Observers stood slack-jawed that the Midas from Omaha had gilded Salomon Brothers with his touch. Buffett—the burger-chomping billionaire next door—had put his money behind a Wall Street bank.
He routinely railed against the Wall Street of which he was now very much a part. He wrote the Berkshire shareholders excoriating the junk bonds used to finance takeovers—including Salomon’s—which, he said, were “sold by those who didn’t care to those who didn’t think.”1 “Wall Street is the only place people ride to in a Rolls-Royce to get advice from people who take the subway,” he said.2 On the pages of the Washington Post, he had decried the “casino society” that was making the corporate raiders rich. Why not tax one hundred percent of the speculators’ profits?3 There was certainly a lot to tax. From 1982 to 1987, the Dow Jones Industrial Average had streaked from 777 to 2,722. If you want to make money, he told business-school students, “hold your nose and go to Wall Street.” But he was already there.
The image of Wall Street seducing a Midwestern populist into bed was too good to leave alone. Asked by a reporter why he owned the largest single chunk of Salomon when Wall Street was such a sinkhole, Buffett did not hesitate. He had placed his faith in one man. John Gutfreund, he said, “is an outstanding, honorable man of integrity.”4
Buffett always did fall in love with people, and observers said he was noticeably in love with Gutfreund—at first. Yet the man who once quit his job as a “prescriptionist” to escape the inherent conflict of interest with his customers couldn’t allow his affection for John Gutfreund to shield him from the basic fact that he owned part of an investment bank. How had he gotten himself into the—at best, awkward—position of sitting on the board of such a company?5 It was as if, during a dry spell, Buffett’s urge to make money had once again overwhelmed his high hopes, high aspirations, and high principles. And as had been true throughout his life, whenever his avarice got the upper hand, trouble followed.
At the time that Buffett invested in Salomon, the market was near a breaking point. Unlike the 1960s, he didn’t have a partnership to dissolve, but over the next few months he started dumping stocks. Part of what was driving the market upward was a new invention, the “S&P 500 future.” Salomon, like all major banks, now traded these derivative contracts that were a way of betting how high or low the index of S&P 500 stocks would be on a certain date.6 Derivative contracts work like this: In the Rockwood Chocolate deal, the value of the futures contract was “derived from” the price of cocoa beans on a certain date. If the beans turned out to be worth less than the price agreed to by the contract (including the insurance premium), the person who had bought the futures contract as insurance “won.” Her losses were covered. If the beans were worth more, the person who had sold the futures contract as insurance “won.” He got the insurance premium, plus the contract entitled him to buy the beans below the then-current market price.
Suppose that in the weight deal Buffett had made with Howie for the rent on his farm, he didn’t want to risk Howie’s actually losing weight, which would drop the rent. Since this was under Howie’s control, Warren might want to buy insurance from someone else. He could say to Susie, “Lookit, I’ll pay you a hundred bucks today. If Howie loses twenty pounds and keeps it off for the next six months, you’ll pay me the two thousand dollars of rent that I’ll lose. If he doesn’t keep it off for the whole six months, you don’t have to pay me the rent and you get to keep the hundred bucks.” The index that determined the gain or loss was “derived” from Howie’s weight, and whether or not Buffett would make such a deal was based on a handicap of the odds that Howie would be able to lose the weight and keep it off.
The S&P “equity index futures” that money managers were buying as insurance in 1987 paid them back if the stock market fell below a certain level. People who assumed the market would keep going up were often “gambling” by “selling” the insurance. They wanted income from the premiums.
Equity index futures were swarming like gnats in July. If stocks started to fall, all the bills would be presented to the sellers of insurance at once. They would have to dump stocks to meet their claims. The buyers of the index futures, meanwhile, were often using them to insure “program trades” that would sell automatically as the market fell, triggering a cascade of sales.
By the early fall the market got nervous, and began to stutter and stall. On Black Monday, October 19, 1987, stocks plunged a record-breaking 508 points as everybody tried to squeeze through the keyhole at once. The market came close to a trading halt, as it did in 1929, and suffered its largest one-day percentage drop in history.7
The Buffett Group happened to be meeting on the third day of the avalanche, this time in Colonial Williamsburg. The topic planned for discussion as stocks were peaking had been “Is the Group finished with the market?” Instead, with the market crashing around their ears, for three days Buffett and the others glowed like fireflies, checking stock prices and phoning their traders with controlled excitement. Unlike the many people devastated by losses, they were buying stocks.8
When the avalanche victims were dug out of the snow, however, Warren’s sister Doris turned out to be one of them. She had sold what were called “naked puts,” a type of derivative peddled by a Falls Church, Virginia, broker. Naked puts were promises to cover somebody else’s losses if the market fell—“naked” because they were unclothed by collateral and thus unprotected against loss.9 The broker had emphasized that the naked puts would provide Doris with a steady stream of income, which she needed. It is hard to imagine that the broker gave her any kind of realistic description of the risk she was taking, especially using a scary term like “naked put.” Doris was unsophisticated about investing but highly intelligent, with a hard-nosed common sense. She had not talked to Warren about the investment, however. He was famous for recommending only extremely safe, low-return investments, like Treasury or municipal bonds, especially when counseling divorced women. These were investments that he would never make himself. Doris had trusted him enough to become one of his first partners; she trusted him implicitly when it came to investing for Berkshire. But that long-ago childhood episode when Cities Service Preferred went down after he bought it for himself and Doris might have loomed large in both their minds, had she asked him for advice. She didn’t ask.
Now, acting on her own, Doris had incurred losses so large that they wiped out her Berkshire stock and threatened her with bankruptcy.
Doris idealized her brother, viewed him as a protective figure, and kept a little shrine to him, featuring miniature golf clubs, Pepsi bottles, and other symbolic accoutrements of his life. But when she had a problem, instead of going to Warren, she called Susie as a go-between, as everyone in the family did. By this time Doris had been married and divorced three times. She felt she had rushed into her first marriage out of insecurity; her second had failed in part because she had felt coerced into it and thus hadn’t fought hard enough to save it. Her third marriage had been a terrible misjudgment. By now, Doris had experienced a great deal of mistreatment in her life, but rather than letting it cow her, she fought back. This time, however, she didn’t know what to do.
“You don’t ever need to worry,” Susie had told her about her brother after her third divorce. “He’ll always take care of you.”
After she confessed to Susie what she had done and asked for help, Warren called her early on a Saturday morning. He said that if he gave her the money to pay her creditors, it would only help the businesses to whom she owed money—the counterparties whom she had insured. His logic was that they were speculators; therefore he would not bail them out. As she realized that this meant he was not going to help her, she broke out in a cold sweat and her legs started shaking. She was sure this meant that her brother despised her. He felt that his decision was simply rational.
“I could have given a couple million dollars to her creditors if I’d wanted. But, you know, the hell with them. I mean, this broker woman who sold this stuff to Doris—she’d busted everybody in that particular branch.”
Doris hoped that Susie would save her. Susie had so much money of her own, and Warren gave her so much money, most of which she gave away. However, she did nothing now to help Doris financially.
The story hit the Washington Post that the sister of “a highly successful investor” had done something extremely dumb. Damaging Warren’s reputation was a serious transgression in the Buffett family, and Doris’s timing was terrible. The Buffetts were still trying to recover from a tragic event several months before. Susie’s nephew Billy Rogers had died of a fatal overdose in a rooming house in San Francisco. Susie, Peter, and Mary discovered his body when they did not hear from him for several days. Losing Billy had been Susie’s greatest failure as a rescuer of people, and the greatest sorrow she had ever known. His death had publicly bared the imperfections beneath the family’s wholesome surface. Now, Warren may have known—on some level—that he was rationalizing about not helping his sister. Certainly he feared Doris’s ire; when she felt threatened—like Kay Graham—Doris defended herself as if cornered. Warren could not tolerate shrill behavior from anyone, not even her. So he stopped calling, and nobody else in the family contacted her either. Frightened at being abandoned and deeply wounded, Doris browbeat her mother for money and loans to prevent her from losing her home.10 Ironically, the Federal Reserve had lowered interest rates, companies were buying their own stocks, and the market was recovering quickly from the debacle, leaving only victims like Doris behind in its wake.
But behind the scenes, Warren was arranging to advance his sister $10,000 a month from the trust left by Howard’s will. “That was more money than I have ever spent in my whole life,” she says. The tension deescalated; they were able to speak. She was almost prostrate with gratitude—until she realized that this was her own money, which she was simply being paid early. At the time, her share of the trust, having grown from a little over 2,000 shares of Berkshire that were worth $30,000 in 1964, was valued at about $10 million. The trust was not structured to pay out until Leila died, when Doris and Bertie would receive the money in four installments. As a further olive branch, however, her brother set up the Sherwood Foundation, which paid out $500,000 a year in charitable gifts. Doris, Warren’s children, and Astrid could each allocate $100,000 to any causes they chose. The annual income produced was as if her brother had put around $7 million into a trust for the five of them. Doris’s share, therefore, was almost as much as if Warren had given her the money after all, but in a different form.
Of course, it was not in a form she could use to pay her debts or save her house—Warren never gave money outright, only in a manner that he controlled. Still, as the storm subsided, Doris regained perspective. She was acutely aware that without him she would have had nothing in the first place. As she scraped together the money to pay her debts, their relationship gradually returned to normal, and the shrine stayed in place on her wall.
The other victim of the crash that Buffett had to deal with was Salomon. Only three months after Berkshire’s investment, he and Munger attended their first board meeting. The topic of the day was the $75 million that Black Monday had cost the firm.11 Salomon faced the cleanup from Black Monday weakened by the fact that, only days before the crash, Gutfreund, his moon-shaped face impassive, had laid off eight hundred people and discontinued marginally profitable businesses such as commercial paper trading (a backwater of the bond business) so abruptly that the disruption hurt relationships with some important clients almost beyond repair.12 These and the losses from Black Monday were going to gouge a deep hole in the shareholders’ pockets that year. And with that, Salomon’s stock fell into the tank.
The shareholders were suffering, yet the compensation committee—which Buffett had joined—began to discuss lowering the price at which the employees’ stock options could be exercised.
Buffett felt this was morally wrong. The others outvoted him two to one. He was outraged.13 But his role on the Salomon board was mostly titular. His advice was rarely sought and less often taken. Even though Salomon stock by then was starting to recover, the repricing of the stock options, he says, made his investment in Salomon “way less attractive financially than it had been.
“I could have fought harder and been more vocal. I might have felt better about myself if I did. But it wouldn’t have changed the course of history. Unless you sort of enjoy combat, it doesn’t make sense.” Buffett’s willingness to do combat—even in a roundabout way—had diminished markedly since the days of Sanborn Map, Dempster, and the Buffetting of Seabury Stanton.
“I don’t enjoy battles. I won’t run from them if I need to do it, but I don’t enjoy them at all. When it came to the board, Charlie and I didn’t even vote against it. We voted yes. We didn’t even abstain, because abstaining is the same thing as throwing down the gauntlet. And there were other things at Salomon. One thing after another would come up that I thought was nutty, but they didn’t want me to say anything. And then the question is, do you say anything? I don’t get in fights just to get in fights.”
Buffett had been originally attracted to Gutfreund, the reserved, thoughtful man in love with his work, who arrived every day at seven a.m., lit up the first of his huge Temple Hall Jamaican cigars, and wandered among the shirtsleeved traders to tell them, “You’ve got to be ready to bite the ass off a bear every morning.”14 Indeed, it appeared to employees who made presentations in board meetings that Buffett was a “relatively passive” board member.15 He seemed to understand little of the details of how the business was run, and adjusting to a business that wasn’t literally made of bricks-and-mortar or run like an assembly line was not easy for him.16 Since he didn’t like the way the investment was working out, he always had another choice, which was to sell it and resign from the board.17 Wall Street boiled with rumors that Buffett and Gutfreund had had a falling out; that Buffett was either going to sell or to fire Gutfreund and bring in someone else to run the firm.18 But it hadn’t come to that. Someone as prominent as Buffett selling and resigning from the board as a major investor would be a shocking gesture that would drive down Salomon’s stock price and cost his own shareholders. By now his reputation had become part of Berkshire’s value. Moreover, he hadn’t given up on Gutfreund. His whole reason for investing was Gutfreund, and when Buffett threw his arms around someone, it took an ax to split them apart. Thus, as the holidays approached, he and Gutfreund struggled uneasily to work out their differences.
Buffett did have a merry Christmas that year. His present to himself was Coca-Cola. It would make up for a great deal of the unhappiness from Salomon. At a White House dinner some time earlier, he had reconnected with his old friend Don Keough, who was now president and chief operating officer of the company; Keough had convinced him to switch from his own concoction of Pepsi dosed with cherry syrup to the newly introduced Cherry Coke. Buffett tried it and liked it. His family and friends were gobsmacked when the man so famously loyal performed this turnaround. For years, KO (Coca-Cola) stock had been too expensive for Buffett to consider. Now the company had gotten into trouble, its bottlers locked in a fierce price war with Pepsi that had taken the price of Coke down to around $38 a share. Although still expensive, it had the same quality of a great brand under duress as American Express had had earlier. The way Warren looked at it, Coca-Cola was pouring forth a waterfall of cash, and spending only a small portion of that to operate.
When Coca-Cola products turned up at Buffett’s shareholder meeting in 1988, Berkshire shareholders began swigging Coke in imitation of him. They had no idea that, through Berkshire, they also owned the stock. The meeting took on a whole new tenor that year when a thousand people showed up at the Joslyn Art Museum auditorium. This was the year that the Frozen Corporation, no longer a quasi-partnership, officially joined big-time corporate America and listed itself on the New York Stock Exchange. The Berkshire meeting had to be delayed because so many people came that shareholders were having trouble finding parking spots. Buffett had an inspiration. He rented two school buses and persuaded a few hundred shareholders to follow him after the meeting, like the Pied Piper of commerce, to the Nebraska Furniture Mart. Part of the appeal was the chance to meet the indomitable Mrs. B, about whom Buffett had been writing and talking for five years. The shareholders were so charmed by the tiny tank of a woman perched on her electric cart in the carpet department—and by her prices—that they spent $57,000.19
By year’s end, the shareholders still did not know that Berkshire had purchased more than fourteen million shares of KO at a cost of almost $600 million.20 Because his every action now moved markets, Buffett had gotten special dispensation from the SEC not to disclose his trades for a year. Berkshire soon owned more than six percent of the company, worth $1.2 billion.21 In March 1989, when his position was revealed, the resulting hullaballoo caused so much demand that the New York Stock Exchange had to stop trading the stock to keep the price from skyrocketing out of control.
Coca-Cola’s CEO, Roberto Goizueta, glowed with delight at the famous investor’s endorsement. He asked Buffett to join his board, possibly the most prestigious in North America. Buffett accepted with alacrity, steeped himself in all things Coca-Cola, and met a number of new people who were fellow board members, including Herbert Allen, the blunt-spoken, straight-shooting chairman of Allen & Co. The two became allies. Allen invited the Buffetts to his Sun Valley conference, which was emerging as the quintessential elephant bump for corporate CEOs. At Sun Valley, investors, Hollywood, and media moguls met to mingle and play every July.
Buffett knew this meant adding a new annual event to his calendar, but Sun Valley was important and he wanted to attend. Moreover, he now had the means to arrive in style. In keeping with his rising stature as a member of the CEO Club, he had just swapped the used Falcon for a fancy new Challenger jet that cost nearly $7 million. He revealed the airplane—which he had dubbed the Indefensible—in his shareholder letter, making sport of himself with St. Augustine’s prayer: “Help me, oh Lord, to become chaste—but not yet.” He would soon write his shareholders that he wanted to be buried in the jet.
On his way to the airport to fly to Sun Valley, Buffett visited his sister-in-law, Dottie, in the hospital. Frail, twig-thin, a longtime alcoholic, Dottie had contracted a severe case of Guillain-Barré syndrome, an autoimmune disorder that can completely paralyze the nervous system. She was in a coma, and Susie had moved back to Omaha temporarily to care for her. While there, she was helping Howie campaign for Douglas County Commissioner as a Republican. Warren, naturally, had chosen not to back his son financially. But Susie was seen everywhere fund-raising for him; she put the family imprimatur behind her son.22
When Howie won the race, it meant that he would be spending more time in Omaha. Susie Jr. had also recently moved back, so that her husband, Allen, could take over as executive director of the Buffett Foundation.
Having his daughter around pleased Warren. Susie Jr. shared her mother’s caretaking quality, although packaged in a more businesslike style. He would now have two women in Omaha to look after him. More women to look after him was something that he had always rationalized. “Women don’t mind taking care of themselves,” he said. “Men mind taking care of themselves. I think women understand men better than men understand women. I’ll eat asparagus before I give up women.” His desire to be taken care of by women was so overwhelming that he mostly left it up to the women to settle any differences in their hell-bent desire to do what, in each of their opinions, was in his best interest. Susie Jr. and Astrid began to work out their respective roles.
The network of connections he had forged now brought Buffett a business that would certainly put him in favor with all his women—Borsheim’s, an Omaha jewelry store. Louis Friedman, the brother-in-law of Mrs. B, had founded this company, which carried high- and mid-range merchandise at discount prices. Buffett had learned how strongly women preferred jewelry to clothes, no matter how well clothing “held its value.” The person most likely to be pleased by this purchase was Big Susie, who had been assembling an impressive collection of jewelry given by her contrite husband. Susie Jr. also appreciated jewelry, as did Warren’s sisters and Kay Graham. The only one not that interested in jewelry was Astrid, who was uncomfortable with expensive things, though if he gave her jewelry, she certainly wouldn’t turn it down.
So Warren’s Christmas shopping for the women in his life was simplified in 1989. He worked out a system: earrings, pearls, watches, everybody would get a variation on some theme each year. But he himself got nothing to equal the hefty chunk of Coca-Cola that he’d bought so happily the year before. Worse still, he got a lump of coal in his stocking in the form of a new book, Liar’s Poker, written by former Salomon bond salesman Michael Lewis. Named after a bluffing game that traders played using the serial numbers on dollar bills, the book captured Salomon’s swaggering, innovative, energetic culture and how it had begun to break down in 1986 and 1987. Liar’s Poker turned into a whopping bestseller; it depicted the firm’s eccentricities so memorably that Salomon would never again live down its reputation as a sort of zoo for the most aggressive and uncouth people on Wall Street.23 The end of the 1980s takeover boom was another problem for Buffett, for while he was still arbitraging announced deals, his usual feeding territory was empty. With no great businesses to buy, Buffett once again lowered his standards as he had when buying Hochschild-Kohn.
The lure this time was other CEOs, who, fearing for their jobs or their autonomy, began to offer him more special deals to invest. For Berkshire, he bought three apparently lucrative “convertible preferred” stocks, all structured along the lines of the Salomon deal, paying him on average nine percent, which gave him a floor on his return while also giving him the right to convert in case the companies did well. Each of these companies was quite different. Champion, a poorly managed paper business, was thought to be “in play” among takeover artists.24 Gillette, a business with a huge “moat” around its brand—like See’s Candies, invulnerable to competition—was being temporarily shunned by investors. And Pittsburgh-based US Air, formerly called Allegheny Airlines, a weak regional player in a newly deregulated industry, was also “in play.”
Like the Salomon preferred stock, the terms of these special deals meant that critics suddenly viewed Buffett as protecting the interests of entrenched CEOs. It was of course in the interest of his own shareholders to maximize their returns while protecting them from risk, but Buffett now looked like one of those boardroom insiders who depended on special deals to get ahead.
In the age of the buyout funds and corporate raiders, this level of greed was chump change. Buffett could have easily been a buyout king himself. But what his determination to stay friendly and on the side of management did make clear was that he was now one of the guys at the country club. Ben Graham had always felt that if someone traded in stocks, this necessarily made him an outsider—because he had to be willing to displease a company’s management. Buffett, who wanted to be liked by everyone, had been trying to bridge that gap since his earliest investing days when he became friends with Lorimer Davidson at GEICO. Now “Many Wall Street investors say Mr. Buffett’s special deals amount to a kind of gentlemanly protection game,” said one news story.25
In the end, what looked like sweetheart deals turned out to be no more than finely handicapped bets. Only Gillette turned into a winner, ultimately earning Berkshire $5.5 billion. US Air was the worst. Buffett had made a number of remarks over the years about the stupidity of investing in things with wings. Then the company suspended its dividend and, like Cleveland’s Worst Mill, the stock plunged. “That was the dumbest fucking thing, going into that deal!” one friend exploded. “What the hell are you guys doing? You violated every one of your principles!”26 Buffett would later agree, saying, “As soon as the check cleared, the company went into the red and never came out. I have an 800 number I call and say, ‘My name is Warren Buffett and I’m an Air-aholic.”27 Charlie Munger’s dry comment was, “Warren didn’t call me on that one.”
Salomon, the model for these deals, was also not doing well. After the crash and the near-escape from Perelman, the merger business had been slow to get back on its feet, and talented bankers left for elsewhere. Gutfreund had restructured the firm once again in another round of layoffs. But the managing directors no longer feared him. “People kept threatening John and he would try to buy them,” said one vice chairman.
Already fragmented into disparate power bases, Salomon now evolved into a system of warlords: a corporate-bond warlord, a government-bond warlord, a mortgage-bond warlord, an equities warlord.28
One ruled above them all: the warlord of bond arbitrage, a soft-spoken, brilliant mathematician, forty-year-old John Meriwether. The shy, self-effacing “J.M.” expressed his outsize ambitions through a team of professors he had lured with Wall Street salaries from schools like Harvard and MIT. These “arb boys,” an oasis of intellect amid the belching, sweating traders, hunched protectively over their computers, fiddling with mathematical models portraying the bond universe. The arbs were launching a revolution in the bond business, and the edge their computer tip sheet gave them against the rest of the suckers produced most of Salomon’s profits. They lived inside Meriwether’s little bubble on the trading floor and felt they had earned their arrogance. J.M. was enormously forgiving of mistakes but relentless toward anyone he considered stupid, and the arbs were his personally chosen elite. He had a deeply complex personal relationship with his team, and spent nearly all his time with them, engaging in one of his three obsessions: work, gambling, and golf. Many an evening after the markets closed the arbs sat together, playing liar’s poker to hone their handicapping skills.29 The boyish-looking, blank-faced Meriwether usually won.
Despite his passivity and limited influence as a board member, Buffett certainly understood arbitrage. But the board’s knowledge of Salomon’s business details went only so far, and Buffett did not understand computers, which were becoming important to every business and intrinsic to the new Wall Street. He did know, however, that he was now a director of a corporation that was utterly dependent on computers, and he had certainly figured out that computers could increase risk.
To Buffett, it was obvious that the combination of fallible human beings and judgment-free computers in a completely unmonitored, unsupervised environment meant an almost unlimited potential for things to go wildly out of control. But as a board member, he lacked authority to make changes and could only try persuasion. By now he and Munger had wrangled repeatedly—and unsuccessfully—with Salomon’s management. Munger had taken over the audit committee—which had not formerly been a bastion of zealous oversight—and put it through six- and seven-hour dissections of the firm and its accountants. Munger discovered that Salomon’s derivatives business had grown immensely, using trades for which no ready market existed. The trades would not settle for long periods, sometimes years. With minimal cash changing hands, the derivatives were valued on Salomon’s books using a model.30 Since the model was created by those whose bonuses it would determine, not surprisingly the models usually showed the trades were quite profitable. As much as $20 million of profits had been overstated through such accounting mismarks.31 The audit committee, however, addressed only trades and deals already approved, and usually completed. The real oversight took place before the fact.
There, in the one area in which Buffett and Munger unequivocally had more skill than anyone else—making investments—they weighed in loudest of all—and were ignored. Their protestations only alienated them from the employees. In one example, Salomon’s Phibro unit had formed a joint venture with a Houston company, Anglo-Suisse, to build oil fields in West Siberia that would supposedly revolutionize oil production in Russia.
“Anglo-Suisse,” Munger said when the idea was floated. “This is an idiotic idea. There are no Anglos and no Swiss involved in this company. The name alone is reason not to get involved.”
But Salomon put $116 million into the joint venture anyway, thinking that oil was going to be integral to Russia’s future and that Western capital was needed to extract the oil. But, while “the country isn’t going to go away,” as Buffett said, and “the oil isn’t going to go away,” the Russian political system could go away. No margin of safety could cover that.32
Sure enough, as soon as the White Nights joint venture got going, the Russian government began toying with a tax on oil exports. The tax nearly wiped out White Nights’s profit. Then the volume of oil production proved disappointing. Russian nabobs flew to the United States and expected to be entertained with prostitutes. The Russian government was unpredictable and uncooperative, resulting in setbacks from start to finish. Somebody was going to make a lot of money from oil in Russia, but it wasn’t going to be Salomon Inc.
Russia was merely a sideshow at the time. In 1989, the United States had become obsessed with the possibility that the whole country would be eclipsed by the rising sun of Japan. Salomon had invested large sums in Japan and was doing well in its start-up business there, which had grown rapidly to hundreds of employees and was making money under its head, Deryck Maughan, who had wisely given local talent the reins. Buffett, who generally did not buy foreign stocks and who believed Japanese stocks in particular to be outrageously expensive, had shown little interest in anything related to Japan.
Katharine Graham, however, had developed a fascination with Akio Morita, one of the world’s most brilliant businessmen. Morita was chairman of Sony, one of the world’s most successful corporations. Graham brought the two men together at one of her dinners, but they did not click. Finally, during one of Buffett’s trips to New York, Morita-san held a small dinner for Graham, Buffett, and Graham’s friend Meg Greenfield at his Fifth Avenue apartment overlooking the Metropolitan Museum. Buffett, who seemed slightly mystified by Graham’s interest in this powerful, visionary man—observing grudgingly that Graham “was sort of enchanted by Morita”—agreed to go.
Buffett had never eaten Japanese food but knew it might be problematic. He went to plenty of events where he touched nothing more than the dinner rolls. He could easily go seven or eight hours at a time without eating. He disliked offending his hosts, however, and as his reputation had grown, he found that there was no way to fake eating by cutting things up and moving them around. People noticed.
One side of the Moritas’ apartment had a sweeping view of Central Park, the other a view of the sushi kitchen. A highlight for guests was the opportunity to watch the four chefs preparing the elaborate meal behind a glass window.
As they were seated for dinner, Buffett looked at the chefs. What was this going to be like? he wondered. As guest of honor, he was seated facing the kitchen. There were chopsticks on a little stand and tiny cruets and miniature bowls of soy sauce. He already knew he didn’t like soy sauce. The first course was brought out. Everyone slurped it down. Buffett mumbled an excuse. He motioned for his full plate to be taken away. The next course arrived. Buffett could not identify it but looked at it with dread. He saw that Meg Greenfield, who had eating habits similar to his, also was having difficulties. Mrs. Morita, seated next to him, smiled politely and barely spoke. Buffett gurgled another excuse. He nodded again for the waiter to remove his plate. As his untouched dishes returned to the kitchen, he was sure the chefs noticed.
The waiter brought out another unidentifiable course of something that looked rubbery and raw to him. Kay and the Moritas tucked in with enthusiasm. Mrs. Morita smiled politely once again when he offered a third excuse. Buffett squirmed. He liked his steaks bloody but did not eat raw fish. The waiter cleared the plates. The chefs kept their heads down. Buffett was sweating. He was running out of excuses. The chefs looked busy, but he was sure they must be peeking sideways from behind the glass to see what he would do. Course after course arrived, and each of his plates went back, untouched. He imagined that he heard a slight buzz from the kitchen. How many more courses could there possibly be? He had not realized there were this many things on the planet that could be eaten raw. Mrs. Morita seemed slightly embarrassed for him, but he wasn’t sure, because she smiled politely all the time and said so little. Time crawled more slowly with each course. He had been counting, and the number of courses now exceeded ten. He tried to make up for his culinary lapses with witty, self-deprecating conversation about business with Morita-san, but he knew he was disgracing himself. Even in the middle of his bonfire of embarrassment, he could not help but think longingly of hamburgers. By the end of fifteen courses, he had still not eaten a bite. The Moritas could not have been more polite, which added to his humiliation. He was desperate to escape back to Kay’s apartment, where popcorn and peanuts and strawberry ice cream awaited him.
“It was the worst,” he says about the meal he did not eat. “I’ve had others like that, but it was by far the worst. I will never eat Japanese food again.”
Meanwhile, hundreds of Salomon employees who would have crawled up Fifth Avenue on their knees blindfolded to eat this same dinner with the Moritas were instead dining at high-priced Japanese restaurants and mutinying over the size of their huge bonus checks. The hugeness of their checks was not the point. It was the hugeness of their checks compared with others’ huge checks that mattered. Buffett and Munger knew little of the trouble fomenting at Salomon. Meriwether’s arbs had been agitating for more money. The former college professors, hired away from salaries of $29,000, felt they were subsidizing money-losing departments like equity investment banking. They viewed sharing their profits as “socialist.”33 The arbs could have made more on their own. They wanted a cut of the hundreds of millions they earned for the firm.34 Although he was so shy that he had trouble maintaining eye contact, Meriwether now became the world’s most aggressive and successful bonus-pimp. Gutfreund caved and gave the arbs fifteen percent of what they made,35 which meant they had the potential to come away with much more money than the traders, who shared their bonus pool. The deal was made in secret between Gutfreund and Salomon’s president, Tom Strauss; the board never knew, nor did other employees at Salomon—yet.
By 1991, Buffett and Munger had been through a series of disappointments and setbacks at Salomon. The financial results they got were not always up-to-date. Staff demands for bonuses continued to spiral. They disagreed with much of what went on in the boardroom. The stock price had not moved for eight years. Earnings were down $167 million, mostly because of employees’ pay.
Buffett, having so far let Munger be the Appointed Bad Guy, now roused himself, met with the executive committee, and told them to cut back. Yet when the final bonus pool number came through, it was $7 million higher than before. Under the new formula that Meriwether, as bonus-pimp, had procured for his arb boys, one of them, Larry Hilibrand, got a raise from $3 to $23 million.36 When word of Hilibrand’s bonus leaked to the press, some of his colleagues went crazy with envy and felt cheated—the millions they were making forgotten.
Buffett himself had no problem with the arbs’ bonuses. “I believe in paying talent,” he says, “but not, as Charlie would say, as a royalty on time.” The arrangement was like a hedge fund’s fee structure and bore some resemblance to his old partnership.37 It would put more pressure on the rest of the firm to perform. What he objected to was not being told. He objected even more to the fact that other people did not get haircuts for their lack of performance. Gutfreund had showed a better sense of proportion than most of his traders, opting to take a thirty-five percent pay cut, in line with the decline in earnings.38 This helped him with Buffett, who thought Gutfreund had more class than his employees. But Buffett’s sense of decency was so offended by the employees’ greed that he overcame his natural inertia and voted against the bonuses for the traders. He was overruled. When word of Buffett’s “no” vote raced through the hallways of Salomon, people were outraged. A billionaire who loved money had called them greedy.
Buffett considered Salomon a casino with a restaurant out front.39 The restaurant was a loss-leader. The traders—especially Meriwether’s people—were the casino: the purity of risk-taking done without conflicts of interest. That was the part of the business Buffett liked, and the new pay system was designed to keep the arbs from bolting.40 But by trying to operate the firm under two distinct pay systems, as if it really were a casino with a restaurant out front, Gutfreund had driven a rift through Salomon’s heart.
Now Meriwether and Hilibrand asked Gutfreund for permission to approach Buffett to buy back his convertible preferred stock. The terms were so rich that it was costing Salomon too much. They were no longer under threat of a takeover. Why pay for Buffett’s protection? Gutfreund said they could talk to Buffett and try to convince him he was better off without the preferred stock. When approached, Buffett said that he was amenable. But having Buffett as an investor must have made Gutfreund feel more secure, for in the end he got cold feet.41
Thus, Buffett was held to his original deal. Having invested both Berkshire’s $700 million and his own reputation in John Gutfreund, by 1991 it was too late to back out.