One day in early 1975, Susie Buffett’s friend Eunice Denenberg came over to the house and sat on the dog-hair-covered sofa in the family room. Susie turned her back and clicked on the tape deck. Then she sang. Denenberg pronounced approval. They talked about Susie’s dream of singing professionally, which she was too diffident to pursue. Denenberg went home; then she called back the next day and said, “This is your agent.” She enlisted a backup band and got Susie a gig at a nightclub in Irvington, the tiny town on Omaha’s outskirts where she and Dottie had once formed the choir in her father’s church. Susie was nervous, but the rest of the family was enthusiastic. Only Doc Thompson, who said, “I don’t know why you want to sing in bars,” had any doubts.
The night of Susie’s first public performance, before a crowd made up of about thirty-five friends, she was so anxious that she asked Warren not to come. Talking and greeting people in a long sequined dress, she stalled until Denenberg pushed her out onto the stage. From Aretha Franklin’s “Call Me,” to what she said was one of her favorites, Roberta Flack’s “The First Time Ever I Saw Your Face,” her choice of music was soulful, passionate, and romantic. The audience responded to and returned her warmth.1 The same pulse and flow Susie got from connecting with people individually came through in a wave when she sang to a group in an intimate space. This was her special gift, transmuted and magnified. She wanted to become a cabaret singer.
Warren at the time had many distractions. He was closing the SEC investigation. He was so fascinated with Kay Graham that he literally could not get enough of her. When Warren got obsessed with something—especially someone new—he could not stop thinking about it or them; this came across to a new person as a wholehearted, flattering, and even overwhelming attentiveness. When business arose, however, he snapped back to it in a split second with all the fierce intensity his steely mind could muster. As Munger put it, Buffett “never let his minor obsessions interfere with his major obsession.”2 Katharine Graham, however, was no minor obsession.
Warren was also taking Kay to business school in a serious way. “Kay had had me trying to explain accounting to her on the side. I’d bring these annual reports to Washington. And she’d say, ‘Oh, Warren, lessons.’ There I was, teaching again.” He considered her son Don “unbelievably smart,” with “as close to a photographic memory as anyone I’ve ever run into.” As a sign of reassurance to the family, Warren had signed the voting proxy on his shares over to Don. He now stayed at Kay’s house when he came to Washington for monthly board meetings.
Buffett felt that Kay was “very, very smart, and in many ways wise, as long as you didn’t go into those areas where the wounds were.” As they grew more intimate, he felt he could say something to her about the way she presented herself to her board. He knew she was less needy than she herself realized. One day he took her aside and said, “You can’t plead for help anymore from the board. It’s just not the position you want to be in.” And so, he says, she quit.
The business and personal ties between the Grahams and Buffett had become close enough that Warren invited Katharine and Don to join the Graham Group at their 1975 meeting, at Hilton Head. Don made an immediate impression with his unpretentious manner, while raising its already high average IQ. Many people quickly saw beneath Kay’s brittle, patrician veneer to the vulnerability and humility that had endeared her to Warren. Thus she fit easily with most of the group despite her queenly presence, worldliness, and connections. She made a sincere effort to get along with everyone—although her deep belief that men were far superior to women wasn’t lost on the women at the meeting. The beautifully dressed, perfectly coiffed Graham, an icon among them, would slide casually into a chair amid the men with a cocktail in her hand; somebody would utter a political opinion, and she would respond “Henry thinks thus-and-so”—speaking of Kissinger. It was impossible not to be impressed.
Henry Brandt pulled Buffett into a separate room and asked him to promise that Berkshire stock wouldn’t drop below $40. By October 1975, the stock had been cut in half after trading at $93 just two years before. “Look, I love you,” Buffett recalls saying, “but I can’t promise you that.” “The world is ending,” said Brandt, or words to that effect. “I’ve got every dollar I own in this stock.”
The world continued to end. Even though the rest of the stock market was recovering, Berkshire was not. Brandt panicked and called Buffett, who offered him $40 a share. Then Brandt called Walter Schloss and said, “Warren will pay me forty dollars and I want fifty. What should I do?”
Schloss was the last champion of cigar butts. At the meetings, the others razzed him about his “buggy-whip” portfolio of bankrupt steel companies and destitute auto-parts makers. “So what,” said Schloss. “I don’t like stress and I sleep well at night.” He filled out his checklists, applying Graham’s philosophy in its purest form. He went home from his desk in the closet at Tweedy, Browne at five o’clock every evening, and his results were phenomenal.
Now Schloss was dismayed to hear Brandt telling himself he was better off without Berkshire stock in a way that contravened this whole cigar-butt philosophy. Schloss worked on him for two hours, saying, You’ve got the smartest guy in the world managing your money, in effect, at no fee, you’re making a big mistake to sell. “I thought I convinced him,” says Schloss. But the U. S. economy by then was in so much trouble that New York City was nearly bankrupt; the country was in a mood of such profound pessimism that it affected people’s judgment. “On Monday he called his broker,” says Schloss, and began selling until half his family’s shares were gone.3
Immediately afterward, President Ford refused a bailout of the New York City economy; the New York Daily News captured the feeling of the times in a huge headline: “Ford to City: Drop Dead.”4
The partners who took Berkshire stock in 1970 when it traded around $40 seemed no better off five years later. “It looked like not much was happening favorably for a long, long time,” says Munger. “And that was not the way our partners, by and large, had previously experienced things. The paper record looked terrible, yet the future, what you might call the intrinsic record, the real business momentum, was gaining all the while.”
Buffett’s own net worth, based on where the stock was trading, had been sliced correspondingly. Yet despite this apparent destruction of wealth—which would have frightened almost anyone else—his pulse never seemed to flutter. He just had the companies he controlled keep buying, and buying, and buying. In 1974, before the SEC investigation began, Berkshire had owned twenty-six percent of Blue Chip. When all was said and done, Berkshire would own more than forty-one percent of Blue Chip—so much that he and Susie owned, personally and through Berkshire Hathaway, thirty-seven percent of the stock all by themselves.
He thought of another way to capitalize on the situation, getting his mother, “who cared nothing about money,” to sell her 5,272 shares of Berkshire to Doris and Bertie. For $5,440 plus a $100,000 note, they each got 2,636 shares of Berkshire—paying the equivalent of $2 a share in cash.5 Buffett, who viewed debt as almost sinful, thought Berkshire so cheap at $40 a share that he had his sisters borrow ninety-five percent of the purchase price to buy it. At the rate he obviously thought he could compound the stock’s value, buying on these terms would make his sisters rich (and avoid an enormous estate tax bill).6
“That was probably the greatest move of all time. It will never happen again. That was a once-in-a-lifetime situation.”
Valuable properties were being sold everywhere for a pittance. Around the same time, Tom Murphy came to Warren with the chance to buy a television station. Buffett realized it would be a terrific deal, but he couldn’t buy it because the Washington Post Company also owned television stations. Since he sat on the Post board, it would put the Post over the limit the FCC allowed.7 “What am I involved with that I don’t own?” he asked himself. He actually had to think about it to find something. Then he remembered that he didn’t own Grinnell College. At Buffett’s recommendation, Grinnell eventually bought a Dayton, Ohio, station for $13 million, putting down only $2 million. Sandy Gottesman arranged debt financing for the rest. The broker who sold it to Grinnell called it the best deal he had seen in the past twenty years.8
There were some good reasons, however, why stocks were cheap and cities like New York were close to bankruptcy. Along with rampant inflation, out-of-control labor costs and unstable labor relations were strangling the economy. Newspapers were among the most severely affected businesses. Right after the Hilton Head meeting, the Washington Post’s union contracts expired, and the pressmen sabotaged the pressroom at four a.m. on their way out the door to go on strike.
Most of the unions other than the pressmen stayed at work, especially the all-important Newspaper Guild of journalists. Using helicopters to move key people past picket lines, the Post started getting out an attenuated paper after only one day’s disruption. But as the strike ground on, Graham became paralyzed with fears that her paper was committing suicide. The Post could produce only half the number of papers at a quarter of their normal size, and advertisers marched steadily over to the Post’s archrival, the Evening Star.
“We crossed the picket line together. Kay was gutsy about that. But I saw her burst into tears when she picked up the Star,” which was copying the Post’s format and stealing its advertisers.
When she felt threatened, the woman that her editor Howard Simons called the “Bad Katharine” flew down the chimney.
“It wasn’t really the Bad Kay. It was the Insecure Kay. If she got feeling insecure, she could get pretty shrill. Occasionally some incident would set her off, and then she would react like an animal. It was as if she felt nobody was on her side. She felt cornered. And nobody would quite know what to do. That’s when they would call for me. Phil hadn’t been on her side, and her mother hadn’t been on her side. The executives at the company hadn’t always been on her side. And so she always had this sense in the back of her mind that she was in an unfriendly environment and it could be triggered by some incident.
“But she always knew that I was on her side. That didn’t mean I agreed with her on everything or ate everything she wanted me to eat. But I was on her side. And I always would be.”
The Bad Katharine bore some similarities to Leila Buffett. And Warren took an obvious pride in being the one person who could win Kay’s trust and keep the Bad Katharine at bay.
For the next six months, the Post would continue to publish while navigating fruitless negotiations, threats, violence, a logistical war of nerves, and a constant struggle to keep the torn Newspaper Guild from striking in sympathy.
“She had people telling her, including some of the people she respected most, ‘You’ve got to give in or you’re going to lose.’ They were afraid, they hated not publishing and seeing the Star gain on the Post.
“So I was the countervailing force. I said to her, ‘I will tell you before the tipping point is reached.’ The tipping point is the point at which the other guy becomes dominant, and after you go back, he is still dominant. At what point does it become more of a habit for them to buy the other paper?”
While “Warren encouraged her, it was her backbone, not his,” stresses George Gillespie, Graham’s lawyer.9
Two months into the strike, the Post had made a final offer to the pressmen, who rejected it.10 Graham began to hire replacement workers, breaking the strike. Over the next few months, the paper gradually won back the remaining unions, readers, and advertisers, even though the picketing and bad publicity continued through the spring.
Just as Graham was slowly rescuing her company,11 Buffett and Munger had finally reached their settlement with the SEC. Now Buffett invited Munger for a steak dinner down at Johnny’s Café near the stockyards to finalize their “simplification” plan. He had decided to stop managing money for FMC on the side. Blue Chip would sell its interest in Source Capital,12 and Berkshire and Diversified would merge. At Betty Peters’s request, Wesco, owned only eighty percent by Blue Chip, would remain a public company, with Munger also chairman. They deferred merging Blue Chip into Berkshire Hathaway until they could more easily agree on the relative values of the companies.
With both Berkshire and the Post emerging from the tumultuous times that had consumed his attention for so long, Buffett’s business routine began to normalize. The Post board meetings lost their edge of emergency, and Graham began thinking of expanding her empire.
Newspapers at the time were being snapped up left and right. “Kay really wanted to buy newspapers. But above all, she didn’t want other people to buy them instead of her,” Buffett says. “Tell me what to do,” she would beg. “I would just make her make the damn decision,” he says. He helped her understand that it was always a mistake to pay too much for something you wanted. Impatience was the enemy. For a long time, the Post did very little and grew slowly. Buffett taught the Grahams the immense value of buying their company’s own stock when it was cheap to reduce the shares outstanding. That increased the size of each slice of the pie. Meanwhile, the Post avoided making expensive mistakes and became much more profitable as a result.13
Buffett, used to doing the taking, for the first time found himself in the giving role and discovered that, with Graham, he liked it. He began to be seen out with Graham more and more. She made it her job to try to give him some polish.14
Munger wrote to Graham about Buffett, “I can see damn well whose ways, predominantly, are actually being mended.”
“Kay tried to upgrade me a little. It was just very gradual and not so I would notice. It was very funny. She worked so hard to sort of remold me, but it didn’t work. She was a hell of a lot more sophisticated than I was, that’s for sure.” Buffett learned that Graham thought it was uncouth and disgusting to eat out in restaurants. “Around Washington your cook was a big point of pride. The highest compliment you could pay somebody at a party was, ‘I’m going to try and hire away your cook,’ or ‘You must have brought your cook over from France.’ Kay cared about that, like everybody in Washington. So her dinners tended to be quite fancy, except that she would make exceptions for me.”
Graham’s chef found the restrictions imposed by cooking for Warren a challenge. “Broccoli, asparagus, and Brussels sprouts look to me like Chinese food crawling around on a plate. Cauliflower almost makes me sick. I eat carrots reluctantly. I don’t like sweet potatoes. I don’t even want to be close to a rhubarb, it makes me retch.”
His idea of a feast was a half gallon of chocolate chip ice cream. He ate his foods in sequence, one at a time, and did not like the individual foods to touch. If a stalk of broccoli brushed his steak, he recoiled in horror. “I like eating the same thing over and over and over again. I could eat a ham sandwich every day for fifty days in a row for breakfast. At dinner at her farm retreat, Glen Welby, Kay served lobster. I was attacking the shellfish through the wrong side, attacking the shell, and not having much luck. She told me to turn it over.” Confronted with a nine-course dinner—each course accompanied by the appropriate wines and destined for a dinner table filled with dignitaries and celebrities and journalism’s star reporters—“it threw him,” says his former secretary, Gladys Kaiser. He never grew accustomed to life on this grand scale.
Yet Buffett became a regular guest at Graham’s famous dinners, which he called her “Kay Parties.” He enjoyed his status as the hayseed who was flummoxed by a lobster. His childlike tastes conveyed an air of authenticity and innocence. But his social naiveté was also genuine—mostly because he went around with blinders on. When “sightseeing” with Graham, he was focused like a laser on who was there, not on which fork to use. He had no desire to broaden this aspect of his horizons. Graham was amazed that Buffett continued to eat nothing but hamburgers and ice cream.15
“She always talked to the cook in French, always, totally in French. So I would hear ‘hamburger’ among the French words and tease her and say, ‘No, no, it’s hambur-zhay.’ Then I would just say, ‘Order me a hambur-zhay,’ and it would come out of the kitchen very fancy. The chef at Kay’s wanted so much to be able to make hamburgers and french fries—and I ate them, but they were not even close to as good as you could get at McDonald’s or Wendy’s. The french fries were always mushy. And he wanted so hard to please.
“But at her big parties, she didn’t make exceptions for me as much.”
At the Kay Parties, Buffett’s role was not to eat but, of course, to talk. As a star investor, he was like a bald eagle in a town where birds of any kind were scarce. Even the most hidebound of Georgetown “cave dwellers”—blue bloods who rarely emerged to socialize with anyone except others of their kind, many of whom were Graham’s friends, such as the columnists Joe and Stewart Alsop, cousins of Eleanor Roosevelt—enjoyed having the charming Buffett around. Dinner guests pelted him with questions about investments, and he fell into his most comfortable role: the teacher.
By now he was in Washington so much that he began keeping a spare set of clothes in Graham’s guest room: usually a fraying blue suede jacket and gray flannel slacks that looked like a rumpled bedspread.16 Graham tried to improve his sartorial sense. “She was appalled by Warren’s clothes,” according to her son Don, “although my mother just hated the way that I dressed. And at one point she said, referring to her employees, ‘Why am I of all people surrounded by the worst-dressed executive staff of anyone in America?’ Her scorn for people’s clothes was widespread, and not confined to Warren.”17 She took him to meet Halston, the tony designer whom she preferred and who had made over her own sense of style. Buffett’s take on Halston: “He was from Des Moines, you know.”
By June 1976, Buffett had occasion to invite Graham to an event of his own: Susie Jr.’s wedding. In every way this event would be the antithesis of a Kay Party—held in Newport Beach, California, a mix of the formal and the casual, with a Buffettish zoo of a guest list, to celebrate a marriage that everybody knew was a mistake from the start.
The spring semester of her senior year of college, Susie Jr. had dropped out of UC Irvine for a secretarial job at Century 21, a real estate company, that didn’t require typing skills.18 Though they were wise enough not to interfere, her parents knew that Susie Jr.’s marriage to blond surfer Dennis Westergard wasn’t going to work out. On some level, Susie Jr. herself knew this, but she was caught up in the fantasy.19 Her wedding was an important affair. Warren had asked that Kay be invited; Big Susie had reserved a special place for her at the church, right behind the family. For a few minutes she sat with Dick and Mary Holland, who had escorted her to the service. Then, not surprisingly, Kay said to them, “I feel uncomfortable. I don’t know why, but it’d be better if I sat in back.” She removed herself to the rear of the church, where she sat for the rest of the wedding.20
The traditional ceremony proceeded without incident. Then the reception at the Newport Beach Marriott turned wild. The Buffetts had let their music-groupie daughter hire any band she liked. Susie Jr. chose her favorite, Quicksilver Messenger Service, a psychedelic rock band that had been among the groups launched at San Francisco’s Fillmore Auditorium in the 1960s. As the twenty-something men with white-boy afros and nipple-length uncombed hair mounted the stage and tuned up their instruments, Buffett looked on with inner horror. When Quicksilver Messenger Service hit it with the drums and electric guitars, Susie Jr. danced in ecstasy at her rock-and-roll wedding while her father managed to keep his composure, even though he was squirming inside. “I was not wild about their music,” he says in an understatement. “They played awfully loud.” He longed for something like his wife’s sweet Doris Day style of singing, or Florence Henderson or Sammy Davis Jr. After ninety minutes, the musicians flabbergasted him again when they stopped playing and put away their instruments. Then their manager compounded his astonishment by asking Buffett to fork over the staggering sum of $4,000—in cash.21
Now Susie Jr. had settled permanently in Los Angeles. Howie had already dropped out of Augustana College after having trouble adjusting and connecting with his roommate. He tried a couple of other schools, but had lost his support system and never graduated. “I was so close to my mom,” he says, “and everything in my life revolved around our family and our home. In college I just could not get any traction.”22 Neither had their father’s ambition, but both had money for the first time. The trust left by Howard to his grandchildren had distributed a little over six hundred shares of Berkshire Hathaway stock to them. Warren gave them no advice on what to do with it. He had never sold a share himself; why would they sell theirs? Susie Jr. sold most of hers to buy a Porsche and a condo. Howie sold some of his to start Buffett Excavating. In a grown-up version of his childhood love of Tonka Toys, he was now digging basements for a living.
Peter, just finishing his senior year in high school, had been accepted at Stanford and would be headed to California in the fall. More and more during the summer of 1976, the house in Omaha was simply empty. Most days after school Peter went to Arby’s by himself to get something for dinner, then headed to the darkroom to work on his photography. Even the dog was decamping. Peter’s friends had started calling to report “Hamilton’s over here.”23
Big Susie, who was rarely home these days, admitted to feeling depressed about the state of her marriage. She felt that Kay was an interloper who was pursuing her husband;24 Kay had such a territorial way with men that it would have been surprising if Susie had felt otherwise. Yet despite—or perhaps because of—her sadness and anger at Warren, Susie herself was “running around like a teenager,” as one person put it, in the hot rush of a midlife romance. She got careless, letting herself be seen with John McCabe, her tennis coach, around Omaha. She still called Milt from time to time as well, and when he agreed to see her they, too, were spotted out in public. She seemed to be living in different worlds, with no plan to proceed in any direction. She could not conceive of abandoning Warren. She described him as an “extraordinary man.”25 However much she joked and nagged about his rigidity and his preoccupation with money, he gave her security, stability, strength. “It mattered to her that he was honest and had a good value system,” says Doris. “If I ever let down someone who needed me,” Susie said, that would be the biggest failure she could imagine.26 Susie had a natural confidence in her ability to manage complex relationships with multiple people, using her emotions as her guide. But somebody would have to be let down eventually.
While Susie was off on her various unknown pursuits, and his three children were headed in their respective directions—Peter taking off for Palo Alto in his little yellow Triumph convertible; Howie driving a backhoe, gorilla costume in tow; and Susie Jr. embarking on married life with her good-looking surfer—Warren was on a journey of his own. Katharine Graham was dragging the man of simple tastes who thought of his life as something out of Leave It to Beaver into elephant territory as fast as she could.
“She didn’t change my behavior as much as changing what I knew and saw. Everywhere she went, she was treated just like royalty. I saw a whole lot of interesting things that I wouldn’t have seen in the world. I had a lot of things explained to me. I picked up a lot around her. Kay knew so damned much about everybody that she would give me insights on people in the political arena.
“It bothered her that she thought I was teaching her all these things and she wasn’t doing anything for me. She was constantly laboring in terms of trying to think of something she could do to help me out, whether it was inviting me to fancy dinners or something else. You could call all these events glamorous or exotic. I found them quite interesting. I’m not knocking these things. There were probably people who were way more dying to do them, particularly in her presence, than I would be. But I had a good time doing it, you know.”
There undoubtedly were people who were “way more dying” to go. Nevertheless, Buffett did go, over and over again, no matter how ridiculous or awkward for him the events turned out to be.
One night Graham took him to a black-tie state dinner at the Iranian Embassy. She wore a golden gown to match the embassy’s decor. Reza Pahlavi, the Shah of Iran, was an important U.S. strategic ally and a charming host. His embassy sat at the apex of the Embassy Row Washington social scene, and its doings glittered with a fin de siècle magnificence.
After the cocktail hour, Buffett sat down at his assigned table and found himself between one of Empress Farah Pahlavi’s ladies-in-waiting and Illinois Senator Charles Percy’s wife. He turned toward Loraine Percy and found her locked in a tête-à-tête with her other dinner partner, Paul Newman. Seeing that it might be a while before she turned toward him, Buffett revolved toward his right and said something to the empress’s lady-in-waiting. She smiled politely. He said something else. She smiled again, then went blank. Ted Kennedy, seated on her other side, leaned over and uttered some bon mot in French. Her face brightened and they began conversing animatedly in French. Buffett sat stranded in the middle. He turned back to Loraine Percy and found that she was still engrossed in Paul Newman. He realized with a dull feeling that with Paul Newman sitting on her left, it might become a very long evening.
Kay had been seated next to the Shah, at another table. Among these circles, Kay was the queen and he was some hayseed investor from Nebraska whom Kay had towed along. Forget Supermoney; this was old money. After a while, Ted Kennedy noticed his plight and asked, “Don’t you speak any French?” Buffett felt like a poseur. He had landed in Bora-Bora with only a snowsuit to wear. The meal went on until one o’clock in the morning, and then the band began to play. One of the gentlemen began to waltz the empress round the floor. Buffett grabbed Graham’s hand and escaped.
And yet, if she had asked him again, he would have gone. Because he was for sure not knocking it. The sightseeing was too good.
As he knew all too well by now, despite the fame from Supermoney and the articles in Forbes, many prominent people had never heard of him. In May 1976, Buffett was visiting Kay Graham in Washington when she said, I have someone I want you to meet. Jack Byrne, the person in question, was reluctant, however. When Graham called to arrange a meeting, he said, “Who’s Buffett?”
“Well, he’s a friend of mine,” Graham said. “He’s just bought a piece of the Washington Post.” Neither knowing nor caring, Byrne turned down the meeting. Then Buffett’s old friend Lorimer “Davy” Davidson, who had retired from GEICO in 1970, called Byrne. “God, what kind of ninny are you to pass up a meeting with Warren Buffett?” he asked.27
Byrne had been hired in 1976 to try to pull GEICO—on the brink of bankruptcy—out of the ditch. Once an insurer only of government employees, GEICO had taken on John Q. Public. “Growth, growth, growth, the emphasis was all growth,” says a longtime executive.28 Fueled by growth, GEICO stock had traded as high as $61—far too rich for Buffett, but he had never stopped following it for the past twenty years.
In 1975, “I looked again at GEICO and was startled by what I saw. It was clear in a sixty-second examination that the company was far underreserved [for claims] and the situation was getting worse. I went in to see [the CEO] Norm Gidden on one of my Washington Post trips. I had known and liked Norm for twenty years on a casual basis. He was friendly, but he had no interest at all in listening to my comments. They were in deep denial. He really sort of hustled me out of the office.”29
That Buffett, who did not own the stock, was trying to help GEICO’s management says something about how attached he still was to the company from which Lorimer Davidson had recently retired, the stock that had been his first really big idea, the investment that had made so much money for him and for his friends and family.
In early 1976, GEICO announced its worst year in history, a $190 million loss from underwriting operations during 1975.30 The company stopped paying dividends, a move that conveys to shareholders that the till is empty. Gidden cast about frantically to bolster the mere $25 million in capital that GEICO had in its coffers.31 That April, at Washington’s Statler Hilton, four hundred angry stockholders stormed the shareholder meeting, armed with questions and accusations. Shortly afterward, the insurance commissioners arrived in a squadron at GEICO’s offices. The board realized, a bit belatedly, that it had to fire the management.32 The board itself was in disarray, several of its members having lost their personal fortunes in the debacle. Without a capable CEO to steer the company, Sam Butler, a steady-handed lawyer from Cravath, Swaine & Moore, took charge as the lead board member—in effect, a temporary CEO.
Butler knew that Byrne had quit Travelers on impulse, bitter at having just been passed over for the job of CEO. A former actuary who became a millionaire at age twenty-nine through a start-up insurance company, Byrne had been instrumental in turning around the Travelers’ flailing home- and auto-insurance lines two years earlier. Butler called him in Hartford and played on his ego, explaining that if he took the job at GEICO it would prevent a national emergency that would throw the whole United States economy into jeopardy. Byrne was easily recruited to audition for CEO in Washington in early May.33 “I came in and gave a sort of off-the-cuff five-hour blah, blah, blah, here’s five points, here’s what we have to do, boom boom boom speech,”34 he says. The desperate board had no trouble deciding to hire this ruddy, round-faced cannonball.
Byrne’s first task when he took over as CEO was to run straight to the dusty Chinatown offices of the District of Columbia’s Insurance Superintendent Max Wallach. An old-school German who spoke with a thick accent, Wallach was “stubborn as hell, and he had this enormous interest in serving the public,” Byrne recalls. He was disgusted with GEICO’s former management and had refused to deal with them. Byrne perceived that Wallach was not wild about him either. Nevertheless, the two men began talking daily, sometimes hourly.35 Wallach insisted that the company put a deal in place by late June to raise money while simultaneously getting other insurance companies to take over some of its policies—that is, to “reinsure” GEICO.36 The idea was to increase the resources GEICO had available to pay claims and to cut the risk it was carrying so that they were more in balance. Thus, Byrne had to sell other insurers on the idea of putting up money to save a competitor.
Byrne’s prior experience was that he could sell anything. At first he was confident.
“My pitch was that if GEICO failed,” says Byrne, “the regulators would just send the bill for GEICO’s unpaid claims to its competitors. So they would end up bailing it out. But Ed Rust, Senior, who ran State Farm, he was a cooney old bastard. He concluded—and he was probably pretty smart—‘I’ll pay a hundred million to cover any of their unpaid claims if it puts GEICO out of business.… Killing GEICO will save us money in the long run.’ “ So State Farm backed out of the reinsurance deal.
“In the end,” Byrne says, “a couple of really good friends reneged. The Travelers just said, ‘We’re not going to help.’ They didn’t have any principled idea behind this. Travelers was just wussy about it.”
Three weeks after he joined GEICO, “I was racing around, thinking I had made the biggest mistake of my life. My wife, Dorothy, was up in Hartford, crying and crying.” The market was suggesting GEICO might not survive; its stock had crashed from $61 to $2 a share. Somebody who owned, say, twenty-five thousand shares had just seen their fortune dwindle by almost ninety-seven percent—from more than $1.5 million to $50,000—from enough to live on for the rest of your life to enough to buy a very good sports car.
The reaction of the company’s investors and shareholders to the calamity would, in not a few cases, literally determine their fate.
Many longtime shareholders had panicked and talked themselves into selling, which is how the stock got to $2 in the first place. Whoever was buying from them took a gamble on GEICO’s fate.
Ben Graham, now age eighty-two, did nothing and kept his stock. Graham’s cousin Rhoda and her husband, Bernie Sarnat, talked to the dean of the University of Chicago business school. He told them to sell it, since stocks that cheap rarely recover. They decided—au contraire—a stock that had sunk so low was too cheap to sell. They had little to lose by keeping it. So they did nothing.37 Likewise, Lorimer Davidson never sold a share.38
Leo Goodwin Jr., the son of GEICO’s founder, sold and destituted himself. Shortly thereafter, his son, Leo Goodwin III, died of a drug overdose, a presumed suicide.39
As for Buffett, he had sniffed out another situation like American Express. Here, however, the company didn’t have a franchise strong enough to pull it out of the ditch. GEICO needed a tow truck. Buffett felt that only a brilliant, energetic manager had any chance of turning the situation around. He wanted to size up Byrne before committing any money to the stock. He had Katharine Graham call Byrne; after overcoming Byrne’s initial resistance, she set up the meeting.
Buffett waited at Graham’s Georgetown house after a Post board dinner for Byrne to arrive. “This is risky,” he told Don Graham. “It could go completely out of business. But in insurance it’s very hard to get an edge, and they have an edge. If they got the right person in to run it, I think he could turn it around.”40
In came Byrne like a firecracker exploding. The two men sat down by the fireplace in Graham’s library. Buffett questioned Byrne for a couple of hours. Of all the Irish-Americans who would ever swing through Buffett’s orbit, Byrne had the greatest gift of blarney, and “by a wide margin,” Buffett says. “I was excited and babbling on and on and on,” says Byrne.
Despite the babbling, Buffett decided that Byrne “understood insurance very well and had the analytical abilities. And he was a leader and a promoter. GEICO needed an analytical leader to figure out how to solve its problem and it needed a promoter to make that sale to all the constituencies that were involved.”41
The next morning, Buffett met up with George Gillespie, the lawyer who had sold him the Post stock, because they had a board meeting to attend at Pinkerton’s, the detective company.42 “George,” he said, “it’s pretty uncharacteristic of me, but today I bought some stock that really might be worthless tomorrow.” He had just called Bill Scott back in the office. Scott put together a huge block trade, buying $4 million worth of GEICO for him.43
Buffett had waited years for the chance to buy GEICO at the right price. But GEICO still did not have reinsurance, it needed capital, and both depended on the goodwill of Max Wallach, the regulator.44 Yet now a new phenomenon took hold. Buffett’s margin of safety was his mere presence as a backer—a now-legendary investor whose company already owned a successful insurer. This gave Byrne a powerful card to play with the regulators.45 In addition, “General McDermott, the head of USAA, wrote a letter” to other insurers, says Byrne. The United Services Automobile Association sold insurance only to military officers and behaved accordingly. Within the insurance industry, it was fabled, General Robert McDermott almost revered. He supposedly wrote that “in the military we never leave people behind; we have a fallen eagle here.”46
Buffett went to see Wallach to do what he could to convince the crusty old public servant to ease up on the June deadline. But assembling the reinsurance deal was like convincing two dozen shivering children to hold hands and jump into a lake.47 To pull it off, the story Byrne was selling was that the former management, befoulers of GEICO, had been tossed out; that what was left of the house was now clean; that Jack Byrne, rescuer of Travelers, had helicoptered in to restore the damage; and so confident was the infallible Warren Buffett in Jack Byrne that he had plunked down a whopping $4 million on the stock.
Nonetheless, when Byrne started hitting the banks on Wall Street, “people were walking out in the middle of lunch,” he says. Then Sam Butler took him down to Salomon Inc. An old, respected specialist bond house, Salomon had never done an equity deal but craved to enter the lucrative business of underwriting stocks. John Gutfreund, an influential Salomon executive, sent a junior research analyst, Michael Frinquelli, and his sidekick, Joe Barone, to Washington to check GEICO out. “I kept them waiting for an hour and a half, so they were furious,” says Byrne. “But I talked till the sun came up. And they were very blank-faced, but on the way to the airport, the company driver heard them talking, and he told me they were very, very enthused on the way back.”48
“The insurance industry can’t afford to let these guys go down,” Frinquelli told Gutfreund. “It would be a terrible black eye on the industry, and these assholes will not tolerate that.”49 But when Byrne and Butler arrived at Salomon’s offices for his last-ditch attempt to raise the money, Gutfreund opened with a bruising remark: “I don’t know who’d ever buy that fucking reinsurance treaty you’re trying to sell.”
“You don’t know any fucking thing you’re talking about,” said Byrne right back.50
Displays of testosterone out of the way, Byrne made a passionate speech, citing “God and the national interest” among reasons why Salomon should raise the money, and referring to Buffett’s investment. As Byrne waxed about GEICO’s prospects and approached liftoff, Gutfreund fiddled with a long, expensive cigar. Finally, wrung out and crestfallen, Byrne ground to a halt. Then Butler said his piece. Byrne thought, from Gutfreund’s demeanor, that they had failed. Then Gutfreund pointed at Byrne and said to Butler, “I will do this underwriting. I feel you’ve got the right guy, but you’ve got to keep him quiet.”51
Salomon agreed to underwrite a $76 million convertible stock offering by itself. No other investment bank would participate and share the risk. GEICO had to consent to an SEC decree in which it neither admitted nor denied the SEC’s conclusion that it had failed to disclose its losses to the shareholders—the mere description of which in a public offering prospectus would tend to poison the deal.52 To get the financing done, Salomon had to convince investors that GEICO would survive, yet the financing was what would enable GEICO to survive. The deal reeked of desperation, and investors could smell it. GEICO was getting such bad press, Byrne said, that if he had walked across the Potomac River, the headlines would have screamed, “Byrne Can’t Swim.”53
Buffett, the ace in the hole, was unperturbed by these events. When the offering looked dicey, he simply went to New York and met with Gutfreund, saying he stood ready as a backup buyer for the whole deal. He strengthened Salomon’s hand, but Gutfreund also got the impression that Buffett wouldn’t mind if the deal failed and he ended up buying all the stock.54 For Buffett, this was the ultimate no-risk deal. Naturally, the backup price he insisted on was low. Salomon told Byrne unequivocally that, given Buffett’s ceiling, the convertible offering would sell no higher than $9.20 per share, not $10.50 as Byrne wanted.
Indeed, once the self-fulfilling prophecy of the sage of Omaha took hold, the deal became oversubscribed.55 Buffett got only a quarter of the stock. Within a few weeks, after a total of twenty-seven reinsurers came forward to provide the required reinsurance, the stock had quadrupled to around $8 a share. And GEICO’s savior, John Gutfreund, became one of a tiny handful of modern Wall Street figures whom Buffett genuinely admired.
But GEICO was still not fixed. Byrne needed a thirty-five percent rate increase in New York—and speedily got it.56 In New Jersey, he went to plead with Commissioner James Sheeran, an ex-Marine who prided himself on being tough. Byrne marched into Sheeran’s office with a copy of the company’s license in his pocket and told him that GEICO must have a rate increase.
“He had a sour-ass, little wizened actuary at his side who had been fired by some insurance company and had a bone to pick,” says Byrne. Sheeran said his numbers didn’t justify a rate increase. “I did all the arm-waving and stuff that I could, and Mr. Sheeran was intractable.” Byrne threw the license on Sheeran’s desk, saying, “I have no choice but to turn in the license,” or something to that effect but containing more four-letter words.57 He then drove back to the office with tires screeching, sent out telegrams to thirty thousand policyholders canceling their insurance, and fired two thousand employees in a single afternoon, before Sheeran could go to court and get an injunction to stop him.58
“It showed everybody, all audiences, I was serious about this,” recalls Byrne. “And that I was going to fight for the life of this company no matter what, including walking out of a state, which wasn’t done back then.” Byrne’s impalement of New Jersey had exactly that effect. Everybody knew he was serious.
“It was like he had trained all his life for that position. It was like he’d been genetically designed for that particular period of time. If you’d searched the country, you could not have found a better battlefield commander.… It was a Herculean job. Nobody could have done it better than Jack.”
Byrne walked through GEICO’s door each morning, sailed his hat fifty feet up to the upper floor of the atrium, and hollered hello to the secretaries.59 “If I don’t whistle by the graveyard, who is going to?” he asked. “If I don’t dance, who’s going to dance?” He had a way of making people feel tah-riffic about the place where they went to work every morning, despite the career-threatening status of their employer. He chopped forty percent of the company’s customers, sold half of its profitable life-insurance affiliate to raise cash, and withdrew from all but seven states plus the District of Columbia. Byrne seemed to run on rocket fuel. His attitude was: “You’re not running a public library here, you’re trying to save a company.”60
“Jack was unmerciful on me,” says Tony Nicely, who had worked for GEICO since he was eighteen years old. “He liked picking on young, aggressive people. But he taught me a lot and I will always be indebted to him. He taught me to think of the business as a whole, not separate functions like underwriting or investing. I learned the importance of a disciplined balance sheet.”61
Byrne told his workers if they couldn’t meet a certain sales figure, they would have to hoist his 240 pounds on their shoulders into a sedan chair like a Roman emperor and bear him into company meetings for a year.62 They made the numbers. Wearing a huge chef’s hat and a giant shamrock, “I cooked Irish dinners for them,” he says. “Colcannon, which is turnips and potatoes and sour milk. It tastes terrible. I’d have these big kettles, and I’d pound these turnips, saying, ‘Oh, this is going to be wonderful!’ ”
Buffett grabbed Byrne and his wife, Dorothy, and immediately pulled them into his circle of friends. Now, between GEICO, Washington Post meetings, West Coast trips for Blue Chip and Wesco, business trips to New York, meetings for Munsingwear, a board he had joined in 1974, and Kay Parties, he was traveling much of the time. Buffett decided that he needed help in the office. Pushed by Big Susie, one of her tennis friends approached Warren about a job. Dan Grossman, a bright Yale graduate with a Stanford business degree, even offered to work for free. Buffett didn’t take him up on that, but latched on to Grossman with his usual intensity. Some thought that since neither of his sons wanted to work in the business, he saw in Grossman the chance at a surrogate son, someone who could potentially succeed him.
Buffett remodeled the office in order to install Grossman next door to himself. Gladys ran interference while Buffett spent hour after hour with him, explaining float, reviewing financial models of insurance companies, outlining regulatory filings, telling Grossman his stories, and leafing through the old Moody’s Manuals. He played hours of tennis and handball with Grossman and added him to the Graham Group, where Grossman became friendly with many people.63 Warren had found yet another object of obsession.