1. Berkshire Hathaway letter to shareholders, 1990; Michael Lewis, “The Temptation of St. Warren,” New Republic, February 17, 1992.
2. At the University of Notre Dame, spring 1991. Cited in Linda Grant, “The $4-Billion Regular Guy: Junk Bonds, No. Greenmail, Never. Warren Buffett Invests Money the Old-Fashioned Way,” Los Angeles Times, April 7, 1991.
3. In “How to Tame the Casino Economy,” Washington Post, December 7, 1986, Buffett advocated a 100% confiscatory tax on profits from the sale of stocks or derivative instruments that the holder has owned for less than a year.
4. Linda Grant, “The $4-Billion Regular Guy.” Buffett hosannaed Gutfreund in his shareholder letters as well.
5. The principal conflicts inherent in Salomon’s business were the undisclosed bid-ask spread that Buffett had objected to while working for his father’s firm in Omaha, the conflict between proprietary trades for the firm’s account alongside customer trades, the investment banking business built off equity research stock ratings, and the arbitrage department, which could trade on the firm’s merger deals. As a board member who made Berkshire’s investment decisions, Buffett says he either recused himself from discussions involving deals or did not invest on information he had, yet his board membership did create the appearance of a conflict of interest.
6. The Standard & Poor’s 500 index was used as a proxy for the market.
7. In the interest of brevity, the history of portfolio insurance has been shortened considerably. The rout began as the Federal Reserve raised the discount rate over Labor Day weekend 1987. Over the next month, the market wavered and showed signs that investors were nervous. On October 6, the Dow broke a one-day record when it fell 91.55 points. Interest rates continued to climb. The Dow dropped another 108 points on Friday, October 16. Professional money managers spent the weekend pondering. On Black Monday, October 19, many stocks failed to open at all in the early hours of trading and the Dow fell a record-breaking 508 points. The exact cause of the crash remains in dispute. Program trading and equity index futures accelerated the decline, but economic factors, military tensions, comments by Federal Reserve Chairman Alan Greenspan about the dollar, a slowing economy, and other factors have been blamed.
8. Interview with Walter Scott Jr.
9. In this case, the way to be hedged would be to short a broad group or index of stocks.
10. This account is based on both Doris’s and Warren’s versions of the story.
11. James Sterngold, “Too Far, Too Fast: Salomon Brothers’ John Gutfreund,” New York Times, January 10, 1988.
12. Salomon supplied its clients’ debt needs along all points of the maturity ladder. For a bond shop to eliminate its commercial paper department was a baffling decision.
13. Interview with Bob Zeller, chairman of Salomon’s compensation committee. Zeller says that Buffett represented the shareholders’ interests on the compensation committee with integrity, while trying to determine which employees genuinely deserved reward.
14. John Taylor, “Hard to Be Rich: The Rise and Wobble of the Gutfreunds,” New York, January 11, 1988.
15. Interviews with John Gutfreund, Gedale Horowitz.
16. Interview with Tom Strauss.
17. While technically the terms of the preferred stock didn’t work that way, if Buffett wanted to, he could have found a way to get out.
18. Carol Loomis, “The Inside Story of Warren Buffett,” Fortune, April 11, 1988. Buffett stated these rumors were false in the article.
19. Robert L. Rose, “We Should All Have an Audience This Receptive Once in Our Lives,” Wall Street Journal, May 25, 1988.
20. Or 14,172,500 KO shares costing $593 million at an average price of $41.81 (or $5.23 split adjusted for the three 2-for-1 stock splits that occurred between 1988 and 2007). All shares and prices are adjusted for subsequent stock splits.
21. At that point, KO’s market value represented 21% of the total market capitalization of Berkshire Hathaway—by far the biggest bet, in dollar terms, that Buffett had ever made on a single stock. Yet in percentage terms, this fit his past pattern.
22. Interview with Howie Buffett.
23. Michael Lewis, Liar’s Poker: Rising Through the Wreckage on Wall Street. New York: W. W. Norton, 1989.
24. BRK received a 9.25% coupon from the Champion preferred, above the going rate of 7%, and raised debt at 5.5% to fund this $300 million purchase. Champion called the preferred early, but Berkshire was able to convert its shares prior to the call and sell them back to the company at a small discount. Berkshire booked a 19% after-tax capital gain over the six years it held Champion.
25. Linda Sandler, “Heard on the Street: Buffett’s Special Role Lands Him Deals Other Holders Can’t Get,” Wall Street Journal, August 14, 1989.
26. From an interview with a friend who said this to Munger.
27. Speech at Terry College of Business, the University of Georgia, July 2001.
28. Interview with John Macfarlane.
29. Interview with Paula Orlowski Blair; Michael Lewis, Liar’s Poker.
30. Many contracts required posting of collateral or margin, but this did not compensate for the risk of mismarking in the model.
31. Buffett and Munger, 1999 Berkshire Hathaway annual shareholder meeting.
32. Salomon held on for eight years. Phibro sold its share in the JV in 1998. Alan A. Block, “Reflections on resource expropriation and capital flight in the Confederation,” Crime, Law and Social Change, October 2003.
33. Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management. New York: Random House, 2000.
34. Interview with Eric Rosenfeld.
35. Meriwether characteristically exempted himself from this lucrative deal.
36. Report to the Salomon Inc. Compensation & Employee Benefits Committee, “Securities Segment Proposed 1990, Compensation for Current Managing Directors.”
37. This pay deal was still one-sided; the arbs could only break even or win. Buffett’s partnership had exposed him to unlimited liability to share in losses if he performed poorly—i.e., his incentives were truly aligned with his partners.
38. Michael Siconolfi, “These Days, Biggest Paychecks on Wall Street Don’t Go to Chiefs,” Wall Street Journal, March 26, 1991.
39. Interview with Deryck Maughan.
40. Using different terms. The casino/restaurant analogy was Buffett’s. Even if the customer businesses had become profitable, they would have demanded even larger amounts of capital in later years, despite bigger scale and market share, and it is questionable whether their returns would ever have satisfied Buffett.
41. Interview with Eric Rosenfeld.