price. But they refused to buy the diamonds back at any price.

The bankers learned that two Israeli banks were also trying to sell large quantities of diamonds received as collateral from Tel Aviv dealers; and this might make it far more difficult, if not impossible, for the Security Pacific Bank to unload its 115,000 diamonds. So they decided not to wait any longer.

Walter S. Fisher, the vice-president of Security Pacific, was charged with the responsibility of selling the 115000 diamonds. He realized that diamonds were not a standardized, or fungible commodity, as were gold, silver and platinum. Different appraisals of the same diamonds varied widely dependent on what the prospective buyer thought he could sell them for. And, though all the bank's diamonds were commercial stones for the mass market, Fisher found that it was extraordinarily difficult to find a buyer. None of the dealers in the United States were willing to buy such a large consignment of diamonds. Fisher found it necessary to deal through De Beers' main broker in London, I. Hennig. Finally and accept the terms dictated by the buyer, if he wanted to sell the diamonds. He then had to deliver the diamonds to an unknown corporation in Liechtenstein, G. S. G. Investments, without receiving any money for them for eighteen months. These were terms that the bank probably would not have accepted in selling any other commodity. With a flourish of understatement, the banker concluded, "Selling diamonds is far more difficult than I had anticipated."

While the Security Pacific National Bank's problem was made worse because it had to dispose of the diamonds quickly, even when diamonds are held over long periods of time, selling them at a profit can prove difficult. For example, in 1970, the British magazine Money Which tested diamonds as a decade-long investment. It bought two gem-quality diamonds, weighing approximately one-half carat apiece, from one of London's most reputable diamond dealers for $1,000. For eight years, it kept these diamonds in its vault, inflation ran As high as 25 percent a year. For the diamonds to have kept pace with this inflationary spiral, they would have had to increase in value at least 300 percent. When the magazine's attempted to sell the diamonds, the highest bid that received was $1500 pounds, which led the publication to conclude "As an eight-year investment the diamonds that we bought have proved to be very poor."
 Comment: Top image is Laurence Olivier from Marathon Man. Middle is Security Pacific and bottom is Stanley Mark Rifkin

1 comment:

  1. I remember doing an analysis of the etamology of "invest"--to provide with the resources for a productive enterprise--to realize that while commodities in general can be a reservoir of value, they can never, by nature, be a true investement. They are, of course, inert and not productive.


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