American Express got started in 1850 as a merger of three competing companies mostly active in transporting goods between New York City and Buffalo. These companies were owned by Henry Wells, William G. Fargo and John Warren Butterfield. Due to a disagreement among them, the first two of these guys would, a couple of years later, found another company you’ve heard of.

Transporting supplies during the Civil War was an immensely profitable business and, by the end of it, American Express had swollen to 900 offices in 10 states. In the 1880s, it expanded into financial services with money orders and in the 1890s began offering traveler’s cheques. Six decades later, in 1958, the company would offer its first charge card to compete with Diners Club.

But the meat of this tale starts a a bit before that, in 1955, when the U.S. Government started a program, called Food for Peace, with the goal of selling surplus goods at low prices to European countries, still slowly rebuilding themselves from World War II. A con-man by the name of Anthony “Tino” De Angelis got a wind of this program and, knowing it would be easy money, set up the Allied Crude Vegetable Oil Refining Company to take advantage of it.

By the early 60s, Tino was a significant player in the vegetable oil business — and certainly making a killing — but he was a con-man not a businessman and so he comes up with a plan to corner the oil market:

Load up on vegetable oil while also buying oil futures. A future is a contract that requires the holder to buy a certain oil amount, at a certain future date for a certain price. Solicit the services of a guarantor firm to emit warehouse receipts stating that Allied kept such and such amounts of vegetable oil in its warehouses. Take these receipts to brokerage houses and banks and take out loans using the alleged inventories as collateral. Use the proceeds from these loans to buy even more inventory and futures. Go back to step 1.

By cornering the market, he would inflate the price of his future contracts as well as his vegetable oil holdings increasing his already substantial, government subsidised, profits.

At the time, a subsidiary of American Express, American Express Field Warehousing Limited Inc., was operating a business of this type — guaranteeing the value of assets stocked in warehouses — and this subsidiary was among the largest providers of such guarantees to De Angelis’ company. In fact, by 1963, AEFW had only one client — Tino.

But why go through the hassle of actually buying the stuff? Just fill the stored tanks up with water and top them off with a bit of vegetable oil. American Express’ inspectors wouldn’t notice it because no one noticed AMEX had issued receipts for 805 millions pounds of oil — 87 pounds more than the aggregate inventories of the whole United States.

Eventually, an anonymous whistleblower calls the oil inspectors, tells them to check out the oil tanks more closely and the gig was up.

Allied entered bankruptcy proceedings, the The New York Stock Exchange halted trading in a couple of brokers that financed Tino, there were repercussions in the commodities and stock markets, De Angelis would serve a seven-year jail term and, American Express Field Warehousing filed for Chapter XI bankruptcy on December 30.

The price of American Express tanked from $65 in October 1963 to $37 in January 1964. And not without reason. By the end of December, it appeared that claims against AEFW might exceed the equity of the parent company. AMEX’s book value was around $58 million and the New York Times reported that there were “scores of creditors, . . . holding nearly $150 million in worthless claims.” But, in principle, the fact that AEFW was a separately incorporated subsidiary meant that the parent company was not responsible for its liabilities.

There was significant confusion in the market while everyone tried to figure out what was going to happen and the fear of AMEX having to go through liquidation was real.

Warren Buffett figured the things would go the way of American Express. He said as much during a lecture:

He began buying shares by the end of 1963 until he established a 5% stake in AMEX for $20 million — 40% of his partnership’s available cash (this was before Berkshire). He knew it was a great company. Here’s a couple more quotes:

You could look at the credit card and you knew it was a winner . . . They had raised prices every time. Their retention rate was higher.

The traveler’s check business had 60% of the traveler’s check business in the world while selling their checks at a higher price than the banks . . .

The whole American Express Company, synonymous with financial integrity and money substitutes around the world . . . [W]hen Roosevelt closed the banks, he exempted American Express Traveler’s Checks, so they substituted as US currency.

The company had one hell of a moat and, due to the whole oil fiasco, the market was afraid of it. American Express was selling at a discount. So why not load up?

Things worked out the way Buffett expected. The company settled for $32 million after taxes. Hilariously, some shareholders blocked the payment and “filed suit to block any settlement, on the grounds that American Express had no legal obligation to pay the warehousing subsidiary’s liabilities.”

From 1964 to 1973, AMEX’s stock increased 10 fold. Berkshire Hathaway is the company’s largest shareholder with an ownership stake of over 18%. This piece of the pie has a total value a shy less of 18 billions dollars.

It certainly takes courage to trade against the market, in any situation. But, to identify this type of miss-pricing in an incredible volatile market and then trade with such conviction takes more than courage, it takes research and some serious badassery.