Buffett was concerned, but calm. He had the same unflappable patience that he brought to investing, even when his reputation was on the line. Munger, in contrast, was nearly apoplectic.
Roderick Hills, Munger’s former law partner, was then serving as White House counsel. As the investigation gathered steam, word leaked out that Hills had been offered the job of SEC chairman. Rickershauser, Buffett’s and Munger’s lawyer, called Hills and pleaded with him to turn it down, arguing that if he took the job the SEC might feel compelled to bend over backward and judge them more harshly. “Is there anything there?” Hills asked, alluding to the investigation. Rickershauser said, “No, it’s crap.” Hills shrugged it off. Then Munger called a couple of times, berating Hills for supposedly abandoning Buffett in his hour of need. But Hills took the job.
Munger appeared at the SEC in March 1975, for two days of testimony. He grandly assured his interrogators, “If anything is wrong, Warren and I take full responsibility,” as though that would put an end to it. He treated it as a test of character, frequently referring to the honor of various parties.
The young SEC lawyers, ignoring his tone, bored in on him. They intimated that Munger perhaps had conspired to sell short the stock of Wesco’s suitor as a means of torpedoing the merger. Munger protested, “That is not our style of operation.” He sounded shocked, like a confessor who has stumbled upon a policeman instead of a priest.
The SEC, in fact, suspected a plot. Specifically, had Blue Chip blown up the merger in order to take over Wesco for itself?
Q: For how long before February 26 had this approach [seeking control of Wesco] been under consideration by you and Mr. Buffett?
MUNGER: As I stated earlier, 98 percent of our attention was devoted to the task at hand. We are believers in Carlyle’s Prescription, that the job a man is to do is the job at hand and not see what lies dimly in the distance.24
Undeterred by Carlyle, the SEC lawyers went to the heart. Why, that is, had Blue Chip paid more than necessary for Wesco?
Q: Why would you intentionally pay a higher price for something that you could get for less?
MUNGER: We wanted to look very fair and equitable to Lou Vincenti and Betty Peters.
Q: What about your shareholders? Didn’t you want to be fair to them?
MUNGER: Well, we didn’t feel our obligation to shareholders required us to do anything which isn’t consistent with leaning over backwards to be fair. We have that Ben Franklin idea that—if you will—the honest policy is the best policy.… You look puzzled.
Q: I am. It was my impression that businessmen always try to maximize profits for the corporation and shareholders that they serve.
MUNGER: Well, maybe we’re trying to maximize profits over the long pull If we hope to have a long and congenial working relationship with Louis Vincenti maybe it’s just, in light of self-interest, to lean over backwards on deals where you might think he cared.25
This was similar to the theme that Buffett had struck with Betty Peters in San Francisco. A long-term investment was more than merely a bet on a stock; it was a form of partnership. A big shareholder—a partner—gave as well as got. To Buffett, the very word “partner” had a powerful implication, suggesting a raft of unspoken responsibilities and loyalties, such as he had felt toward the investors in Buffett Partnership.
The modern portfolio manager saw stocks in two dimensions; they flickered across the screen, and at the push of a button they disappeared. Buffett and Munger wanted a larger role. They often talked about how managing money was not enough. As Munger recalled, “I said to Warren, ‘We don’t want to be like Russell Sage, a shrewd, miserable accumulator.’ We didn’t want to be remembered by friends and family for nothing but pieces of paper.”†
The SEC lawyers were incredulous. It looked to them as if Blue Chip had been propping up Wesco’s stock—i.e., “manipulating” it—presumably to sell at a higher price. But as Blue Chip hadn’t sold, the lawyers were mystified. Now, they tried with Buffett.
Q: From a business point of view, wouldn’t it have been better to let the price go down and buy it at the cheaper price?
BUFFETT: On that single transaction it might, but I think if you look at the overall Blue Chip picture, having the people at Wesco feeling that shareholders had been fairly treated … I think the general business reputation of Blue Chip would not have been as good.
Q: How about your responsibility to the shareholders of Blue Chip?
BUFFETT: I own a fair amount of stock. It has an impact on us. We’re not spending other people’s money entirely.
Q: You think it might have looked bad if right after the merger blew up, you went into the market and the price went down?
BUFFETT: I think someone might have been sore about it.
Q: I’m extremely puzzled by this rationale that somehow you thought the management of Wesco would be upset or sore at you.… I’m saying why should you care, why should Blue Chip care, why should the management of Wesco care?
BUFFETT: It’s important how the Wesco management feels about us. You can say, well, we own the controlling interest so it doesn’t make any difference. But it does make a difference. Lou Vincenti doesn’t really need to work for us. He likes working with us. And I enjoy working with him, and it’s a good relationship. If he felt that we were, you know, slobs or something, it just wouldn’t work. It isn’t based solely on the salary he’s getting.26
It is implausible that a government agency would have badgered, say, J. P. Morgan, Sr., for paying too much attention to his reputation. “Why should you care?” To Morgan’s contemporaries, the question would have been unthinkable. But so much of that era had been lost. Indeed, Buffett’s dialogue with the SEC was suggestive of a colloquy across different centuries. The agency, and the buttoned-down lawyers whom it was accustomed to dealing with, defined corporate affairs as a series of transactions. Each action was discrete: today’s partner could be tomorrow’s adversary. Buffett preferred to think in terms of relationships, some of them lasting. He stubbornly stuck to his antique code like a rolltop desk for which he had a quaint fondness. Perversely, it was seen as grounds for suspicion.
The fact that Buffett had a doppelgänger merely heightened the SEC’s suspicions. They had found the co-conspirator; now they merely needed the crime. Naturally, they looked for it in the mysterious-seeming alliance of Buffett and Munger.
Q: Who at Blue Chip makes the investment decisions?
MUNGER: It would usually be Mr. Buffett. He would ordinarily consult with me and get my approval before he went ahead.
Q: Now, after Mr. Buffett placed the order for the first purchase, did he tell you that he was going to keep purchasing the stock of Wesco Financial?
MUNGER: That type of thing is so natural to us that frequently we don’t have to talk to one another or discuss what our future intentions are.
Q: Did you ask him?
MUNGER: I don’t have to. I understand how his mind works.
Q: Would you consider yourself Mr. Buffett’s—like—alter ego?27
The casual phrasing was disingenuous. The SEC had heard the term from Betty Peters. They tried it on Buffett, too.
Q: Did you consider him sort of like an alter ego to yourself?
BUFFETT: Well, it depends on what area you’re talking about. We differ on some investments, you know. On most investment decisions, we tend to agree.
Q: From the time you became sort of investing philosophers in the same manner would you say you consulted with him on most of your investments?
BUFFETT: No, I wouldn’t.… I would say there was a trend in that direction.
Q: Okay. So that you both discuss many investments, philosophies, what you’re investing in.
BUFFETT: Sure.
Q: So you know basically what he is buying and selling most of the time [and] he knows what you are buying and selling?
BUFFETT: He knows what I got an interest in buying or selling. I know some of the things he has an interest in.
In terms of keeping track of what he is actually doing at a given time, I have no idea.28
Buffett’s tenor was unhurried. He returned to the SEC, informally and on several occasions, and seemed to go out of his way to help his interrogators. He patiently explained the Blue Chip jigsaw puzzle to Lawrence Seidman, an SEC attorney. When they took a break for lunch, Buffett told Seidman about his youth in Washington. Here and there, he sprinkled in a dose of the Buffett philosophy. Soon Seidman was caught in Buffett’s gossamer web, just as Betty Peters had been. Seidman recalled:
I sat around a table with him a number of times, charting it out. He’d say, “You’re wrong here, this company doesn’t own this,” or, “That belongs over here.” I spent a lot of time with him. I didn’t view it as adversarial. He was a superb person to deal with—even though we were on the other side.
For the modern chief executive, the idea of wandering into the SEC unaccompanied by a lawyer and taking up one’s case with a junior investigator—and, indeed, supplying him with information—would be so out of the question as to be ludicrous. Even if he had a mind to do so, the executive’s lawyers would protest and doubtless restrain him. The modern spirit is a hesitant one. Spontaneity has given way to cautious legalisms, and the age of heroes has been superseded by a cult of specialization. We have no more giants; only obedient ants.
Buffett was at least a bit larger. He was a throwback to the age—long, long past—when people had been willing to act without their lawyers. He sensed that these modern auxiliaries—not only the lawyers, but also the government-relations people, consultants, and myriad other advisers—did not merely help, they also controlled. And that was anathema to him. Succeed or fail, Buffett would permit no one else to set the agenda for him.
The beauty of his sweet solo act was that it worked. People responded to his openness, in addition to his considerable personal charm, and they were disarmed by his lack of contentiousness. Buffett did not confront Seidman; he turned him into mush.
“Larry,” Buffett said finally, “if you look at it your way, you’re right, there is a technical violation. If you look at it our way, there isn’t. But we weren’t out to do anything wrong. Now how do we solve it?”
The case dragged on through 1975. The SEC went fishing in a new area: Source Capital—yet another Buffett-and-Munger-controlled pool of funds. By now, Buffett was “sick to death” over his sundry complications.29 If the nightmare of being under the lamp ever ended, he told the SEC, he yearned to simplify his affairs:
So hopefully we would have the same businesses we have now, but less complications. I really don’t like these complications. It seemed fairly simple while we were doing it, but not simple now.30
In December, Rickershauser, Buffett’s lawyer, pleaded for an end, arguing that Buffett had done nothing to deserve such scrutiny. He trumpeted Buffett’s unblemished record of preparing his own tax returns over three decades as a sort of contemporary object lesson on a par with Lincoln’s log cabin.
He has paid federal income taxes continuously since his paper-route earnings required them at age 14, aggregating several millions of dollars over that 30-year period, and his total deficiency assessments have been less than $200.31
In 1976—two years after the inquiry had begun—the SEC settled. The terms amounted to a slap on the wrist. The SEC formally charged that Blue Chip had purchased Wesco not merely as an investment, as it had disclosed, but also for the purpose of defeating the merger (which was true). It also alleged that Blue Chip had artificially propped up Wesco’s market price over a three-week period. Blue Chip agreed not to do it again, without admitting or denying guilt, a common clause in such settlements. It also forked over $115,000 to certain Wesco shareholders that the SEC construed had been hurt by Blue Chip’s trades.
The SEC did not take action against Buffett. But a few weeks later, it named him to a blue-ribbon panel to study corporate disclosure practices. Possibly the agency was offering absolution. To say the least, it was unusual treatment for a guy it had spent the previous two years investigating.
Buffett got rid of, or simplified, his “complications” with the zeal of a reformed sinner. He sold Blue Chip’s interest in Source Capital (which had doubled). He quit his sideline as a money manager for FMC. He consolidated Wesco within Blue Chip (he would have bought all of Wesco, but stopped at 80 percent at the request of Betty Peters). And, after a further two-year hiatus, he went ahead and merged Diversified into Berkshire.
Happily for Buffett, the merger formalized his union with Munger. In exchange for his Diversified stock, Munger got 2 percent of the stock in Berkshire. Also, Buffett named his pal vice chairman. Munger remained in Los Angeles, pursuing largely separate interests, and he was modest about his role in Berkshire. “By a significant margin most of the ideas come from Warren,” he said. Yet for someone as insular as Buffett, having the counsel of the brilliant Munger, who observed the battle at a distance, was vital.
The merger also gave Berkshire a majority stake in Blue Chip Stamps. In effect, Buffett had just one “pocket” left—Berkshire Hathaway. He had no portfolio on the side: virtually no personal investments.32 But Berkshire, which he had rescued from the dead end of textiles, was itself “personal.”
In his first decade, Buffett had engineered a rise in Berkshire’s net worth from roughly $20 a share to $95. He had transformed the company, now unrecognizable as its former self, by acquiring an insurance unit, a bank, a stock portfolio, and majority stakes in Blue Chip, See’s, and Wesco.
Another chief executive might have renamed the company to reflect the changes—maybe “BH Corp.” or “Berkshire Enterprises.” But Buffett was not a changeling. He liked the name, which evoked the company’s origins. Though an unsentimental man, he asked Ken Chace to dig up the old directors’ notes from the archives in New Bedford and ship them to Omaha. As Buffett explained to the SEC, Berkshire was something he intended never to sell.
I just like it. Berkshire is something that I would be in the rest of my life. It is public, but it is almost like the family business now.33
Not long-term, but the rest of his life. His career—in a sense, his life—was subsumed in that one company. Everything he did, each investment, would add a stroke to that never-to-be-finished canvas. And no one could seize the brush from him, as Buffett had seized it from Seabury Stanton. By the late seventies, Buffett owned 43 percent of the stock, and Susie owned another 3 percent. To gain control of Berkshire and of its Blue Chip subsidiary, Buffett had invested $15.4 million. That was the equivalent of $32.45 per share of Berkshire.34 And that was all the capital that Buffett would put into it. Any further refinement of that canvas—any rise in Berkshire’s valuation, and any increase in Buffett’s personal fortune—would flow from that investment of $32.45 a share, and from what he could do with it.
* Book value is a useful gauge for most banks. Since a bank’s assets consist of loans and other financial assets, intangibles such as brand names are usually insignificant.
† Munger liquidated his partnership in 1976. His compound annual growth rate from 1962 to 1975 was 20 percent.
Chapter 10
WASHINGTON REDUX
When Warren Buffett parachuted into her company, Katharine Graham was midway through the signal transformation of her life. Her father had purchased the Washington Post, the fifth newspaper in a five-paper town, out of bankruptcy, in 1933. Kay assumed control in 1963 when her brilliant, but ultimately deranged, husband put a shotgun to his temple. As little as anyone could prepare for such a blow, Graham seemed, more than most, at the mercy of events. The daughter of Eugene Meyer, a financier-cum-statesman and head of the Federal Reserve Board, and a worldly but indifferent mother, Graham grew up with the peculiar loneliness of the rich. She was raised in a world of governesses and private schools, and was accustomed to receiving replies to her letters from her mother’s personal secretary.1 As a young woman, Graham worked as a reporter, but had no expectation that the family paper would be hers
to run.2 With marriage, she turned to raising a family.
When she was catapulted to authority, she was shy, self-conscious, and painfully self-abasing. Her male colleagues were condescending,3 and Graham herself proclaimed in an interview that, given the way the world worked, “a man would be better in this job than a woman.”4 She expected to be only an interim caretaker.5 In fact, responsibility proved a tonic. The Post, at the time, was an intelligent but parochial newspaper. Graham hired Benjamin Bradlee, the Washington bureau chief of Newsweek, to run the paper, and Bradlee, with significant support from Graham, propelled the Post to the front ranks of American journalism. In 1971, when the Post Co. was in the midst of an initial public stock offering, Graham overrode her wobbly-kneed advisers and published the Pentagon Papers, the government’s secret history of the Vietnam War, despite threats of indictment from the Nixon administration.6 (The U.S. government had already won a restraining order halting publication in the New York Times, which had broken the story.) Then Graham backed the Post’s investigation of Watergate, despite a challenge, presumably Nixon-instigated, to the Post Co.’s television licenses in Florida. When John N. Mitchell, Nixon’s Attorney General, observed with regard to a pending story, “Katie Graham is gonna get her tit caught in a big fat wringer if that’s published,”7 Graham knew that she had arrived.
But the second act of her metamorphosis had barely begun. Despite its clout in political circles, the Post Co. was unimpressive as a business. Its flagship newspaper dominated the Washington market, yet its profit margin was an uninspiring 10 percent. A like condition prevailed at its television stations.
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