Buffett flew back to Nebraska alone. He knotted every waking minute into a web of distractions. He read financial reports and newspapers. He watched CNBC. He talked to people on the phone. He played bridge in the evenings after work. He surfed the Internet for news online. In between, he played helicopter on the computer.
A week later he was crying on the phone, great gulping sobs, choking, gasping cries that left him out of breath. The convulsion broke through the dam that had kept his grief contained.
A moment later, after the torrent of grief had poured out of him, he was recovered enough to speak. He regretted not being able to eulogize Kay at her funeral, he said. It shamed him. The man who had worked so hard to become comfortable on a stage felt that he should have been able to do that for Kay. And there would be more regrets, more second thoughts.
“If I’d been playing bridge with her that day she might not have fallen,” he reflected later, sadly. “I would have taken her back in her golf cart myself. She might not have died.”
But Kay probably would have walked up the steps by herself anyway. And nobody knew whether she died from the fall or whether she had fallen because she had a stroke.
Still, Warren was plagued by a sense of lost opportunities. He felt at times that, had he been with her, he could somehow have kept Kay safe.
As weeks passed, if her death was mentioned, his eyes teared and the conversation would come to a stop while he collected himself. Then, like a motor turning over and restarting, he would brighten and shift to other subjects.
Buffett’s birthday would be arriving in a few weeks, something to which he feigned indifference but actually dreaded. This year he was turning seventy-one. He could not believe he was seventy-one. He could not believe it, either, when he’d turned forty, and fifty, and sixty, and seventy. But this year, especially, he did not want to think about his birthday, because he did not want any reminders of mortality so soon after Kay’s death.
Within ten days, he would have a new distraction to fully consume his time and attention. The morning of the Omaha Classic—Buffett’s annual charity golf tournament, which attracted CEOs, celebrities, friends, and relatives—Buffet turned on the television to see that two planes had crashed into the World Trade Center. Almost everyone in Omaha at the golf tournament was affected in some way or another, however remotely. Many had friends, relatives, neighbors, or business acquaintances who worked in the towers. Berkshire, of course, had employees in businesses scattered all across the country. In the end Buffett would find that Berkshire had lost no employees—only money.
Some people decided to leave the golf tournament immediately, although with all airports closed this was not easy. Others stayed, some because they didn’t want to insult Buffett, many because they had no choice.1
While these momentous events were occurring, Buffett proceeded with his schedule, compartmentalizing as he did under stress even in extreme situations. He arranged to complete the acquisition of a small business that was already in process. Then he went ahead with a meeting that had been scheduled with the head of Home Depot, Bob Nardelli.2 Afterward he showed up at the Omaha Country Club, where about a hundred guests were milling around. Buffett said that things would go on as planned but people should do whatever they needed or wanted to do. As the tournament got rolling in a surreal atmosphere, Buffett rode a golf cart through a planned circuit of stops at different tees so guests could have their picture taken with him.3 A strange calm hung over the event, which was like a celebrity golf tournament the day Pearl Harbor was attacked. And in fact, like Buffett, more than a few of the golfers could remember Pearl Harbor and its aftermath. This was not an excitable crowd. Most of them were prominent businessmen accustomed to stress and pressure, from a generation of men that considered poise and equanimity in the face of disaster as essential as the suits and ties they wore every day to work.
Buffett was even more prepared for this than most because he had already been thinking about terrorism risk. In May, he had told General Re and Berkshire Re to cut back on insuring buildings and clients that represented a concentration of exposure to terrorism risk, his mind working as it always did to extrapolate toward potential catastrophes. He had actually cited the World Trade Center as an example of such a risk.4 While the rising threat of terrorism in the late 1990s and early-millennium years was no secret, Buffett’s attempt to protect Berkshire against the danger had been unusually prescient, and probably unique among insurers.5
Over the next few days, as airports gradually began to allow flights to resume on a limited schedule, the Buffetts organized dinners, tennis, and golf for the remaining guests until everyone was able to straggle home from Omaha.6 The stock market was about to reopen after its longest recess since the Great Depression. Buffett agreed to go on 60 Minutes with former Treasury Secretary Robert Rubin and Jack Welch, the recently retired CEO of General Electric. He was the country’s most trusted expert on investing and the stock market. On the show that Sunday evening, Buffett said that he would not be selling stocks—he might be a buyer if they declined enough—and explained that he had confidence in the ability of the United States economy to surmount the ripples from the terrorist attack. By now, when he said something, people knew he meant it. At Sun Valley, of course, Buffett had said the value of the market would need to fall by half before he would get really excited. So the savvy knew that “enough” meant “a hell of a lot.”
The next day, the Dow fell 684 points, or seven percent, its largest point decline ever in a single day. The Federal Reserve began to take action after the market plunged on its reopening, cutting interest rates fifty basis points (half a percent). By the end of the week, the Dow had fallen more than fourteen percent, its largest one-week drop in history. Yet the drop as a percent of investors’ wealth was less than half that of 1987, when the market plunged by one-third.
Within days, Buffett talked to Berkshire’s insurers and tried to assess the damage to Berkshire Hathaway. The initial estimates indicated that Berkshire had lost $2.3 billion.7 This was many times its largest loss from any earthquake, hurricane, or other natural disaster to date. Of the total, $1.7 billion came from General Re.
Buffett had had enough. He went to work writing a special letter that he posted on his Web site, excoriating General Re for having broken the “basic rules of underwriting.” Since he had never, in the history of Berkshire Hathaway, publicly dressed down the management of one of his companies, the effect was to brand General Re with a red-ink scarlet letter, which remained posted on the Web site for all to see. It was now in a precarious situation. Having publicly embarrassed Buffett in such a dramatic way, it risked becoming the next Salomon—a business that he could never embrace, that would instead become only another cautionary tale.
To prevent panic, the Fed took interest rates down to historically low levels. The Fed’s role was to maintain the banking system’s liquidity. This time, however, the Fed would keep interest rates artifically low for three years.8 One month after the attacks, stocks completed a full recovery, restoring $1.38 trillion in market value. But the market remained in a nervous mood, partly due to uncertainty over the outcome of the invasion of Afghanistan a few weeks after 9/11. Then, in November, an energy trading company called Enron stuck a pin in the remains of the late 1990s stock-market bubble, which had shrunk but not burst. As the Justice Department moved in, Enron melted into bankruptcy in the heat of an accounting fraud.
A whole series of accounting-fraud and securities-violation cases followed: WorldCom, Adelphia Communications, Tyco, ImClone. As 2002 began, New York Attorney General Eliot Spitzer mounted an assault against the Wall Street banks for having inflated stock prices by touting new offerings using biased stock research.9 Valuations of stocks and bonds began to fall apart as investors lost confidence in the numbers reported to them by managements.
Berkshire’s best opportunities always came at times of uncertainty, when others lacked the insight, resources, and fortitude to make the right judgments and commit. “Cash combined with courage in a crisis is priceless,” said Buffett. Now his time had come round again. Anyone of normal energy might have been overwhelmed, but Buffett had been waiting for years for the kind of opportunities that sleeted down upon Kiewit Plaza. Every one of his faculties seemed engaged at once. He bought a group of junk bonds, which had become cigar butts, for Berkshire. He bought the underwear maker Fruit of the Loom, quipping, “We cover the asses of the masses.”10 He bought Larson-Juhl, which made picture frames. Berkshire’s MidAmerican Energy subsidiary invested in the troubled Williams Companies and bought its Kern River Pipeline.11 Berkshire bought Garan, the maker of Garanimals children’s clothing. It picked up the Northern Natural Gas pipeline from Dynegy, another troubled energy company.12 Within days, MidAmerican lent more money to Williams Companies.13 It bought The Pampered Chef, which sold cookware at parties through a sales-force of 70,000 independent “kitchen consultants.” It bought farm-equipment maker CTB Industries and teamed with investment bank Lehman Brothers to lend $1.3 billion to struggling Reliant Energy.
Ajit Jain quickly moved into the terrorism-insurance business, filling a sudden vacuum by insuring airlines, Rockefeller Center, the Chrysler Building, a South American oil refinery, a North Sea oil platform, and the Sears Tower in Chicago. Berkshire insured the Winter Olympics in Salt Lake City against a terrorist attack. It insured the FIFA World Cup soccer championship against terrorism.14 Buffett was handicapping.
Some of Berkshire’s businesses struggled in a weak economy. Buffett had always said he’d rather have a lumpy fifteen percent return than a steady ten percent. Most would naturally right themselves over time. NetJets, however, was struggling, not just because of the economy but because the premise for buying it—the uniqueness of its franchise—was looking less unique. Other people who forgot to call the Air-aholic hotline kept setting up businesses to compete with NetJets, even though the economics of the fractional aviation business were unattractive. Buffett now realized that it was testosterone that caused Airaholism. “If only women could be CEOs of companies that flew planes,” he said, “I think it would be a lot better. It’s like sports franchises. If only women could own sports franchises, they’d sell for one-tenth what they sell for now.” He told the shareholders that NetJets would return to profitability and would dominate its market. He did not point out, however, that it might not earn the margin on capital he had hoped, at least not any time soon. After all, NetJets was fun. He knew mountains of minutiae about how the planes were purchased, managed, scheduled, routed, maintained, insured, piloted, and crewed. NetJets was cool. He did a lot of elephant-bumping at NetJets events. He would never sell it, even if the world’s other mega-billionaires tried to arm-wrestle him for it.
The more serious, if smaller, problem was Dexter Shoe, the modern equivalent of the textile mill. Buffett would later say it was the worst acquisition he had ever made, quoting Bobby Bare’s country song: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”15 He changed the management. Frank Rooney and Jim Issler, who ran Brown Shoe Company, a more successful operation, eventually shut down Dexter’s U.S. operations and moved them overseas.16 For every dollar they were paying workers in the U.S., it cost a dime to hire employees to make shoes elsewhere.
“I was wrong about the economic future of that one. The people working in the town of Dexter, Maine, were wonderful people who were very good at what they did. But even if they were twice as good as the Chinese, the Chinese would work for a tenth as much.”
Yet even with all this money-spinning activity, Buffett felt that the most important opportunity given him in the aftermath of 9/11 had nothing to do with business. Rather, he now had both the privilege and the responsibility to influence events and ideas. After the bubble of hubris that had enveloped the financial community for the past several years, America had become more sober-minded, and less blind to the corner-cutting in the name of greed that had gone on in the late 1990s. Buffett thought the time was right for him to speak up about the rapacity of the rich and the way it was being validated by fiscal policy.
His sense of justice was particularly inflamed by a proposal that was a centerpiece of President Bush’s new budget—a plan to gradually repeal the decades-old federal estate tax, which took for the government a slice of the largest inheritances. Supporters of the plan referred to the estate tax as the “death tax,” which had an ominous sound. They cited a proverbial family that would have to sell the family farm to pay the tax when its patriarch died. Undoubtedly, there were some such families. Buffett argued that the suffering of those few was far outweighed by the effect on everybody else.
Buffett used his preacher’s pulpit to point out that of the roughly 2.3 million Americans who died each year, fewer than fifty thousand—two percent—paid any estate tax at all. Half of all the estate taxes paid came from fewer than four thousand people—two-tenths of one percent of those who had died.17 These were the monumentally, colossally rich.
As to the question, it was their money, why shouldn’t they be able to do what they wanted with it?—why should they “subsidize” others?—Buffett’s answer was that they owed some minimum amount to the society that enabled them to become so rich.
If the estate tax were eliminated, he said, somebody else would have to make up the difference, since the same amount of money would still be required to pay for running the government.
For years a supply-side theory had postulated that cutting taxes would force the government to cut expenses. This theory had an intuitive logic; after all, if people were supposed to live within their income, why not the government? (Of course, by 2002, the populace was busy setting up home-equity lines of credit based on artifically cheap interest rates to avoid living within its income.) Debate over supply-side policy still boiled after twenty years; the taxes the government was collecting usually didn’t cover its costs, and it was borrowing to make up the difference. The theory by now looked more dubious. Buffett felt that proposing an estate-tax cut while running the federal budget at a deficit was the height of hypocrisy.18
Buffett didn’t blame people for acting in their own interests; he even felt pity for the politicians who were chained to the grindstone of endless fund-raising. It was the system that he scorned, in which money bought power.
Shortly after President Bush’s inauguration in 2001, Buffett had gone to the LBJ Room in the Capitol Building to speak about political campaign financing to a group of thirty-eight Senators who were part of the Democratic Policy Committee. He said that the campaign finance system was corrupt. The laws were shifting in ways that enhanced the ability of the rich to get ever richer, to keep more of what they made, and to pass more of it along to their heirs. Buffett called this “government by the wealthy, for the wealthy.”
He pointed out a growing army of lobbyists whose job was to push for legislation that benefited the rich. He said, however, that nobody lobbied for the other ninety-eight percent of Americans. Lacking their own lobbyists, the best redress for the ninety-eight percent was to understand what was going on and to quit voting for people who enacted laws that took taxes out of the average person’s pockets so the rich could pay a lower share.
“I’d have a higher tax at the higher levels of wealth. I wouldn’t mind having no tax up to a point and then a hundred percent tax for an estate over a hundred and fifty million dollars.
“The most important thing is to ask, ‘And then what?’ If you eliminate the twenty billion dollars or so raised by the estate tax, you’ve got to make the money up by taxing everybody else somehow. It’s amazing how hard the American population will fight for the families of those few thousand people who pay large estate taxes and for the whole rest of the country to pay for it out of their own pockets.
“I don’t like anything that, in effect, creates a residue of humanity. I don’t like a tax system that goes in that direction; I don’t like an educational system that goes in that direction. I don’t like anything where the bottom twenty percent keep getting a poorer and poorer deal.”
But the debate over estate taxes turned shrill and bitter. Buffett was portrayed as a silver-spooned populist who was trying to keep the next generation from bootstrapping its way to success in the classic American entrepreneurial way.19
Subtly or not, the estate-tax feud was informed by the issue of Buffett’s own money. Some people called rich guys like Buffett tax-dodgers, because they had amassed their money through lightly taxed investments. But to say that Buffett invested to dodge taxes was like saying that a baby drank its bottle to fill its diapers. Indeed, Buffett was the first to say that the tax on investments was unfairly low. In fact, this was another of his causes; he wanted to raise the tax rate on capital gains. He liked to compare his tax rate to his secretary’s, pointing out how unjust it was that she paid a higher tax rate on her income than he did, just because most of his income came from investing.
Having already angered all the plutocrats and would-be plutocrats, but with his credibility at a peak in other quarters, Buffett vowed to carry on the fight against repeal of the estate tax, and would spin on this subject for years. He spoke again on another subject to the Democratic Policy Committee just days before the first shots were fired in the Iraq War in 2003. He said that President Bush’s plan to cut taxes on dividends was more “class welfare for the rich.” In the Washington Post, he wrote about “Dividend Voodoo,” noting again that his tax rate was lower than Debbie Bosanek’s. The reaction from conservatives against yet another of Buffett’s populist manifestos was swift and savage. “Millionaires are seething at Warren Buffett’s betrayal of their class,” said one.20
That, of course, was his point. He felt that the United States of America was never meant to be a country where people with money were a self-perpetuating “class” who constantly gathered more wealth and power unto themselves.
The rich, however, had been getting very rich indeed as the stock market continued its resurgence after 9/11. A dozen new hedge funds seemed to sprout every day. They were cashing in on all the leverage from the low interest rates the Federal Reserve had provided. Billionaires were becoming as common as raccoons around a garbage can. A lot of the quick-bucks wealth of the new economy bothered Buffett because of the way it had been transferred in massive amounts from investors to middlemen without producing anything in return. The average investor was still getting—of course—the average return, but with all of these fees gouged out.
One of Buffett’s least favorite ways for the rich to get richer was through stock options—since his famous “no” vote on the pay package at Salomon, no other board had ever asked him to serve on its compensation committee. Coca-Cola had given Doug Daft options on 650,000 shares of its stock in 2001. Daft had originally asked to be compensated with stock options that would pay off only if earnings increased fifteen to twenty percent. The shareholders approved it with Buffett staring at his shoes thinking, Okay, this will never happen. A month later, the compensation committee belatedly realized that too, and backtracked and bonus-pimped for him, lowering the target to eleven to sixteen percent.21 That was like moving the finish line in a marathon to the nineteen-mile mark. So far, Daft had not impressed, and Coca-Cola’s stock had gone nowhere. Watching trophy-sized option payments proliferate despite rising outrage, Buffett felt he had to seize the opportunity he had been waiting for—to finally kill counterfeit stock-option accounting.
Managers loved stock options because of a quirk of accounting history that said that if companies paid their employees with options instead of cash, they booked no cost. It was as if the stock options did not exist. In the “real” world, a privately owned business would instantly recognize this as a bogus idea. If the butcher, baker, and candlestick maker gave away options for shares worth, say, twenty percent of their businesses, they would be acutely aware that they had just given away a chunk of the profits as well.
But the accounting rules had made stock options into play money. Thus, bonus-pimping on an incredible scale had begun to occur in the late 1990s. CEOs had, on average, been paid forty-two times as much as the average blue-collar worker in 1980. Twenty years later, that ratio had increased to more than four hundred times.22 The top-earning CEOs got billion-dollar packages. In 2000, Sandy Weill was paid $151 million at Citigroup, Jack Welch $125 million at GE, Larry Ellison $92 million at Oracle. Although Steve Jobs was taking only a $1 salary at Apple for 1997 through 1999, he got a windfall $872 million stock-option grant in 2000—plus a $90 million Gulfstream jet.23
When the accountants had tried to change these rules in the early 1990s, corporate America, led by Silicon Valley, stormed the gates of Congress, armed with lobbyists and campaign contributions, begging their representatives to save them from the terrible new accounting rules. Until the bubble finally burst in 2002, they had succeeded in stopping those rules dead in their tracks.
Buffett had been writing about stock options since 1993 but now felt the time was finally ripe for change. He wrote a thundering, influential editorial in the Washington Post, “Stock Options and Common Sense.”24
“CEOs know what their option grants are worth. That’s why they fight for them,” he wrote, and repeated the questions he had raised before.
“If options aren’t a form of compensation, what are they?
“If compensation isn’t an expense, what is it?
“And if expenses shouldn’t go into the calculation of earnings, where in the world should they go?”
At Sun Valley in July 2002, emotions ran high over stock options. Buffett’s loudly expressed view, combined with his influence, hung ominously over the heads of the stock-option lobby. The thermometer hit triple digits, and the sweating celebrities and corporate chiefs headed off in buses to go rafting and escape the heat.
Buffett himself went somewhere else shortly after he arrived, somewhere he needed help to face. Katharine Graham’s condominium had been right next to Herbert Allen’s, a spot that people passed by often on their way to and from events. The Coca-Cola board would be convening later for a meeting at Allen’s, since most of its members were on-site. The purpose was to discuss stock options, and he would not miss this. But first:
“I was with Bill and Melinda, and we went up to the spot where Kay fell. I was shaking, and I couldn’t stop. It was like I had the chills or something. And, you know, they were probably embarrassed. I really wasn’t. I was just overcome at that point.”
Afterward, Buffett was able to perform his ongoing miracle of the bathtub memory, and carried on with composure. The Coca-Cola board made a decision during its meeting and announced in a press release that it would start to book the cost of its employee stock options as an expense, which was currently allowed but not required. Coca-Cola’s announcement hit corporate America like a cluster bomb, its force magnified by the venue at which the new policy was proclaimed—the Sun Valley gathering where the press had dug in outside its flowerpot barricades like an encampment. Buffett’s thinly veiled hand could be seen behind this announcement. Right after Sun Valley, the Washington Post Company emulated Coca-Cola and announced that it, too, would expense stock options.25
Silicon Valley suited up for another fight in Congress. But one by one, other companies began to follow in the footsteps of Coca-Cola and the Washington Post Company, announcing that they, too, would recognize the expense of stock options on their books.
The battle over stock options would continue formally for nearly two years, until the Financial Accounting Standards Board finally made it official. But Coca-Cola’s decision had kicked over the domino in a chain of events.
Buffett’s momentum as an influential statesman during this period was gathering speed. Although the estate tax was still scheduled to be repealed, he found another target in the accountants who had facilitated the accounting frauds of the past few years. If the auditors had not been sitting in the laps of the CEOs, wagging their tails, he felt, then managements would not have been allowed to loot the shareholders’ pockets, transferring vast sums into their own pockets. Buffett appeared at an SEC roundtable on financial disclosure and oversight, saying that, instead of lapdogs, shareholders needed guard dogs, and directors who served on audit committees and oversaw the auditors must be “Dobermans” who “hold the auditors’ feet to the fire.”26
He said he had a short set of questions for the audit committee at Berkshire Hathaway:
—If the auditor had prepared the financial statements herself (as opposed to their being prepared by the company’s management), would they have been prepared the same way?
—If the auditor were an investor, could he understand how the company had performed financially from the way the financial statements were presented and described?
—If the auditor were in charge, would the company follow the same internal audit procedures?
—Did the auditor know about anything the company had done to change the timing of when sales or costs were reported to investors?
“If auditors are put on the spot,” Buffett said, “they will do their duty. If they are not put on the spot … well, we have seen the results of that.”27
These simple questions were so obvious, so clearly defining of right and wrong, so self-evidently useful in sorting out the truth and preventing fraud, that at least one or two other companies with directors who had common sense and were concerned about their exposure to liability from lawsuits actually copied Buffett and began to use them.
As Buffett swung his saber with ruthless accuracy, and accountants cowered and compensation committees ducked and muttered about why he publicized their bonus-pimping instead of just shutting up, and as would-be tax-cutters tried to find even nastier terms than the ultimate pejorative, “populist,” to throw at him, so encouraged was Buffett by all this newfound authority that in the spring of 2002 he outdid himself and endorsed … a mattress. He let himself be photographed lounging on the “Warren,” part of the “Berkshire Collection,” sold by the Omaha Bedding Co., as seen on posters of “Buffett and His Bed.” Now when he went down to the Nebraska Furniture Mart during the shareholder-meeting weekend, he could lie on his own bed while selling his own mattresses. “I finally landed the only job I really wanted in life—a mattress tester,” he said.28
The Sage of Omaha, at whom plutocrats railed and tax-cutters shook their fists, before whom accountants quivered and stock-option abusers fled, whom autograph-seekers followed and television lights illuminated, was at heart nothing more than a starstruck little kid, endearingly clueless in many ways about his place in the pantheon. He got excited over and over by fan letters from Z-list celebrities. Every time somebody wrote him to say he was their hero, it was like the first time. When porn star Asia Carrera called him her hero on her Web site, he was thrilled. He was thrilled to be anybody’s hero, but being called a hero by a porn star who was a Mensa member had real cachet. His favorite letters were from college students, but when prisoners wrote and said he was their hero, he was proud that his reputation extended to convicts who were trying to turn around their lives. He would much rather be idolized by porn stars and college students and prisoners than by a bunch of rich businessmen.
All this basking in the limelight meant that Debbie Bosanek and Deb Ray had to guard the phone and the door with dogged vigilance. Once, an overexcited woman who flew from Japan to get his autograph arrived in the office. She was so overcome by Buffett’s presence that she prostrated herself to “worship” him and had a sort of conniption on the floor. The secretaries hustled her out.
She wrote later that her doctor had given her tranquilizers, and she hoped to be allowed in Buffett’s presence again. She sent photographs of herself and wrote letters.
“I like being worshipped,” Buffett said in a plaintive tone. Nevertheless, the secretaries had their way and the woman wasn’t invited back.29