Buffett knew none of the details of the scandal, for which he would now be responsible. But he made no attempt to grill anyone. Glancing about the boardroom, he said it was obvious that people were tired and should get some rest. His relaxed manner had a calming effect. For the first time in a week, the executives felt their spirits lift.56
“This is only a temporary setback.”
He said it as if he knew.
Then Buffett went to the auditorium for an assembly of Salomon’s managers. Gutfreund spoke first. He said the firm was fortunate to have Buffett stepping in, and that Gutfreund would be rooting for them. He did not show sentiment—only a hint of the old defiance. He had committed no crime; now he was gone. Leibowitz thought his dour farewell was “horribly sad.” Richard Barrett, an investment banker, said it was “pure John—making a bad moment worse.” Nobody forgot Gutfreund’s final words. “Apologies,” he said, “don’t mean shit.”
After a pause, Buffett faced the troops for the first time. They had seen their firm brought to its knees. They were desperate for leadership, but unsure of where they wanted to be led. Now, Buffett told them, Salomon Brothers would have to do more than obey the rules. His standard would be far stricter.
“Anything not only on the line, but near the line, will be called out.”57
It was a warning but also a challenge, evoking a muffled memory of the firm’s long-lost pride. According to witnesses cited in the next day’s Times, it was what they wanted to hear:
After Mr. Buffett’s discussion, in which he told the managing directors that the firm would have to follow the laws closely, the firm’s executives burst into applause for the man who would soon be their chairman.58
* Eric Rosenfeld, one of Meriwether’s traders, says he witnessed the incident, and that it involved Meriwether and John O’Grady, a veteran salesman, since deceased. After O’Grady repeatedly challenged Meriwether to play him during a busy day of trading, Meriwether dared him to one round for $1 million, “no tears.” Meriwether beat him, in front of a group of spectators. According to Rosenfeld, the bet was clearly in fun. Gutfreund, he says, was not present. However, Gutfreund frequently did play liar’s poker with other traders, though for less impressive stakes. “He never played during the middle of the day,” Rosenfeld said. Michael Lewis, the author of Liar’s Poker, later attributed his account to Meriwether, “among others.” Meriwether and Gutfreund both denied Lewis’s version.
† Gutfreund also instituted a useful reform, according to which a significant portion of bonuses would be paid in stock.
Chapter 22
SALOMON’S COURT
I—Crisis
Friday evening, Buffett leaves Salomon with Gutfreund and Strauss. Their limousine snakes through the financial district, pushing against the six-o’clock tide of homeward-bound commuters. At the Federal Reserve, Corrigan greets them austerely. Stressing that Salomon’s dealership is at risk, he makes clear he wants not just the phony bids cleared up but a broad reform. He has had it with Salomon’s swagger. Buffett pleads for time. Otherwise, he is contrite as a fallen samurai.1
In the morning, Buffett reconvenes with a dozen of Salomon’s brass at the midtown office of Wachtell Lipton. Eyeing the group—some of whom he has never met—he coolly announces that he intends to pick one of them to manage the company.
“I’m going to meet with you one at a time,” Buffett declares. “I’ll ask you all the same question: ‘Who should run this firm?’ Come in any order you like.” Then he walks into an adjoining room and shuts the door.2
All but two of the executives nominate the same man. Maughan says, “I’m afraid it may have to be me.”
When Buffett reappears, Lawrence Pedowitz, a Wachtell Lipton partner, gives a briefing on the Mozer case. Buffett asks about Meriwether. The general view is that Salomon’s top producer has done nothing wrong but that, given the cry for a clean break, he may have to go. Later, Buffett sees Meriwether in private. “JM”—the first incidental casualty—resigns.
Now, Saturday night, the scene shifts to Christ Cella, a bustling steakhouse on Manhattan’s East Side. Buffett, Munger, and Gutfreund are dining. The latter offers his consulting services, gratis. Buffett graciously responds that he will need all the help he can get. The King of Wall Street lifts his glass and toasts to the new regime.3
Cut to ten o’clock Sunday morning, outside 7 World Trade Center. The directors push through a phalanx of photographers and head for the boardroom on the forty-fifth floor. But events are moving ahead of them. As they gather around the burled-walnut table, the directors learn that the Treasury has just banned Salomon from its auctions.
The board meeting is disjointed. One director is participating via a speakerphone at a lodge at Mount McKinley. Another is on the phone from Maine. Buffett repeatedly darts out to take calls from government officials, including Nicholas Brady, Secretary of the Treasury, Jerome Powell, the assistant secretary, and Corrigan, who are also in conference with one another and with Fed chairman Alan Greenspan.4 Buffett pleads with the regulators for a show of grace, and he reminds them that Salomon’s king-sized $150 billion balance sheet is almost entirely financed with short-term money. It rolls over an astounding $50 billion every day, of which $1 billion is secured only by Salomon’s name—a rapidly depleting asset.5 If it cannot refinance, it will have to liquidate. At this very moment, Wachtell Lipton is preparing bankruptcy papers.6 Although it is morning in New York, the opening of markets in Tokyo is only hours away. Buffett is afraid that the Treasury’s banishment of Salomon will trigger a funding crisis in Japan and, ultimately, the firm’s collapse.7 He needs some evidence that Salomon—or Buffett—has the government’s faith.
Meanwhile, as news of Salomon’s expulsion flashes over the wires, employees drift onto the trading floor, like family members awaiting the last rites of a relative. Eric Rosenfeld, a bond trader, Lawrence Hilibrand, the $23 million arb, and McIntosh are going over options for emergency funding. Maughan is talking to Japan. John Macfarlane, the thirty-seven-year-old treasurer, having just finished a triathlon, has raced to the office. He is trying to figure out how much cash Salomon will need in the coming days. Above the vast trading room, a trio of electronic clocks tick off the seconds in New York, London, and Tokyo. “Your life,” Macfarlane says, “flashes in front of you.”
In the boardroom, Gutfreund has resigned, and Buffett has taken control. His sense of humor has left him, but he is running the meeting with his customary calmness and sense of purpose. Dwayne Andreas, a director, takes heart from the fact that Buffett has so much of his own money invested in Salomon. Another board member is cheered by the thought that Buffett, at least, knows the government officials personally. For varying reasons, each of the directors is convinced that Buffett is the one person who has the combination of reputation, financial clout, experience, and inner strength to save the firm.8 All of his prior career—particularly, his habit of making lonely decisions—now seems but a preparation for this moment.
But Buffett is not certain that he wants the job. If Salomon remains on the Treasury’s blacklist, Buffett will be little more than Salomon’s undertaker. Munger is vehement that Buffett should refuse such an assignment.
Around midday, Secretary Brady calls. As Buffett ducks out of the boardroom, Munger snarls, “You’d be crazy to take it!”
Brady is at a summer home in Saratoga, where he has been trying to assess the damage to markets if the biggest firm on Wall Street fails. Buffett takes the call in a side room with antique pottery and lavender walls. He ticks off the changes at Salomon: Mozer fired; Gutfreund and Strauss resigned; specific new procedures to prevent a recurrence. In addition, Buffett delivers a personal promise to clean house thoroughly:
I told him there were going to be controls that he could hold me responsible for in the future.… Similarly, that we were planning a future that would be considerably different than our past.9
But if the Treasury cuts Salomon off, Buffett adds, it may not ma
ke any sense for him to become its chairman.10
Brady understands that Buffett has issued a threat, but his instincts tell him that Buffett is not a quitter. “He has never walked away from any investment before,” Brady tells himself.11
Brady is relatively unperturbed by the prospect of Salomon’s demise. The system has survived Black Monday, the collapse of Drexel, and similar traumas. “No one is bigger than the U.S. government,” Brady thinks.12
But Brady, of course, knows Buffett. He is the same Nick Brady who, as a Harvard M.B.A. student, wrote a thesis on his family firm, Berkshire Fine Spinning. Though he sold his stock before Buffett’s arrival, he is all too aware of what Buffett has done with it since. In recent years, Brady has rubbed shoulders with Buffett at Katharine Graham’s dinner parties and, like Graham herself, has occasionally called Buffett for a “reality check.” Though shrugging off what he regards as Buffett’s bluff, he puts immense stock in his promise to clean up Salomon Brothers. The call breaks off without resolution.
The board meeting lurches on until midafternoon, when Buffett is due in the auditorium for a press conference. As he exits the boardroom he collars Deryck Maughan. “You’re the guy,” he says with a nod. Salomon, the colossus of Wall Street traders, is now in the hands of a Midwesterner who once proposed a 100 percent tax on short-term trading and a onetime British civil servant and career administrator.
Introducing himself and Maughan to the press, Buffett explains that he will be an interim, unsalaried chairman, for as long—but only as long—as it takes to get Salomon out of trouble. Then he delivers a bit of good news: Brady has just reversed himself and announced that Salomon may bid at Treasury auctions for its own account, though still not for customers. This is a limited but hugely important reprieve.
Softening up his inquisitors, Buffett says he is ready to take the reporters’ questions and will “attempt to do it in the manner of a fellow that has never met a lawyer.”13 Buffett still has only a sketchy outline of the scandal. But fielding questions, he is in his element, fluid and witty as at his annual meetings. Now contrite, now gently remonstrative, Buffett already has a strategy. He wants to apologize for the past, but also to disassociate it from the future.
REPORTER: I am curious if you have read Liar’s Poker?
BUFFETT: Yes, a long time ago.
REPORTER: Any book review?
BUFFETT: No. I want to make sure there is not a second edition.
The pressing question is whether Salomon’s culture is to blame—whether Mozer is merely a symptom. Buffett defends Salomon as generally honorable. It was not “pouring out criminal acts in any way, shape or form.” Still, he recognizes that the question of motivation is inherently obscure, and that the culture may have played a part. “I don’t think the same thing would have happened in a monastery,” he admits.
The most delicate interchange concerns Gutfreund. Buffett declares that his silence regarding Mozer was “inexplicable and inexcusable.” But otherwise, he does not back down from his previous, admiring characterization of his friend.
REPORTER: Do you think you misjudged Mr. John Gutfreund, and do you regret having invested in Salomon Brothers?
BUFFETT: The answer to both of those is “No.”
Buffett’s three-hour performance goes over well. The press conference over, he pops into a room with the senior executives and delivers an unmistakable message. “Deryck’s running this firm, so don’t call me. He decides who gets promoted and who gets fired. That’s all—see ya.”14
Then he departs for the nearby Marriott Hotel. In one day, Buffett has had a taste of regulators, the press, the executives, and the staff. Saving Salomon will require that he satisfy each of these constituencies—and the company’s customers and creditors, too. In the recent past, no investment bank that has wrestled with such a crisis has managed to survive.
II—Wartime
“For Salomon, the tough times are only beginning,”15 Monday’s Wall Street Journal intoned. One might have asked why they were beginning. The crime had been foiled; the perpetrator was gone. Yet the Journal proved sage. In Washington, regulators pledged a full-scale probe. Salomon’s debt was downgraded. The firm remained frozen out of commercial-paper markets. And more customers—Connecticut, Massachusetts, the California Public Employees Retirement System, and the World Bank—cut Salomon off. Individually, these blows were glancing, hardly worthy of advancing a plot. Yet stitched together they wove a familiar thread. To wit, a “scandal” was in progress, and it had transformed Gutfreund’s bond house into a pariah.
Buffett struck back on several fronts.
Early Monday, he distributed his home telephone number to Salomon’s top managers, with a letter instructing them to call him at any sign of further misconduct. Though largely symbolic, this was a characteristically simple and powerful stroke. Most CEOs do not like to be called at their homes.
The same day, he and Munger went to see Richard Breeden, chairman of the SEC, the lead agency investigating Salomon. Breeden, a regulatory hawk, was trying to expand the SEC’s jurisdiction into the Treasury market. In keeping with his macho reputation, he warned his visitors that he was prepared “to dig up an entire beach looking for a grain of sand.”
“Call us anytime someone doesn’t give you what you want,” Buffett replied evenly. “You’ll have a new person to deal with in twenty minutes.”
Breeden was impressed.16
Returning to New York, Buffett took steps to generate cash. Salomon hiked the interest rate that it charged its traders, inducing them to sell securities. By the end of the first week, a company-wide liquefaction of assets was in progress.17
Then Buffett demanded that Feuerstein, the general counsel under Gutfreund, resign. Buffett implored Robert Denham, a partner at Munger Tolles in Los Angeles, to drop his practice and replace him. The squeaky-clean Denham had been Buffett’s lawyer on Berkshire matters for fifteen years. “Bob, I really need you,” Buffett said. Denham felt he couldn’t refuse.
The biggest worry was the threat of prosecution by the Justice Department. Buffett knew that Salomon wouldn’t be able to run its business while fighting an indictment, and he figured that the firm would be nearly as devastated were it to plead guilty to one.18 (Many fiduciaries are forbidden from doing business with felons, and few would choose to do so.) That left one hope: play ball with the government so fully that Justice might grant a reprieve. Wachtell Lipton deduced that this was “a real long shot.”19 The government rarely passed up a chance to prosecute a high-visibility case.
But the strategy was the only one Buffett could have followed. Instinctively, he shrank from confronting his adversaries, but he was superb at winning them over without a fight. He did not so much convince; he disarmed, he co-opted. Though fearful of hostility, he knew what many are slow to learn—that a sustained demonstration of good faith is apt to be returned in kind, if it is not undermined by any conflicting behavior. That is how he had induced Kay Graham to trust him, and Stan Lipsey to go to Buffalo and save his newspaper; and the SEC to drop its investigation of Blue Chip. Now he had to cooperate with Salomon’s investigators, bow down before its accusers, actually help Justice prove its case. He had to assume, very publicly, as only Buffett could, a personal responsibility for the scandal—to show that the stain was not only purged but deeply and sincerely regretted.
There was a political element to the case, and the political climate was overtly hostile. The public had been predisposed—by previous scandals, and by Liar’s Poker—to believe that all of Salomon was rotten. Also, regulators and many in Congress, who were embarrassed at having slept through the S&L fiasco, viewed the Salomon case as an opportunity to demonstrate their “toughness.” Their outrage seemed to run ahead of the revelations. Rep. J. J. Pickle, a Texas Democrat investigating Salomon, actually issued a statement declaring, “My fear is that this isn’t the only runaway train on the tracks, and that the real wreck [at Salomon] is yet to come.”20 At the SEC, Breeden was treat
ing the Salomon affair as a replay of Drexel, and had dashed off 135 subpoenas and requests for information.21
Compared with Boesky or Milken, Mozer, of course, was very small beer. But his blunt defiance of the Treasury was the picture of Wall Street arrogance—and arrogance, more than any specific crime, is what turned the public’s stomach. In one respect, Salomon was the most arrogant of all. “We screwed around with securities of the U.S. government,” noted Gedale Horowitz, a longtime Salomon executive. “Not even Milken did that.”
As summer wound down, Washington was abuzz over “the Salomon scandal” as only Washington can be. Rep. Markey, having booked a hearing for two days after Labor Day, had bagged Buffett as the star witness. The Senate had scheduled a hearing for a week later.
Bell, Salomon’s capital lobbyist, shrewdly took Buffett to see some of his interrogators in advance. A few had tough questions about the Salomon board’s lack of oversight. Buffett said, you know, he wished he had paid more attention to it at the time. He was humble, sort of hat-in-hand, laying on that killing kindness. He reminded them that he was a congressman’s son, and poked fun at the fact that he had gotten himself in a stew.22
He freely admitted that Salomon had been in the wrong, and persuaded the legislators that he was on their side. After meeting with Buffett, Senator Jake Garn turned to an aide and said, “You know, we shouldn’t go flying off the handle.”
It hardly hurt that Buffett was friendly with some of the key players, such as chairman Markey. Nor did it hurt that, unlike many businessmen, he had never lectured Congress on the evils of regulation—Buffett believed in government, and had long said so.
The usual tactic at a congressional hearing is to lob grenades at the witness. But the congressmen were wary of slinging mud at Buffett. Despite his $700 million investment in Salomon, they saw him as a figure from without Wall Street—from the Plains. “Half the people think Omaha’s a farm town,” Bell noted.
Buffett Page 47