The regulators’ confidence that Salomon could survive on Buffett’s reputation alone was almost certainly misplaced. Salomon barely survived even after the Treasury partially reversed itself. Some of its biggest customers simply felt revulsion toward the firm. First the huge and influential California Public Employees’ Retirement System, then the World Bank, washed their hands of Salomon. Buffett fell asleep each night with visions of the hundreds of billions of dollars of Salomon debt that would fall due over the next few weeks staggering through his dreams like sickly sheep. “Events could do me in, and I couldn’t get off the train. I didn’t know where the train was going to go.”
Buffett had to return to New York the following week. Senator Daniel Patrick Moynihan wanted to see him about Salomon, and there were many other matters that required his presence. He and Munger took Moynihan up to a private dining room on Salomon’s forty-seventh floor, where the chef prepared a proper Wall Street meal for Moynihan, including the correct wines. Moynihan looked at Buffett and Munger, who had ordered sandwiches, in disgust. The aftermath of Hurricane Bob was still pounding the East Coast. Suddenly, cascades of rain began pouring in through a leak in the windows. “The gods are angry with Salomon,” Buffett remarked.1
Later that week, he and Munger went down to Washington to see Bill McLucas and Dick Breeden at the SEC. They came into the office looking like “two guys you would see at the Greyhound bus station,” according to McLucas. Then they started talking and laying out their plan to save Salomon; McLucas then understood, he says, why one person he was talking to was considered a legend and the other could finish the legend’s sentences.2
Afterward, Buffett visited the Treasury Department himself to see Nick Brady, who told him that he had thought Buffett was bluffing. “Warren,” he said, “I knew you were going to take the job no matter what we did.”3 It was only the sincerity of Buffett’s plea that had touched him. Wind up the job as fast as you can, Brady said, and get out of there.
Buffett was determined that whatever was wrong at Salomon be found, confessed, and fixed right away. “Get it right, get it fast, get it out,” he said. When he said fast, he meant fast; he talked to his new secretary, who had worked for Gutfreund and knew everybody well. Paula, he suggested, why don’t you start talking to the board members and ask them questions about what they knew and when.4 Bob Denham, the cautious, thorough Munger, Tolles lawyer who had been airlifted in from Los Angeles to head the investigation, got wind of this plan and put a stop to it. The investigating would be done by lawyers.
The first thing Denham did was interview Don Feuerstein. Afterward, Feuerstein was fired summarily. He asked to talk to Buffett, who told him only “You could have done more.” Since Buffett had known that from the beginning, Feuerstein couldn’t understand the about-face.5 Buffett, however, had gradually focused on Feuerstein’s loyalty to Gutfreund; Feuerstein had put his boss’s interests ahead of Salomon’s. Now Denham got the job of general counsel. As Buffett began to assume control, he discovered how much the board had been subjected to what he called adroit “information rationing” by Salomon’s management. He and Munger now learned that when Mozer had first admitted in April to submitting an unauthorized bid, the firm had also discovered that he had tried to cover it up, and had misled the customer whose name he had used by claiming the bid was a clerical error.
Buffett had no doubt what he would have done. “When you hear about an action like that, it is very obvious in ten seconds that you pick up the phone and say, Mozer, you’re fired.”6
Of course, it wouldn’t be obvious in ten seconds to many people. Mozer was so valuable to the firm—might it be possible to rehabilitate him? But Buffett thought in probabilities; he extrapolated right away to whether a catastrophic outcome was possible—then worked out very fast what it would take to get to the lowest probability of catastrophe. Here, it was firing Mozer and confessing right away. Buffett also thought in black-and-white terms about honesty; he had no tolerance for liars and cheaters. So that was that.
Now he found that the situation unfortunately involved more lying and cheating than he had previously been told. The investigators reported to him that Feuerstein had said at the time that Mozer’s actions were “criminal in nature”—a startling contrast to the firm’s agreeable response to later legal advice that no disclosure was required. And nobody had ever told the firm’s compliance department—which was charged with overseeing regulatory conduct—of Mozer’s behavior. True, Salomon had an attitude toward compliance that was best described as loose. There would later even be an argument over who should be considered a member of the compliance committee.7 Nevertheless, the head of compliance had been disturbed when he found out that he was out of the loop and was angry that such procedures as did exist had been ignored.
Buffett and Munger also learned about Gutfreund’s meeting in early June with Treasury Undersecretary Bob Glauber, after which Salomon’s management had decided that the time was not right to disclose Mozer’s actions. Glauber later said he felt that he was played for a sucker. Nothing had inflamed relations with the government and compromised Salomon’s credibility more than this meeting with Glauber. It smacked of an outright cover-up.
The second press release that the board had approved, saying that the delay occurred thanks to “a lack of sufficient attention to the matter,” had made the board look like part of the cover-up. But of course the board itself had been ignorant of the Glauber meeting.
Buffett was especially angry that he had known nothing of these matters during the entire weekend of the crisis when he had been negotiating with the government. Everybody whose number one job was to protect the firm’s franchise had failed to do so. Yet even with all of this to outrage him, Buffett still did not know about one last thing: the “cocked gun” Sternlight letter that had been sent and ignored.
A few days later, the board met, and Buffett explained his thinking based on what he had learned. The board took away the former executives’ secretaries and got rid of chauffeurs and limousines. They were barred from entering Salomon’s offices. It tried to cancel their health insurance. Wachtell, Lipton offered to step aside as counsel, and Buffett accepted.
To augment the legal team, Buffett brought in Ron Olson, the most recent name partner of Munger, Tolles & Olson, who had worked on the Buffalo Evening News case and now represented Berkshire Hathaway.8 Buffett told Olson that he wanted to pursue a novel strategy.9 Salomon could not, in his view, survive a criminal indictment.10 And he believed Salomon’s best hope of avoiding a criminal indictment was to show extreme contrition; he would surgically dig out every last cell of the cancer and, with scorching radiation, cleanse the firm and burn out any trace of a recurrence.
On Olson’s first day on the job, he was sent to see Otto Obermaier, the U.S. Attorney for the Southern District of New York, who would make the decision whether to criminally indict Salomon.
“The argument we made to Otto Obermaier was that we would set an example. This was going to be an example of the most extraordinary cooperation that a target has ever given, and the outcome would have an effect on the behavior of future defendants and how the justice system worked.”
Olson had to make an extraordinary pledge. On the spot, he waived Salomon’s attorney-client privilege, which shielded communications between the firm and its lawyers from prosecutors. He said that whatever MTO found in its investigation, Obermaier would know it as soon as MTO knew it.11 In plain English, this meant that MTO, on behalf of Salomon, had volunteered to act as an arm of the government.
Obermaier was “incredulous,” Olson says. “He thought we were some Midwest aw-shucks group, come to sell him a bill of goods.”12 He could not believe that any company would make an offer voluntarily that was so against its own best interest.
Initially, it was not clear what waiving the privilege meant. Frank Barron, an attorney from Cravath, Swaine & Moore, one of Salomon’s other law firms, was put in charge of negotiating what this extraordinary gift would mean to the Justice Department. Salomon had little leverage. The Justice Department pressed hard for a broad interpretation of the commitment and largely got its way.13 The agreement put the firm in a peculiar and paradoxical situation of prosecuting its own employees. The more evidence that MTO found that employees were guilty, the more proof it could show that Salomon had cooperated and cleansed itself. The employees, meanwhile, must cooperate or be fired, their statements to investigators unprotected by the normal attorney-client privilege.14
Asked to help Buffett prepare for upcoming congressional testimony, Gutfreund and his lawyer met with Olson a few days later. Gutfreund had volunteered to cooperate, but when his lawyers tried to lay down ground rules for the conversation, Olson refused to accept them. Gutfreund and his lawyers walked out.15 Olson reported back to Buffett that he had been “stonewalled.”16
Everything at Salomon was turned topsy-turvy as the new culture of openness went into effect. A couple of days after meeting with Obermaier, Olson and Buffett walked into a room at 7 World Trade Center for a meeting. Around a large square table, two dozen public-relations people sat waiting for them. Buffett listened for fifteen minutes as they described how they wanted to manage the crisis. Then he stood up. “I’m sorry, but I’ve got to excuse myself,” he said. He leaned over, whispered in Olson’s ear, “Tell them they won’t be needed,” and walked out of the room.17
“It isn’t that we’re misunderstood, for Christ’s sake,” said Buffett afterward. “We don’t have a public-relations problem. We have a problem with what we did.”
On his birthday, August 30, Buffett went down to Washington. He, Deryck Maughan, and Bob Denham went to testify before Congress. Buffett made a striking impression, seated alone at the subcommittee table and pledging extraordinary cooperation with Congress and the regulators.18 “I want to find out exactly what happened in the past so that this stain is borne by the guilty few,” he said, “and removed from the innocent.”
The Congressmen excoriated Salomon, postured as saviors of investors, and demanded a total break with the past. Nonetheless, they appeared slightly awed by Buffett. When he spoke, “The Red Sea parted, and the Oracle appeared,” says Maughan.19 Salomon, Buffett said, was going to have different priorities from now on.
“Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”
Those words have since been parsed and dissected in classrooms and case studies as the model of corporate nobility. Buffett’s unflinching display of principle summed up much about the man. In this statement, many of his personal proclivities—rectitude, the urge to preach, his love of simple rules of behavior—had merged. Openness, integrity, extreme honesty, all the things that he meant to stand for: Buffett meant for Salomon to stand for them too.
Buffett headed back to 7 World Trade Center and put out a one-page letter to employees, insisting they report all legal violations and moral failures to him. He exempted petty moral failures like minor expense-account abuses, but, “when in doubt, call me,” he told them. He put his home phone number on the letter. We are going to do “first-class business in a first-class way,” he wrote.20
He wanted to run things by what he called the “front-page test.”
I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter.21
Employees at the time were frantically trying to keep from losing the firm. They called customers and begged them not to desert Salomon. John Macfarlane and the repo desk, which sold and bought batches of bonds, managed an intricate runoff of assets while negotiating tensely with numerous lenders, some of whom were refusing to advance money to the firm.22
The balance sheet dwindled at the rate of about a billion dollars a day. Macfarlane’s team concentrated on stabilizing Salomon’s balance sheet and customer relationships, gradually raising the firm’s interest allocation charge and letting economics do the rest.23 They restructured the debt toward medium-term notes and longer-term capital. The firm’s traders tiptoed through the market to disguise the giant fire sale they were putting on. If other brokers recognized the pattern of their sales, it could set off a raid.24
Under threat of indictment, it was far from certain that Salomon would survive. The employees understood the message of Buffett’s letter. Absolutely nothing else could go wrong in this atmosphere. “I want every employee to be his or her own compliance officer,” Buffett said. This meant that to save the firm, they had to spy on each other. As the customers fled, the trades shrank, and the fear spread, the firm’s long-standing culture of swashbuckling risk-taking began to fade.
Within days, Buffett was called back, this time to testify before the Senate. Corrigan, Breeden, and the federal prosecutors remained disgusted with Salomon. As he waited to be called, Buffett heard Senator Chris Dodd question Corrigan about whether the Federal Reserve had been asleep at the switch.25 Corrigan said no, and that the Sternlight letter delivered on August 13 had been designed to produce a change in management but had been ignored.
Buffett sat figuratively scratching his head. He knew there was some kind of major problem here, but he didn’t know what Corrigan was talking about.26
When it came time for him to testify, he was asked: Why hadn’t a board filled with smart people been more aware and alert? Without betraying the fact that he was steaming inside about the Sternlight letter—whatever that might be—Buffett said that management had withheld information.27
He was not about to defend Salomon. Defending the firm of Liar’s Poker was not likely to win friends. No, Salomon was a financial Gomorrah that must be investigated and purged of its ticket-forging, bonus-pimping, pizza-tossing ways.
This bold, arresting stance stopped a brewing witch hunt in its tracks. The pitchforks went back into the barns.
When Buffett got back to Salomon, he went after the details of the Sternlight letter; “he was livid,” according to board member Gedale Horowitz. “It compounded the felony.” Other than the Glauber meeting, the Sternlight letter was the most serious act of “information rationing.” Buffett’s and Munger’s attitudes toward prior management hardened. Now the real import of Munger’s term “thumb-sucking” became absolutely clear. “Thumb-sucking” meant ignoring the obvious until your diaper was full. As far as Gutfreund was concerned, “we had no option of forgiveness,”28 Buffett said.
Through these revelations, Buffett led Salomon with apparent equanimity and poise. But beneath his eggshell-smooth demeanor, he was roiling in turmoil. He hated being away from Omaha. Gladys Kaiser noticed the lift in his step when he returned and the drag in his feet when he had to leave.29 New York did not suit him any more than it had when he was young and working at Graham-Newman. He remained aloof, never appeared on the trading floor, and even a glimpse of him in the hallways at Salomon was a rare sighting. Before long, he had set up a regular bridge game with Carol Loomis, George Gillespie, and Ace Greenberg, the CEO of Bear Stearns. Bridge helped him relax because when he played bridge, he couldn’t think about anything else. A couple of miles uptown, in his enormous Park Avenue apartment filled with a painstakingly assembled collection of art, his old friend Dan Cowin lay dying of cancer.
Buffett wasn’t sleeping. When in New York, he would call home at twelve-thirty a.m., since he had the special deal to get the Wall Street Journal early in Omaha, and have tomorrow’s news read to him over the phone.30 He listened on tenterhooks, fearing that something horrible would be published about Salomon. Often there was, but at least he knew it before the rest of the employees. They were working fourteen or more hours a day to hold the firm together in the face of repeated obstacles and humiliations. Salomon’s salesmen called clients, trying to convince them that the firm was not going under. Investment-banking clients were canceling previously committed deals as fast as they could run out the door. Competitors used the firm’s precarious status against it when Salomon vied against them in banking “bake-offs.”31
Other employees got field promotions of daunting magnitude. Maughan elevated one of the arbs, Eric Rosenfeld, to head trader. Rosenfeld, a former college professor who had never worked with a team of more than five people, suddenly found himself managing six hundred.
He did not want this promotion; he and the other arbs wanted J.M. back. Meriwether’s office remained exactly as he had left it. The golf clubs, his ceremonial instruments of power, leaned in the corner. The cleaning crew kept the shrine well-dusted. The arbs gathered to consult the oracles of trading. They prayed for J.M.’s return. Salomon’s stock continued to slump toward the low $20s.
By now, Salomon’s investigators had discovered that Mozer had bid more than thirty-five percent on eight separate occasions, submitting false customer bids or jacking up customer bids and taking the extra bonds into Salomon’s own account without informing the clients whose names had been used. On four occasions he had managed to acquire more than three-quarters of all the debt issued.32As the witch-hunt atmosphere heightened, Buffett upped the ante. At the next board meeting, he led a discussion. Why should Salomon be paying the attorneys of John Gutfreund to stonewall us? was the thrust of his questioning.33 The directors voted, almost unanimously, to make two surprising moves. No severance pay, they said. And the firm cut off payment of legal fees for the former executives.34
The drama now revolved around two things: the Federal Reserve’s deliberations over whether to keep Salomon as a primary dealer, and the criminal case.
The U.S. Attorney’s prosecutors thought they had enough evidence to indict. The criminal law makes it very difficult to defend corporations against the acts of their employees. Gary Naftalis, Salomon’s criminal lawyer, advised the firm that “Salomon plainly could be convicted” if it was indicted. For obvious reasons, everyone at the firm was desperate to get the criminal matter resolved.
After some three months of work dedicated to reforming the firm, Denham led Buffett, Olson, Naftalis, and Frank Barron to a secret location, chosen at U.S. Attorney Otto Obermaier’s insistence. It was a last-ditch attempt to persuade Obermaier and his lawyers not to indict.35
A Teutonic old-school prosecutor with a love of the law and a deep respect for the history and traditions of the U.S. Attorney’s office, Obermaier had been trying to figure out what to do with the fiasco that had landed in his lap. He recognized its unique nature. “This is no assault case on the New York subways,” he said. Indeed, he had been calling Jerry Corrigan “alarmingly often” to learn the ins and outs of the Treasury bond market.36
Sitting in a little conference room facing Obermaier, Buffett did most of the talking. He worked very hard to convey what he had said so many times, that if the firm were indicted, it could not survive. Obermaier made comparisons to a case involving Chrysler, which had survived prosecution.37 The difference between a firm that sold hard assets and a firm that bought and sold nothing more than promises on pieces of paper was initially not clear. Buffett tried to get past the image of onion-burger-tossing slobs inspired by Liar’s Poker and invoked the innocent rank and file who would lose their jobs if Salomon went down. He promised that he would not sell his Salomon stock anytime soon and that his people would continue to run the place. He conveyed the sweeping nature of the cultural changes taking place inside the firm. This made an impression on Obermaier, but he kept a poker face. He had many other factors to consider.38 The Salomon team went back across town with no idea whether they had succeeded or failed.
By midwinter, Salomon’s status as a primary dealer remained unresolved. Under threat of corporate criminal indictment, Buffett and Maughan labored to prove the firm worthy of saving. Buffett had run a full-page ad in the Wall Street Journal explaining the firm’s new standards.39
“I said that we would have people to match our principles, rather than the reverse. But I found out that wasn’t so easy.”
Day after day, Buffett bore down, shocked by the lavish lifestyle that was taken for granted on Wall Street. The executive dining room’s kitchen, as large as that of any restaurant in New York, was run by a head chef trained at the Culinary Institute of America. Employees could order “anything on earth they wanted” for lunch.40 In his first days in New York, Buffett received a letter from the head of another bank, inviting him to lunch so their chefs could do battle. “I follow a very simple rule when it comes to food,” said Buffett, however. “If a three-year-old doesn’t eat it, I don’t eat it.”41
For Buffett, the dining room symbolized the culture of Wall Street, which he found abhorrent. He had been born in an age where money was scarce and life was lived at a walking pace, and he’d arranged his own life to keep things that way. On Wall Street, money was plentiful and life was lived at whatever speed bandwidth could currently supply. People left their homes at five a.m. daily and returned at nine or ten at night. Their employers showered them with money for doing that but in return wanted every waking second of their time and supplied certain services to keep them working at a treadmill pace. Buffett as a child had been impressed by the Stock Exchange employee who rolled custom-made cigars, but now found all of this astonishing.
“They had a barbershop downstairs, and they didn’t even tell me about it. They were afraid of what would happen when I found out. And they had a guy who came around and shined your shoes, and you didn’t pay him.”
But it was the battle over pay that became the watershed. Early in the fall, Buffett had told the staff that he would be slashing $110 million from the year-end bonus pool. “Employees producing mediocre returns for their owners should expect their pay to reflect this shortfall,” he wrote.42 That seemed simple and obvious to him. Maughan agreed with Buffett that the culture of entitlement had to go.43 But for once Buffett had miscalculated the limits of human nature. The formerly enriched employees, used to being showered with money on bonus day, now knew that they were about to be gouged.
Buffett’s reasoning that employees should not take home all the spoils and the shareholders none was lost on them. Indeed, they believed the opposite, since they had been taking home the spoils for years. They felt that Buffett was trying to transfer some of the guilt from Mozer’s misdeeds to them by making an issue out of the bonuses. They had not caused Salomon’s woes. Rather, they had stayed out of loyalty and were enduring humiliation and misery in its aftermath. They were sweeping up behind the elephant. They felt that they deserved combat pay. It wasn’t their fault that their businesses weren’t performing. How could they sell an investment-banking deal while the firm was under threat of indictment? Didn’t Buffett understand that? They were up against the fact that everybody on Wall Street knew that Buffett thought investment bankers were nothing but useless stuffed shirts with fancy cuff links. Meanwhile, despite its problems, Salomon was actually having a decent year financially. They resented being called greedy once again by an avaricious billionaire.
The deprived traders, sales force, and bankers had to hang around until year-end, the traditional time for quitting, after individual bonuses were paid and the smaller but nevertheless multimillion-dollar deferred bonus pool was scheduled to cash out.
When the bonus pool was divvied up around the holidays, the battle over pay reached epic scale. The top thirteen executives saw their bonuses slashed by half. As soon as the numbers were announced, Salomon’s hallways and trading floor erupted in open revolt. With budgets and bonuses gutted, traders and bankers fled. Half the equity department—home of the investment bankers—ran out the door. The rest of the trading floor went on a temporary strike.
“They took the money and ran. Everybody just peeled off. It was just so apparent that the whole thing was being run for the employees.”44
He had just saved Salomon and had thought that that would matter to the employees. But no, “We were grateful for about five minutes,” was the verdict of one ex-employee. The fact that they wouldn’t have a job without Buffett was forgotten in the grim shadow of the Bad Bonus Day. “Warren didn’t understand how to run a people business” became the refrain among ex-employees. Buffett viewed the new pay deal as a cultural litmus test: Those who left were mercenaries whom the firm could do without, and those who stayed had signed on to the kind of firm he wanted.
Wall Street being a mercenary kind of place, little by little many of the top employees continued to drift away, carrying books of business to competitors as they departed. Buffett couldn’t sleep. “I couldn’t turn off my mind,” he says. He had spent his whole life avoiding commitments to anything where there was no escape hatch and he didn’t have total control. “I’ve always been leery of getting sucked into things. At Salomon I found myself defending things I didn’t want to defend; and then I found myself being critical of my own organization.”
Months had passed and Obermaier was still pondering whether Salomon’s conduct was bad enough to indict.45 In considering the phony bids, he thought it important that Mozer’s actions were motivated more by rebellion against the Treasury rules than simply to enrich Salomon. Likewise, no serious financial losses had occurred.46 He also weighed Buffett’s promises and the new culture.
Together with Breeden at the SEC, he began to work on settlement talks with Salomon that would allow the firm to escape indictment. Frank Barron, the lawyer from Cravath, went down to the SEC to negotiate its share of the settlement in a meeting with Bill McLucas, Breeden’s deputy, who informed Barron the fine from the Department of Justice and the Treasury Department would be $190 million plus a $100 million restitution fund. Barron was shocked—the fine was huge. Why? he asked. “Well, Frank,” said McLucas, “you have to understand that it’s going to be $190 million because that’s what Richard Breeden says it’s going to be.”47
The moment when John Meriwether had rushed into the conference room that Sunday morning, white and shaken, quoting Dick Breeden, who had called Salomon “rotten to the core, rotten to the core,” came to mind. There would be no appealing this decision. Salomon agreed to pay the extraordinary fine.
Buffett was trying to undo the “rotten to the core” image as fast as he could. Dubbed “Jimmy Stewart” by the staff, he nixed deal after deal that he thought was too close to the line, despite the resulting internal backlash.
On May 20, Obermaier’s office called Olson to say that the government was not going to indict and had dropped all charges. The U.S. Attorney and the SEC announced a settlement with Salomon over fraud and record-keeping charges; including a $100 million restitution fund, it was in total the second largest fine in history. The settlement found no evidence of wrongdoing other than Mozer’s illegal bidding, which had been discovered by Salomon itself. Mozer was going to prison for four months, and would pay a $1.1 million fine. He was barred from the industry for life.48 Gutfreund, Meriwether, and Strauss were reprimanded for failing to supervise him, given small fines, and suspended for a few months from working in the industry.49
Most observers were dumbstruck at the size of the fine for what amounted to technical violations by one employee. In fact, by acknowledging its guilt to the government so freely, some thought Salomon had given up its negotiating leverage. But what the large fine really reflected was that the firm had bungled its reporting responsibilities so badly, and had made the regulators look asleep at the switch in front of Congress. Thus it was, as the well-exercised saying goes, the cover-up, not the crime.
Three days after the announcement, Dan Cowin died of cancer. Buffett wrote out a heartfelt eulogy, meaning to deliver it himself, and asked his secretary, Paula Orlowski, to stop by his hotel room and pick it up to have it typed. But when she arrived, he met her at the door and said, with an agonized look, that he could not bring himself to speak at Cowin’s service. Instead, Susie was going to read it for him.50 Buffett went to the service. “I sat through it shaking all over the whole time,” he says.
Then he went back to work. Salomon estimated that the $4 million profit Mozer had made from his trades had cost the firm $800 million in lost business, fines, penalties, and legal fees. The firm’s status as a primary dealer remained unresolved, although it now seemed a foregone conclusion that this would be resolved in Salomon’s favor.51 Employee defections had slowed to a trickle, and the rating agencies were starting to upgrade Salomon’s debt. Customers started coming back. As Salomon stock crept above $33, Buffett announced that he was stepping down. Deryck Maughan took over as permanent CEO, and Buffett appointed MTO lawyer Bob Denham as chairman.
In that mournful spring of 1992, as Salomon staggered to its feet, the question of how to deal with those who had nearly brought it down remained open. Second only to Mozer in the public’s assessment of culpability was John Gutfreund. In the end it was he who was responsible, despite all the legal advice that reporting was not required.
When the time came for Gutfreund to discuss what money he would receive from the firm, he asked for the “fair treatment” he had been promised as long as Buffett and Munger were alive. Now, however, it turned out that the parties’ opinions of what was fair differed dramatically.
Gutfreund’s lawyer thought that he had made a deal with Charlie Munger on that fateful weekend in August of the previous year, and that Munger had accepted a resignation letter conditioned on the lengthy list of severance terms. Gutfreund felt that he had fallen on his sword to save the firm and believed he was owed $35 million in back pay, stock, and severance. Salomon took the position that Charlie Munger had made no deal at all. The board interpreted Gutfreund’s employee-benefit plans strictly and also took back the stock options he had earned, even though the stock-option plan contained no provisions allowing for forfeiture under this or any circumstances. It countered with $8.6 million.
Insulted and outraged, Gutfreund turned it down. “It seemed wrong,” he said. “As a matter of principle, I fought.”52 His lawyers interpreted the offer not as meant to inspire negotiation but as so insultingly low that it must be dismissed. In 1993, Gutfreund took Salomon to arbitration.
In arbitration, a panel of neutral parties listens to both sides and reaches a binding decision to resolve a dispute. Arbitration is a throw of the dice, for its very nature cuts off negotiation forever once a decision is reached.
John Gutfreund had been reduced to sitting in a small three-room office, where he answered his own phone when his part-time secretary was away. He and Susan, now dubbed “Marie Antoinette” by the press, had been cast out of the New York social set. The press had turned on him savagely, in a way he had never imagined could happen, comparing him to felons like Boesky and Milken.53 Many of his former friends had abandoned him. Unassisted by Salomon, he was running up huge bills to defend himself in civil lawsuits.
Gutfreund wanted vindication through the arbitration. But a public raking and digging over the whole Salomon mess, which might have salved his wounded pride, was guaranteed to alienate Buffett and make him less likely to compromise. After Buffett had staked much of his image on Salomon, Gutfreund had let him down. Now that he and Gutfreund were no longer partners, in Buffett’s special sense of the word, transgressions he might once have eventually forgiven became larger with hindsight. They were many, and even without benefit of hindsight they were large:
• The stock-option repricing in 1987, which had cost Buffett so much money.
• The Sternlight “cocked gun” letter from the Fed, which Buffett had not learned about until it was too late.
• The meeting with Bob Glauber at the Treasury, when Gutfreund had kept silent, which had also been kept from Buffett and the other board members.
Although he normally avoided conflict, if forced into battle Buffett made sure that his proxies fought for him like cornered hyenas. Charlie Munger, who was inclined to say things such as that Gutfreund made Napoleon look like a shrinking violet, was the appointed bad guy in the arbitration.54 His testimony would be crucial, because he was the one who had negotiated with Gutfreund’s lawyer, Philip Howard.
It was the young president of the New York Stock Exchange, Dick Grasso, who chose the three graying arbitrators who would decide Gutfreund’s fate in a dingy conference room at the Exchange.55 A team of lawyers from Cravath—backed by testimony from Salomon board members, employees, ex-employees, Buffett, and Munger—began to pulverize Gutfreund in a process that took more than sixty sessions and several months before the arbitrators.
Over and over, the arbitrators heard about the meeting between Munger and Philip Howard in which Howard reviewed the list of compensations Gutfreund wanted and Munger listened in some fashion or another. All agreed that Howard left without a signature on Gutfreund’s severance papers, but there was no agreement about how to interpret the rest of the events of that evening. Howard was certain that Munger had made a deal with him.
Gutfreund’s lawyers called Charlie Munger as a witness. Frank Barron of Cravath, Swaine & Moore had attempted to prepare Munger, who was utterly impatient with the process. Although Barron had prepared Munger by himself, Munger, a lawyer who disliked paying legal bills, extemporized to the arbitrators that, in preparing him for testimony, Cravath had employed an excessive number of expensive paralegals and “aspirin-carriers.”56 When he began to testify, every word that came out of his mouth “had nothing to do with what we had gone over,” says Barron. “Putting Charlie Munger on the witness stand was the most nerve-racking, hair-raising experience I ever had as a lawyer.”57
Munger’s confidence as a witness was unmatched. A number of times the lead abitrator, growing irritated, admonished him: “Mr. Munger, would you please listen to the questions before you answer them.”
Munger insisted that on the night when he had met with Philip Howard, he was “deliberately not listening … being polite, but I wasn’t paying much attention … I sort of turned off my mind.… I was just sitting there politely with my head turned off.”
Gutfreund’s lawyers asked him whether he had made a conscious decision not to talk as well as not to listen.
“No,” said Munger, “when the time came to talk, I talked. One of my faults—I am fairly outspoken. I may well have discussed some individual things that got through my band of indifference. This is one of my most irritating conversational habits. It followed me through the course of my life.
“So every time something would get through and I would see a counterargument,” he said, he would give it. Howard had asked for an indemnification for Gutfreund against lawsuits. Being a legal matter, this had gotten through Munger’s band of indifference.
“I think I said to him, You don’t even know what you are going to need. God knows there will be litigation, there will be a big mess, who knows how things are going to work out. You are misrepresenting your own client if you think it makes sense to get into any of those issues at this time.”
Was that also a conversation in which you were tuning out? asked Gutfreund’s lawyer.
“No, I tend to tune in when I am speaking myself,” said Munger, under oath. “I tend to remember what I say.”
Was this also a conversation in which you were deliberately not listening at various times?
“What did you say?” said Munger. “I just tuned out again, and I wasn’t doing it on purpose.”
Was this also a conversation in which at various times you were deliberately not listening?
“I am ashamed to say I have done it again. Will you please do it one more time? This time I will use an effort.”
Gutfreund’s lawyer repeated the question for the third time.
“You bet,” said Munger. “I was going through the motions.”
In what mental state the arbitrators, the lawyers, and Gutfreund heard these words can only be imagined. Regrettably, much of the misunderstanding seems to have stemmed from Philip Howard’s unfamiliarity with the outward signs of the workings of Charlie Munger’s mind. He had labored that night under the illusion that he and Munger were having a conversation. He did not recognize Munger’s occasional replies as intermittent thought-bursts ignited by some random mite that had pierced Munger’s band of indifference. Whenever Munger objected, Howard assumed they were negotiating, not that he was simply being lectured. When Munger said nothing or emitted a grunt to move the conversation along, Howard inferred that Munger agreed, or at least that he had no objection to whatever had just been said. Nobody had explained to him that Munger’s head was turned off.
Gutfreund’s lawyer reminded Munger of Buffett’s testimony, in which he had acknowledged saying to Gutfreund that he had the power to make all this happen. Did Mr. Munger recall Mr. Buffett saying that?
“I don’t remember Mr. Buffett’s words as well as I remember my own,” said Munger. “But certainly the gist of the thing was that you can count on us to be fair.”58
The issue was what was meant by “fair.” Salomon never disputed that the money was Gutfreund’s and that he had already earned it. The argument boiled down to whether Gutfreund would have been terminated had all the facts been known. Thus, the case became an exercise in proving that Gutfreund should have been terminated. Even Donald Feuerstein agreed that in concealing what he knew from Glauber, Gutfreund had been dishonest with the government. Although everyone thought this bizarre and out-of-character behavior, nonetheless, it had happened.
In fairness to Salomon, Gutfreund understood why the firm was expending so much effort to prove he should have been fired. He knew it was in everybody’s interest to vilify him, but the lack of proportion bothered him. At some point it should have ended, he thought.
Everyone, even Buffett, felt that Gutfreund was entitled to some of the money. Buffett had Sam Butler, a fellow GEICO board member and friend of Gutfreund’s, call him twice and offer $14 million. Butler whispered, “I can probably get you a little more.” Buffett would have gone to $18 million.59 But Gutfreund had been humiliated by the process. He considered Charlie Munger mean-spirited and self-righteous. He turned the offer down indignantly. The arbitrators would decide.
After months of testimony, lasting until spring 1994, the arbitrators were showing their impatience at the endless, circular, and conflicting arguments, one side professing complete innocence and the other portraying Gutfreund as an archfiend. Then, at the closing statements, Gutfreund’s lawyers showed up with a chart, raising the demand to $56.3 million by adding interest, penalties, stock appreciation, and other items.
The lawyers and people involved at Salomon had set up a betting pool as the arbitration crawled at an agonizingly slow pace toward its conclusion. How much money would the arbitrators give Gutfreund? The lowest bet was $12 million. The highest was $22 million.60
No one will ever know what factors the arbitrators weighed in their decision. When the decision was announced, they awarded Gutfreund nothing, not a dime.