Buffett seemed to thrive like a trumpet vine as he grew larger than life. Yet he remained brilliant at balancing his priorities. As requests for his time grew, his view that commitments are sacred and his natural inclination to conserve energy saved him from succumbing to the flattery of being in demand. If he added something to his schedule, he discarded something else. He never rushed. His friends could pick up the phone and call him whenever they liked. He kept his phone calls warmhearted and short. When he was ready to stop talking, the conversation simply died. The kind of friends he had didn’t abuse the privilege. While he had many fond acquaintances, he added true friends only at intervals of years.
Susie added new “friends” at intervals of days or weeks. Kathleen Cole handled a gift list that had grown to literally a thousand people. Susie called herself a “geriatric gypsy” who lived in the sky. She traveled for months on end—visiting grandchildren, caring for the sick and dying, vacationing, traveling on foundation business, seeing Warren and the family.
Not only was Susie a woman who couldn’t say no; she was a woman who couldn’t be reached. Susie was such a nomad, she was so helpless to limit her attention to anyone, and the number of people who felt they had claim to her time had grown so astoundingly, that by now even her close friends were allowed to contact her only through Kathleen.
Some who loved her grew concerned, although they rarely saw her to say so. “No one can have three or four hundred genuine friendships,” argued one. She seemed to run faster all the time. “All this chasing, like chasing your tail,” was another friend’s reaction. “You can’t have friends if you’re not around.” But “if you’re ill,” Susie said, “I’ll have plenty of time for you.” Some felt that her compulsion to serve and please had replaced living life in a straight line toward goals of her own. “She never spoke her own truth,” said one. “Her life got heavier and heavier,” someone else said. “Stop!” another wanted to tell her. “Get some perspective and nurture yourself.” But “it was as if she couldn’t slow down, because if she did, something would happen.”
Yet many people called her a saint, an angel, and even compared her to Mother Teresa. She gave so much of herself to so many that she seemed fragile now. But isn’t that the nature of a saint, mused one friend, to give of herself until nothing was left? Isn’t that exactly what Mother Teresa did?1
Warren wanted to spend time with Susie so badly that he agreed to go to Africa in the spring of 2007 to celebrate her seventieth birthday. Howie had been planning this trip for eighteen months. “It would have been the eighth wonder of the world to see my father in Africa,” he says.2 The Buffetts would be leaving for Africa a few weeks after their annual trip to New York, which always followed the annual shareholder meeting.
On April 1, 2003, as the shareholder meeting drew near, Berkshire announced the acquisition of a mobile-home manufacturer, Clayton Homes. This deal was like many others Berkshire was making at the time—a natural continuation of buying discount assets in the post-Enron slump.
The Clayton deal had come about because years of low interest rates had given lenders piggy banks full of cheap money, and that had turned them into pigs.3 Banks were quick to train consumers that low interest rates meant they could buy more stuff for less cash outlay now. Those with equity in houses learned it could be used as a checking account. But whether it was credit cards, houses, or mobile homes, the lenders, in search of growth, increasingly turned to people who were the least able to repay—but wanted to participate in the American dream anyway.4 In the case of mobile homes, the banks lent money to the manufacturers, who used it to lend money to the buyers. Historically, this process had worked, because if the mobile-home maker made bad loans, it faced the discipline of not getting paid back.
But then the mobile-home makers began to sell their loans, handing off the risk of not getting paid back. That was now somebody else’s problem. The “somebody else” who had assumed the problem was an investor. In a process known as “securitization,” for some years, Wall Street had neatly packaged loans like these and sold them to investors through a “collateralized debt obligation,” or CDO—debt backed by the mortgages. They combined thousands of mortgage loans from all over the U.S. and sliced them into strips called “tranches.” The top-tier tranches got first dibs on all the cash flow from a pool of mortgages. The next tranches had second dibs, and so forth down the line.
These tranches paid a rating agency to assign the top AAA rating to the first-dibs tranches, AA ratings to the second-dibs tranches, and so on. The banks sold off the tranches to investors.
As lending standards declined, the quality of the CDOs—even AAA CDOs—got sludgier.5
Yet, investing in AAA CDOs now appeared to contain no risk. “When money is free,” wrote Charles Morris later, “and lending is costless and riskless, the rational lender will keep on lending until there is no one left to lend to.”6
If it was pointed out that risk did not disappear, those who participated in the market would explain with a sigh that derivatives “spread” the risk to the far corners of the globe, where it would be absorbed by so many people that it could never hurt anyone.
In his 2002 shareholder letter, Buffett called derivatives “toxic,” and said they were “time bombs.” At the shareholder meeting that year, Charlie Munger described the accounting incentives to exaggerate profits on derivatives, and concluded, “To say derivative accounting in America is a sewer is an insult to sewage.” In his 2003 letter, Buffett wrote of derivatives as “financial weapons of mass destruction.”7 While many people appeared to be participating in a market, in fact a handful of large financial institutions would always tend to dominate it using their leverage. They would also have other assets that seemed uncorrelated with these derivatives but which would actually move in tandem with the derivatives in a collapsing market.
General Re had a derivatives dealer, General Re Securities, which Buffett had shut down, either selling its positions or letting them run off in 2002. He had already turned Gen Re Securities into the cautionary tale of derivatives—writing at length to the shareholders about the expensive and problematic cost of shutting it down. General Re had made Buffett so angry by losing almost $8 billion by now from insurance underwriting that he could barely talk about it. The Scarlet Letter remained posted on the Berkshire Web site, though Ron Ferguson had retired, replaced by Joe Brandon and his number two, Tad Montross. General Re’s competitors gleefully told clients that Buffett was going to sell the company or shut it down. Given the example of Salomon, these predictions were not spun from gossamer.
It was going to take billions in profits before General Re groveled its way back into Buffett’s good graces. Its derivatives business would have little to do with that, either way. The same was not true for the global economy. By a “low but not insignificant probability,” Buffett said, sooner or later—he didn’t know when—“derivatives could lead to a major problem.” Munger was more blunt. “I’ll be amazed,” he said, “if we don’t have some kind of significant blowup in the next five to ten years.” Derivatives were lightly regulated and subject to minimal disclosure. Since the early 1980s, “deregulation” had turned the markets into the financial equivalent of a rugby scrum. The theory was that the market’s forces were self-policing. (And yet, the Fed did seem to intervene at times when trouble cropped up.)
By “problem” and “blowup,” Buffett and Munger meant that a bubble was brewing in this witch’s cauldron of easy credit, lax regulation, and big paydays for the banks and their accomplices. They meant an unsnarlable traffic jam of claims from derivatives leading to financial-institution failures. Large losses at financial institutions could lead to a credit seizure—a global “run on the bank.” In a credit seizure, lenders become afraid to make even reasonable loans, and the resulting lack of financing sends the economy spiraling downward. Credit seizures had in the past tipped economies into depressions. But “that’s not a prediction, it’s a warning,” said Buffett. They were giving a “mild wake-up call.”
Buffett’s “financial weapons of mass destruction” remark was quoted everywhere, often paired with a question about whether he was overreacting.8
Even as early as 2002, however, the beginnings of mass destruction could be seen in the mobile-home industry. Stung by bad loans, lenders were cutting off funding or raising interest rates to prohibitive levels.
Buffett began to capitalize on this, first with smaller investments, then with a deal to buy Clayton Homes, which was the class act of the troubled manufactured-housing industry. Even though it was fundamentally sound, its lenders were behaving, as Buffett said, like Mark Twain’s cat, who, having once sat on a hot stove, wouldn’t sit on a cold one. Buffett felt that Clayton’s problem was mainly that its financing was drying up. Clayton stock had fallen with the rest of the industry to as low as $9. The Claytons, like Salomon during its crisis, were starting to run out of funding sources. They were motivated to sell. Buffett called the family in Knoxville and spoke to Jim Clayton’s son, Kevin.9
Kevin Clayton: “We might entertain an offer in the twenty-dollar range.”
Buffett: “Well, it’s not likely that we could ever come up with a number that would repay the sweat and time and energy that you and your father have built into this wonderful organization.”
Clayton: “Our financing is getting tight. How about if you just lend to us?”
Buffett: “That doesn’t work well for Berkshire Hathaway. Why don’t you just throw together whatever you have lying around that tells about your company and send it to me someday whenever you have a chance?”
This classic Buffett maneuver, Casting the Line, resulted in the arrival of a massive Federal Express package the next day. The fish had snapped at the bait.
Wall Street valued Clayton at more than all of its competitors combined, and its reputation was deserved: Most of the other mobile-home manufacturers were closing retail stores and losing money. Like most cult stocks, it had a founder with a strong, charismatic personality. Jim Clayton, the company’s guitar-picking chairman—a sharecropper’s son, who had started the business by refurbishing and selling a single mobile home—thought of his shareholder meetings as “mini-festivals” and had once strolled up the aisle from the rear of the room toward the stage singing “Take Me Home, Country Roads.” He delegated the negotiating to Kevin. Kevin, of course, had never heard of Buffetting.
Buffett: “$12.50 bid.”
Clayton: “You know, Warren, the board might entertain something in the high teens, more like $17 or $18 a share.”
Buffett: “$12.50 bid.”
Kevin Clayton got off the phone and went and talked to the board. Even though the stock had recently traded around nine bucks, it was a hard nut to swallow, that the company was worth only $12.50.
Clayton: “The board would consider $15.”
Buffett: “$12.50 bid.” Although not part of the official record, by this point he had almost certainly applied his other classic maneuver, the Circular Saw, slicing the floor out from under the Claytons by stressing—in a sympathetic way—how weak and vulnerable they were with their funding sources drying up.
The Claytons and their board went through some further processes.
Clayton: “We’d like $13.50.”
Buffett: “$12.50 bid.”
More discussion.
Clayton: “Okay, we’ll take $12.50, on the condition that we get Berkshire stock.”
Buffett: “I’m sorry, that’s not possible. By the way, I don’t participate in auctions. If you want to sell to me, you can’t shop this bid against me to any other buyer. You have to sign an exclusive that you won’t entertain any other offers.”
The Claytons, who perhaps understood the direction that their industry was headed better than most experts did at the time, capitulated.10
After Buffetting the Claytons, Warren flew out to Tennessee to meet them, tour the plants, and visit with local Knoxville dignitaries. He had asked Jim Clayton to “pick and sing” with him, and they had rehearsed a couple of songs over the phone, but when the time came, “He forgot all about my guitar on the stand beside him,” wrote Clayton later. “Give our new friend Warren a microphone and he forgets all about time.”11 Not used to being upstaged, Clayton at least had the consolation of being the guy who brought the famous Warren Buffett to Knoxville.
Yet while the local folks were mostly pleased with the deal, investors in Clayton were not. Buffett’s aura worked against him for the first time. Many of the investors knew about Buffetting, even if the Claytons didn’t, and they were in no mood to be Buffetted themselves.
Clayton’s large investors thought Buffett was buying at the “bottom of the cycle” for mobile homes and had opportunely timed the deal to catch a bounce. At its peak in 1998, the manufactured-housing industry, using aggressive lending tactics, had shipped 373,000 homes a year. The outlook for 2003 was a measly 130,000. But surely it would turn. Buffett’s history as a savvy trader convinced them that he must have bottom-ticked the price and that they would be suckers if they sold the company now.
That was not what Buffett saw, however. He saw that the mobile-home market had backed itself into a corner by using easy financing terms to make a large percentage of its sales to people who could not afford to buy a home. Therefore the number of homes sold by the industry was not going to bounce.
But the dissidents were stewing, talking on the phone far away from Omaha.
Unperturbed by shareholder outrage, Buffett reveled in the thought of his future role as a mobile-home impresario. He kind of liked the trailer-park aspect of the thing. And buying a company from a sharecropper’s son appealed to the man who ate Dilly Bars at Dairy Queen, still lusted over model-train catalogs, and got a huge kick out of having his picture taken with the Fruit of the Loom guys. The P. T. Barnum in him was already beginning to stir. He could picture it so vividly—a giant mobile home installed in the exhibition space down in the basement of Omaha’s new Qwest Convention Center at the 2004 shareholder meeting, next to the See’s Candies shop maybe. The exhibition space kept adding more vendors and more merchandise for sale every year. The thought of a whole house, right there in the middle of his shareholder meeting, with a lawn even, and shareholders lined up to get into the house, gaping in awe, delighted him. How many mobile homes could you sell at a shareholder meeting? he wondered. None of the guys at Sun Valley ever sold a mobile home at their shareholder meetings.
By the end of the month shareholders jammed every flight into Omaha’s airport and filled every hotel room in town for the 2003 shareholders’ meeting, to see the man whom popular magazines had been proclaiming the “Comeback Crusader” and “The Oracle of Everything.” And there was some surprising news too. The Hong Kong Stock Exchange had disclosed that Berkshire had bought a stake in PetroChina, the giant, mostly state-owned Chinese oil company. It was Buffett’s first publicly acknowledged foreign investment in many years.12 He was notoriously cautious about investing outside the U.S. and had not owned a significant position in a foreign stock since Guinness PLC in 1993.13
Reached by reporters hungry for an explanation, Buffett said he knew nothing much about China and had bought it for the oil that was denominated in RMB, the Chinese currency. He was pessimistic about the dollar and optimistic about oil. Buffett had written an article for Fortune, “Why I’m Down on the Dollar,”14 in which he explained his belief that the dollar would decline in value. The reason was something called the trade deficit: Americans were buying more from other countries than they were selling, and at a fast-accelerating rate. They were paying for the difference through borrowing; foreigners were buying Treasury bonds, an I.O.U. from the U.S. government. In short order, the country’s “net worth,” he said, “is being transferred abroad at an alarming rate.”
To hedge the risk of the falling dollar for Berkshire, he had studied Chinese stocks because of China’s burgeoning economic power. He had found PetroChina, and gotten comfortable enough to buy it. Although he was able to purchase only $488 million, he said he wished he could have bought more. His endorsement of PetroChina sent investors over the moon. Warren Buffett had bought a foreign stock! PetroChina soared. And so did attendance at the BRK shareholders meeting.
That year, 15,000 people came to Omaha’s Woodstock for Capitalists. Buffett’s $36 billion fortune was once again exceeded only by Bill Gates’s. He had bounced back, almost to the top of the heap.
“What is the ideal business?” a shareholder asked when the questions began. “The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine,” Buffett said. “So if you had your choice, if you could put a hundred million dollars into a business that earns twenty percent on that capital—twenty million—ideally, it would be able to earn twenty percent on a hundred twenty million the following year and on a hundred forty-four million the following year and so on. You could keep redeploying capital at [those] same returns over time. But there are very, very, very few businesses like that … we can move that money around from those businesses to buy more businesses.”15 This was about as clear a lesson on business and investing as he would ever give. It explained why Berkshire was structured as it was. It explained why he was always looking for new businesses to buy, and what he was planning to do with Clayton Homes. He expected to invest part of Berkshire’s extra capital in Clayton so that it could survive, take market share away from its bankrupt competitors, and buy and service their portfolios of loans.16
On Monday morning at the Berkshire board meeting, Buffett held a little seminar, explaining to the board the things he most wanted to teach them about this year, which consisted of the risk that the dollar would decline against foreign currencies and the problems involved in the financing of mobile homes.
Tom Murphy and Don Keough had just been voted in as directors, joining Charlie Munger, Ron Olson, Walter Scott Jr., Howie, Big Susie, and Kim Chace, the lone representative of the old Hathaway textile family. There had been some grumbling about these appointments, with shareholders making noises about cronyism, and lack of balance and diversity. But the idea of a board of directors overseeing Warren Buffett was ludicrous. A board made up of Barbie dolls would do just as well. When the Berkshire board met, it was to listen to Buffett teach, just as every occasion—from a party to a luncheon to a sing-along with Jim Clayton—turned into an opportunity for Buffett to figuratively stand at the blackboard, fingers dusty with chalk.
The reason shareholders cared about Berkshire corporate governance was not oversight, however, but the question of who would succeed Buffett, who was now almost seventy-three. He had always said there was a “name in an envelope” crowning his successor. But he would not acquiesce to the pressure to reveal the name, because that would tie his hands to one person, and events could change. It would also effectively begin the transition, and he certainly wasn’t ready for that.
There was, of course, a guessing game about who this person could possibly be. Most of the managers of the various companies Buffett bought seemed unlikely candidates. Buffett liked managers like Mrs. B—people who shunned the spotlight, who worked as tirelessly as a human anthill—but these people did not manage capital. Where was the capital allocator who could run this thing? The right person had to be willing to sit behind a desk reading financial reports all day long, yet excel at dealing with people in order to retain a bunch of managers who wished they were still working for Warren Buffett.
“I have this complicated procedure I go through every morning,” Buffett said, “which is to look in the mirror and decide what I’m going to do. And I feel at that point, everybody’s had their say.”17 The next CEO would have to be a superb leader—and yet oversized egos need not apply for the job.
As the board meeting ended on Monday, the town emptied of shareholders, and the Buffett family headed to New York for their annual trip. Every year they traditionally attended a dinner with the East Coast members of the Buffett Group, held at Sandy and Ruth Gottesman’s house, where Susie would pile into Warren’s lap and run her fingers through his hair, and Warren would gaze enraptured at his wife. But this year it seemed obvious that Susie wasn’t feeling well. At lunch one day, dressed beautifully in a light wool skirt suit with a wraparound shawl, she ate only a tiny piece of chicken and some carrots with a glass of milk. She said she was fine but wasn’t that convincing.
Within two weeks, shortly before they were to have left for the trip to Africa, Susie was admitted to the hospital with another bowel obstruction. There, the doctors found that she was anemic and had an esophageal ulcer related to her reflux. The Africa trip had to be postponed by a year. Even Warren was dismayed, because he knew how much the trip meant to Susie. But, asked if he was worried, he said, “Oh, no, it would bother Susie if she thought I was worrying about her. She wants to worry about me, not the other way around. She’s a lot like Astrid in that sense. I’m not a worrier in general, y’know.”
It turned out to be a good thing that Buffett was around that June. As the meeting at which the Clayton shareholders would vote on the merger approached, opposition to the deal swelled like a blister chafed by shareholders’ resistance to the price—even to the very idea of selling to Berkshire. Rumors started that another bidder would come in.18 Some of the shareholders were convinced that the Claytons had sold out to Buffett too cheap in order to keep their jobs and benefit themselves. The potential conflict of interest when the management of a public company wanted to sell the company to Berkshire was about to set off a war.
William Gray of Orbis Investment Management filed a petition with the SEC and a lawsuit with the Chancery Court in Delaware, where Clayton was incorporated; his argument was that the Claytons were heisting the company on behalf of Buffett.19 After all, said one investor, “if Buffett bids for something, it must by definition be undervalued.”20
Buffett’s reputation, which had been an asset for so many years, had begun to work against him in certain other ways as well. He was such a magnet for publicity that anyone who wanted publicity for themselves or their cause could hijack his shareholder meeting or misappropriate his fame to get it. And so it happened that just before the shareholder meeting and around the time that Berkshire had announced the Clayton deal, Doris Christopher, CEO of The Pampered Chef, called him with just such a problem.
The Pampered Chef sold kitchenware at home parties through independent salespeople, mostly women. After Berkshire’s purchase of the company, members of pro-life organizations had begun boycotting their parties. Berkshire’s position was that it made no donations to pro-choice or reproductive rights groups, but only acted as a conduit for its shareholders, who through the charitable-contributions program as of now had the right to allocate $18 per share to the charity of their choice. Of the $197 million that had been donated to nonprofit groups of all types, the largest number of recipients were schools and churches, many of them Catholic, and most of the money went to causes not related to abortion. But a significant amount of money had gone to reproductive-rights organizations.21 As it happened, Warren and Susie’s personal share of the contributions—about $9 million in 2002—went to the Buffett Foundation, where it mostly funded reproductive rights. The argument that these contributions were not Berkshire’s fell on deaf ears.22 In 2002, Buffett had tried to square things with one of these groups by showing them how much money went to causes other than family planning. He got a reply from the president of Life Decisions International, saying, “Even if only $1.00 went to Planned Parenthood and $1 billion was donated to pro-life organizations, the former gift would still land Berkshire Hathaway on The Boycott List.”23 If the price of filling a parking meter was enough to attract a boycott, that was a pretty clear sign that Berkshire would find little room for compromise.
Doris Christopher had tried to mediate, telling her people that while she personally did not agree with Buffett, “it is not my place to ask or to judge” how he donated money.24 Still, the boycott was affecting business and hurting the people involved. Christopher called Buffett to tell him the disruption to her business was getting worse.
“She didn’t ask me, but I could tell she was hoping I would cancel the program. And you know, I’ll do it. I thought we could tough it through, but we can’t. It’s hurting too many people that I don’t want to hurt. It hurts Doris, and these are her flock. They’re getting injured, and they’re innocent. They’re in her office, crying.”
In late June, Buffett called Allen Greenberg, his former son-in-law and executive director of the Buffett Foundation, into his office and explained that he had talked to Charlie Munger. Rather than sell The Pampered Chef—one of the options—they had decided to shut down the charitable-contributions program. Greenberg was astounded. The year before, ninety-seven percent of shareholders had defeated a resolution by a pro-life shareholder to cancel the program. He pointed out that the contributions came from individuals, not the corporation. People could still donate on their own. Shutting down the program would accomplish nothing. But Buffett had made up his mind.
Greenberg returned to his office to draft a press release that went out to the news wires right before Sun Valley, over the Fourth of July weekend. The phone rang and rang for several days; the secretaries grew weary from ferrying messages up and down the hall. Life Decisions almost instantly put out its own release dropping Berkshire from its boycott list.
But Buffett’s friends, no matter what their views on abortion, mostly reacted the same way: They were stunned. Some were angry. “I was surprised that he gave in on that,” one said. “It didn’t sound like him to back down so easily. Warren is such a principled person. Was it such a big deal that it had to be done?” asked another.25
Buffett said he was worried that such a stance might put The Pampered Chef consultants at risk. And although he didn’t say it, not just their livelihoods but their physical welfare might be at stake. Buffett himself was a very big target. Taking a stand might make Berkshire Hathaway, as well as him, a symbol of pro-choice defiance, which was dangerous.26 He shrank from confrontation anyway; this was something he simply could not do.
Afterward, he never showed any sign of rancor over the criticism or the prolife victory laps. You can always tell them to go to hell tomorrow, as Murph said. There was never any need to do it today. Over the years he had saved himself a lot of trouble by following this advice. Almost as soon as he got past The Pampered Chef sidebar, he simply stopped thinking about it.
Alas, this did not solve the other problem caused by being the famous Warren Buffett. As the July 16 meeting to vote on the Clayton deal approached, the argument about the industry being at the “bottom of the cycle” gained currency. About thirteen percent of the investors, including respected money managers, said publicly that they would oppose the deal. Kevin Clayton trotted around the country, meeting with investors and pitching the merger, while Orbis and other naysayers worked the phones and the press.
Before Buffett bid, nobody had wanted Clayton. Now the former wallflower suddenly looked prettier to others. At midnight two days before the shareholder meeting, Cerberus Capital faxed a letter to Clayton suggesting that it was likely to make a higher bid. When it came to money, Buffett’s attitude was defiant. “Okay, let them,” he said. He was certain that Clayton without Berkshire wasn’t worth more than $12.50 a share.
And, indeed, by the day of the meeting, it was still a toss-up whether the Claytons had enough votes to win approval of the sale. Jim Clayton faced an hour-long barrage of questions from agitated shareholders who had packed the auditorium where the meeting was held. Manufactured-housing stocks had been on a tear since the deal was announced, making the $12.50 price look even worse by comparison. Some shareholders wanted Cerberus to have a chance to make its offer.
Kevin Clayton left the meeting to call Buffett and ask him to agree to a delay on the vote, to allow Cerberus time to make a bid. Buffett said okay—if they would pay Berkshire $5 million for the delay. Clayton agreed to Buffett’s price, reconvened the meeting, and adjourned it before taking a vote.27
By now the business press was covering the story as a David and Goliath set piece in which a gang of tiny Davids—the hedge funds that were fighting the deal—tried to defeat the greedy Claytons and the colossus Buffett. The press turned on Buffett. If he was buying something, the price must be too cheap.
The test of whether Buffett was stealing Clayton would be whether another bidder could be found. A week later, when seventy accountants, lawyers, and financial specialists from Cerberus Capital and three other firms descended on Knoxville, the clock began to tick toward the moment of truth. Clayton housed them in its fanciest mobile homes, adjoining the headquarters. Most of the team toured Clayton’s plants and pored through rooms full of documents, focusing increasingly on the huge maw of the mortgage unit and the way it sucked down capital.28
After a week of digging, the Cerberus people returned to New York and faxed a sheet labeled “for discussion purposes only”: “Clayton Recapitalization—Sources & Uses.” The sheet was not an offer, but it contained a price: $14 a share. The Claytons’ first impression was that Cerberus had beaten Buffett’s offer by a healthy margin. However, a closer look revealed that this was a typical leveraged-buyout proposal, in which a company’s assets are sold and it takes on debt in order to finance its own sale.29 The investors would get $9 in cash per share and the recapitalized stock, which was nominally worth $5, but in fact worth much less because it would consist of a piece of a financial company that had piled additional debt on top of a shrunken capital base. Debt was the blood coursing through the veins of mobile-home makers; without it they were dead. Yet lenders were already shying away from the business. How could Clayton take on even more leverage? The Cerberus people had delivered a proposal that was the best that financial engineering could do, but it wasn’t financially viable. The Claytons called Cerberus to discuss it and, without any rancor, they agreed to go their separate ways.
CNBC and the financial press were now portraying Buffett as a ruthless financier who had connived with the Claytons to adjourn the shareholder meeting illegally so Buffett could buy the company cheap. The manner in which Buffett’s reputation had compounded to the point where it worked against him represented a dramatic reversal of the image of the wise, grandfatherly man who attracted legions of would-be coattail-riders. Large investors were no longer coattail-riding, waiting for his reputation to take prices higher; they wanted to use his reputation against him, to block him.
Buffett, however, had never really specialized in buying things that other people wanted at a price that was too cheap. Instead, he bought things that other people didn’t want and thought that they were better off without. True, they had often been mistaken about that. Increasingly, since the Buffalo Evening News, Berkshire had bought properties that most people really were better off without. There weren’t many companies that had the balance sheet to look a union in the eye and stare them down, that had the financial wherewithal to finance Clayton’s debt, that could make decisions on deals like Long-Term Capital in an hour rather than a week. Berkshire could do all those things, and more. Buffett’s real brilliance was not just to spot bargains (though he certainly had done plenty of that) but in having created, over many years, a company that made bargains out of fairly priced businesses.
At the end of July, the adjourned Clayton shareholder meeting finally reconvened. No other bidder had come forward, and Cerberus had declined to make a deal. In the end, 52.3 percent of the shareholders voted for the Berkshire deal, barely enough. Excluding the Claytons, the other shareholders had voted no by a margin of two to one. Buffett sat by the phone until he got the news.
But even then, the battle was not over. As soon as the merger was effective, opponents to the deal won an appeal at the Tennessee Court of Appeals, staying a lower-court ruling that allowed the deal to proceed. That prevented Berkshire from paying out the proceeds. The Court of Appeals gave the lower court a homework assignment, asking it to rule on a number of issues within two weeks. Lawyers and company people were working almost around the clock.
Kevin Clayton and his wife had just had a baby; she was colicky from a protein allergy. “It took twenty-seven formulas before we found one from London that would work,” says Clayton. “Plus, I got shingles right in the middle of it, from stress. I called up my dad and said, ‘Dad, this is rough.’ And he said, ‘Well, son, I had paralysis on the left side of my face when I was your age from stress.’ Then I called up Warren, and he said, ‘Well, Kevin, when I was younger, I lost a lot of my hair from stress.’ I got no sympathy from either one of them.”
On August 18, the lower court ordered a trial before a jury. Clayton immediately appealed.
Clayton stock had ceased trading weeks ago, but Berkshire could not pay out the merger proceeds, since the deal marinated in the galley of the appellate court. Forty thousand shareholders awaited their money from Berkshire Hathaway. All $1.7 billion sat in the bank, earning interest for Berkshire.
Buffett got a fax from a couple who were being foreclosed out of their home. They needed the money from the Clayton stock to pay their mortgage. Pay what you can, he told the couple, and just explain the situation. Probably that will be enough to avoid foreclosure.
“It’s the Perils of Pauline,” he said.
After a series of legal maneuvers—including competing appeals to the Tennessee Supreme Court and the Delaware Chancery Court that did seem like a script from the Perils of Pauline—the legal battle ended with the merger intact.
But soon it became clear that sales of manufactured housing were not going to turn around.30 Buffett had not bought just as the bounce was coming back. In fact, the downward spiral in manufactured housing had just begun. The price that had looked so cheap was barely reasonable. To help the deal’s economics, Buffett had Kevin Clayton begin buying portfolios of distressed loans. It was going to take some mighty fine footwork to make the Clayton deal work out.