B000U5KFIC EBOK

by Janet Lowe

  Some disgruntled employees left Salomon, including the core members of Meriwether's former team, who joined him at his new company, the glamorous but ill-fated Long Term Capital Management.

  LTCM was a highly sophisticated attempt to use the Black-Scholes risk model, a formula commonly favored by commodity traders, plus other mathematical models, to allow LTCM to safely and profitably trade in international markets. Meriwether assembled a team that included two of the professors who developed and refined the formula, Myron Scholes and Harvard professor Robert Merton, along with former Federal Reserve officer David Mullins and of course, the crack traders from Salomon.

  The minimum investment in LTCM was $10 million, but because of the team's towering credentials and contacts, they quickly raised $3 billion. The returns in LTCM's first three years were fabulous: 20 percent in the first, 43 percent in the second, and 41 percent in the third.

  Then in 1997, the fourth year, returns fell to 17 percent. That same year a real estate crisis erupted in Thailand and rapidly spread throughout Asia, and in August of the next year, Russia defaulted on its international debt, which created worldwide panic in financial markets. LTCM's mathematical models failed so badly that it lost $500 million in a single day. In September, Meriwether sent a letter to investors saying the fund had lost $2.5 billion or 52 percent of its value that year.36 Though the fund held some valuable assets, because LTCM was highly leveraged, it was trapped when margin obligations came due. According to some accounts, the fund's global investment positions amounted to $1.25 trillion, frighteningly close to the annual budget of the United States government. It became clear that if LTCM collapsed, there would be reverberations around the globe.37

  The LTCM problems erupted when Buffett was on a wilderness trip with his friend Microsoft founder Bill Gates. Never much of a technical person, Buffett's only contact with the outside world was a satellite telephone. Munger was on vacation in Hawaii and making telephone connections by satellite was problematic, so they never actually discussed a bail-out offer Buffett made to LTCM.

  Buffett offered to buy the ailing LTCM portfolio for $250 million and recapitalize it with $3 billion from Berkshire Hathaway, plus $700 million from the insurance giant AIG and $300 million from the investment banking house Goldman Sachs. None of LTCM's contingent liabilities would be picked up and there would be no management position for Meriwether and his team. Meriwether rejected the offer, and not long afterward was rescued through pressure from the Federal Reserve Bank by a consortium of 14 commercial banks who themselves had something to lose if LTCM went under. The 14 contributors put up $3.6 billion. Meriwether and his people held on to a 10 percent stake in the company and would run it under the supervision of an oversight committee. With enough capital to allow the investments to play out, Meriwether was able to work his way through the difficulties and by mid-year 1999 was back on his feet.38 He repaid the banks, and a few weeks later quietly closed the fund. Some original investors, however, never got their money back.

  Though he remained at arm's length from the LTCM drama, Munger had an opinion about it. The hedge fund known as Long Term Capital Management recently collapsed through overconfidence in its highly leveraged methods, despite IQs of its principals that must have averaged 160," he said. "Smart, hard-working people aren't exempted from professional disasters of overconfidence. Often, they just go aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods."39

  THE SALOMON AFFAIR FIRMLY ESTABLISHED Munger and Buffett as voices of integrity in the business world, but it also showed how tough they could he. Corporate leaders, no matter how deeply entrenched they may seem, shouldn't mess with Buffett and Munger when they're on the war path of righteousness.

  "When the final chapter is written, the behavior evinced by Salomon will be followed in other, similar cases," said Munger. "People will be smart enough to realize this is the response we want-super prompteven if it means cashiering some people who may not deserve it.,, 41)

  Among the many lessons to be learned from the Salomon episode, said Munger, is that when serious problems arise, the reaction of top management must be both swift and thorough.

  "It was a huge mistake for John Gutfruend not to go to the New York Fed when he saw that Mozer was in trouble," said Munger. "The Fed would not have called for Gutfreund's head. Face your big troubles. Don't sweep them under the rug."

  As well-publicized as Salomon's debacle was, Munger says the same sort of thing is likely to happen again in the future. "Warren and I will never stop criticizing some aspect of investment banking culture. It's hard to have people floating around in a miasma of billions without an occasional regrettable act."

  C H A P T E R E lG H T E E N

  In mj, whole life nobody has ever accused me of being humble. Although humility is a trait I much admire, I don't think I quite got my full share.'

  Charlie Munger

  ,HE Los ANGELES FE.I>ERAL COURT HOUSE, across the street from the Dorothy Chandler Music Center, is a famous edifice. It often is used as a movie or television backdrop and was seen daily on television during the O.J. Simpson murder trial. In the summer of 1999, the Daily Journal Corporation, publisher of the legal newspaper the Los Angeles Daily Journal, was in court there facing an unfair trade practices suit brought by the tiny Los Angeles Metropolitan. On most days of the trial, an artfullydressed older man wearing extremely thick glasses sat in the spectators' gallery watching the proceedings. Finally Charles T. Munger, chairman of the Daily Journal Corporation, was called to the witness stand.

  Ronald Olson, Munger's attorney, knowing Charlie's personality, had warned his client to limit his testimony to simply answering the questions. At first Charlie did fairly well, but gradually he slipped into the persona he occasionally displays at the Berkshire Hathaway annual meeting and shares every year at the Wesco Financial Corporation gathering. Charlie began to wax philosophical about his life, his work, and his fascination with newspapers and the news business. The plaintiff's attorney, Thomas Girardi, objected, asking the judge: "And what would the court think about asking Mr. Munger if he could reply directly to Mr. Olson's questions? This is beyond the pale."

  Girardi insisted that he'd practiced law long enough to know what was going on. "This obviously is an orchestrated attempt-Munger has his chair turned toward the jury, trying to he cute: 'I lost money here, I lost money there.' This is totally wrong."

  The judge instructed Olson to keep his client strictly to the business at hand.

  "I'll do the best I can," said Olson.2

  About an hour later, the plaintiff's attorney again had enough of Munger and complained to the judge:

  He's a real smart guy, I know it, Ron knows it, the court knows it. And I think it's totally inappropriate the way he's behaving. And it's forcing me as a lawyer to have to jump up every time that he goes on his diatribe. He's yet to answer one question directly out of the 42 questions that have been asked so far.3

  The judge seemed perplexed at what to do, since it was becoming clear that Charlie's way was Charlie's way, and he might not have any other method of answering questions. Finally the judge simply asked that Mr. Munger avoid hearsay, and the trial continued.

  A half hour later, in the middle of testimony regarding how much the LA Metropolitan might he worth if sold, Munger was still on the witness stand. Suddenly he let out a howl.

  "Ow, Ow, ouch, ouch, ouch."

  The eyes of the judge, the attorneys and the jury were riveted on Munger as he writhed and struggled with some sort of pain.

  "I've got a cramp in my leg," he finally explained. "It's the beauty of getting old."

  The opposing attorney demanded-in vain-that the judge call a break in the proceedings, no doubt worried that Munger's plight would make the jury more sympathetic to his newspaper's cause. The judge allowed the witness to stand up for a moment and work out the cramp. Finally Charlie declared the pain gone and himself ready to conti
nue.

  "When you get as old as I am, it will happen to you," he proclaimed to everyone present in the courtroom.'

  IT WAS JUST ANOTHER DAY in court for the Daily Journal Corporation, and an all too familiar experience for Munger.

  "Berkshire has practically no litigation," said Munger. "But if you take our legal newspapers, I don't think a year passes without litigation. Discrimination, sex, old age, race. It is very litigious. The Metropolitan News is suing us now regarding the foreclosure business. It gets to be a bit of a sewer."

  Munger's interest in journalism and the business of newspapers goes back to his childhood in Omaha when his father was the chief outside counsel to the Omaha World Herald. Among the Munger family friends were both the managing editor and city editor of the newspaper.

  "He loves newspapers," said Molly Munger of her father. "He loves to read the newspapers in Minnesota. Getting daddy's newspaper (at Star Island) is a big deal."

  A passion for print media is something that Munger and Buffett share. That fascination, along with the good economics that once existed in the industry, prompted their investments in the Washington Post and the Buffalo News. But Berkshire only has a partial ownership in the Washington Post. Actual control of the newspaper is in the hands of Katharine Graham's family. When the small Los Angeles legal publication, the Daily Journal, came on the market, Munger saw a chance to own his own newspaper and expressed interest immediately. Here would be a newspaper where he could have a vastly greater influence, and one in his own city to boot.

  In 1977, Munger asked Stan Lipsey, who ran the Buffalo News for Berkshire, to take a look at the Daily Journal and give him an appraisal. Lipsey told Charlie that the Daily journal, which was then printed on newsprint that was even broader than a broadsheet, was sadly outdated in its style and content and needed modernizing.

  Munger had heard that the newspaper was for sale from a member of his breakfast group at the Pacific Coast Stock Exchange. Chuck Rickershauser, one of Munger's former law partners, had been hired by the Daily Journal's prior owners to sell the paper as part of a settlement of an antitrust case.

  "Because I was having breakfast with Charlie daily and wanted to pick his brain, I asked him how to conduct the sale. He said, `I would like to be a bidder.' We had some connection, so I got him another lawyer."

  As it turned out, Munger was the high bidder for the newspaper. The Daily Journal was bought for about $2.5 million through the New America Fund. In May of 1986, when Munger and Guerin liquidated the New America Fund, the Daily Journal Corporation became an over-the-counter public company with several thousand shareholders.

  The newspaper's stock was distributed to New America Fund shareholders in proportion to their holdings in the fund. Among those getting stock were Otis Booth and some of Charlie's old Omaha friends such as Lee and Willa Davis Seemann. Munger and Guerin ended up the largest shareholders, with exactly the same amount of ownership held within their respective families.

  "But since I had this legal-judicial background that he didn't, I was the logical one to be chairman," said Munger. "And we made him the vice chairman."'

  Al Marshall, Munger's partner at Wheeler, Munger, became secretary of the corporation.

  Munger owns about 6 percent, his children have another 6 percent, and his grandchildren hold an additional 6 percent of the shares, giving the family control of about 18 percent of the .6 The shares are held within a limited partnership called Munger, Marshall & Co., which also includes stock held by Marshall, Booth, the Seemanns, and a few other original New America Fund investors. In all, Munger, Marshall & Co. controls 34.5 percent of the Daily Journal Corporation, Guerin interests hold almost 18 percent and the general public owns the remaining 48 percent.

  Gerald Salzman, president of the company, says there are approximately 1,700 shareholders of record, though the shareholder pool gradually declines. "The board has a policy of buying on the open market from time to time. One year we bought 12 shares, another year we bought several thousand."

  Over the years, Munger and Guerin's investing interests have diverged and though they remain friends, The only thing we're in together now is the Daily Journal Corporation," said Guerin.

  After acquiring the newspaper, prompted in some cases by opportunity and in other cases by a need to protect their territory, Munger and Guerin began building a chain of legal publications and businesses related to legal publishing. In time, the Daily Journal Corporation became more than a big city legal rag, it turned into an empire-a small regional empire, to be sure, but an empire nonetheless.

  "Charlie was always an aspiring media mogul. He didn't get very big," said Al Marshall.

  In 1988, the Daily Journal Corporation bought the San Jose PostRecord, the San Jose Advocate Journal, and the Santa Cruz Record. The acquisitions continued and by 1997 the company owned 18 newspapers with a total paid circulation of about 35,000. The flagship newspaper, the Los Angeles Daily journal had a circulation of 15,000.7 The company acquired the California Lawyer from the California State Bar. The publication has about 700 paid subscribers and the magazine is sent free to California attorneys. In addition to California, the company now has operations in Arizona, Colorado, Nevada, and Washington state. Counting all its publications, the company has 100 reporters and 350 total employees.

  California is one of the better venues in which to be engaged in the legal publishing business. With more than 105,000 lawyers, the state is home to one-seventh of all U.S. attorneys.

  Guerin and Munger feel the 112-year-old newspaper has improved from being weak to a paper that now sometimes scoops the respected Los Angeles Times on stories.

  Munger says he is particularly proud of the paper's daily profiles of judges: "The truth of the matter is I like judges. If judges don't do their work well, then civilization doesn't work well."'

  Despite the improvements, the Daily Journal remains a paper that only an attorney could love. Even at that, many attorneys complain that too few resources are allocated to the paper and its news coverage is skimpy. Another small Los Angeles newspaper, the New Times, described the paper as "the embodiment of journalist sobriety. It prides itself on being a local newspaper of record, even if, to some, that also means being hopelessly dull. Indeed, the Journal seems permanently stuck in safe mode."' The newspaper, groused the New Times, doesn't even write its own editorials, but rather reprints editorial material from other publications."'

  A reporter who jumped ship to join a competing paper described Munger and Salzman as aloof, and wanting to forge closer relationships between advertising and editorial, an alarming prospect to dedicated journalists. "They have a trade rag mentality. They don't want to publish anything controversial or anything negative about law firms."''

  Compared to the mainstream Los Angeles Times or the entertainmentoriented alternative newspapers in its circulation areas, the Daily Journal and its sister newspapers do on many days seem bland. The news stories are wrapped around pages and pages of court dockets and other information upon which attorneys rely. Yet among legal newspapers in California, the Daily Journal is the one against which most legal publications measure themselves. Other legals have tried to imitate the Daily Journal's court calendars, descriptions of court rules, and its daily appellate reports.

  If the Los Angeles Daily journal is more of a tool for lawyers than a journalistic lollapalooza blockbuster, the California Lawyer is livelier than it's sedate name implies. When the Daily Journal Corporation first bought the magazine, it was published in cooperation with the State Bar. In 1993 some lawyers complained that the news of their professional organization was being printed along with stories that were critical of lawyers and their behavior. The joint-publishing arrangement was terminated and the State Bar again began publishing its own magazine.

  The California Lawyer prints stories related to all aspects of law and law enforcement in California, a state in which there are plenty of knockyour-socks-off stories. The magazine's cover frequently splas
hes titles such as "Bienvenidos, Felons: It's a good time to be a fugitive in Mexico," a page-turner about the crackdown on U.S. bounty hunters across the Mexico-California border, accompanied by an eye-popping photo essay of Tijuana's notorious La Mesa prison. Another 1999 issue recapped a sexand-favors-for-testimony scandal in the San Diego District Attorney's much heralded gang unit. A writer of lurid true-crime tales would be wise to subscribe to the California Lawyer for story leads.

  As far as the business aspects of the Daily Journal Corporation go, Al Marshall, the corporate secretary, says they are frightful. "Nobody else could stand the heat. It's not that profitable, and he's always being sued." Marshall pointed out that neither Munger nor Buffett like investing in newspapers as much as they once did.

  While the Daily Journal has been a source of satisfaction, it continues to be an irritation. Competition among the legal newspapers in California is intense for the lucrative legal advertisement business, and, as noted earlier, the Daily Journal has had to defend itself in one lawsuit after another. While Munger concedes that he is in the newspaper business more for personal satisfaction than for profit, he is keenly competitive and hangs on tenaciously when he thinks his company's economic base is threatened or being unjustly attacked.

  CHALLENGES HAVE COME FROM EVERY direction for Munger's chain of newspapers. One of the most alarming threats came in 1986, shortly after the Daily Journal Corporation became public. That fall Steven Brill, a chubby, suspendered young man who had accumulated a group of eastern legal publications, thus earning the title of "the Rupert Murdoch of the legal publishing world," called at the offices of the Daily Journal Corporation.12 Brill, who later made a national name for himself in television and magazine publishing, sauntered into the business offices and asked if the business was for sale. He'd like to buy it. "We have no intention of selling at any price," declared Munger.'3