The Snowball
Page 54
Munger was resigned. “If a policeman follows you down the road for five hundred miles,” he said to Buffett, “you’re going to get a ticket.”
Then Rickershauser made a further proffer to Sporkin, put delicately: “The complex financial interests of Mr. Buffett and Mr. Munger…have apparently raised the impression that compliance with various legal requirements is becoming difficult,” he wrote, noting the pair had tried to comply with both the spirit and the letter of the law. “They now wish to simplify their holdings as rapidly as they can.”39
In their interviews, the SEC lawyers had already explored what simplifying would mean. “Sometime in the future, it is certainly possible that we would merge Blue Chip with Berkshire,” Buffett had responded to their question, “but Blue Chip has a lot of legal problems, and until some of those are resolved, it might be hard to arrive at what we would feel reasonably sure would be a fair exchange ratio. If I had my preferences, it would be that someday they would be merged. So hopefully we would have more or less the same businesses we have now, but less complications. I don’t really like these complications. It may look like I like these complications. I don’t have a great staff to handle it all. It seemed fairly simple while we were doing it,” he said, “but not simple now.”40
Asked by an SEC investigator if Buffett had “contingency plans” to simplify things, “Oh, does he ever,” said Munger. “He has about twice as big a contingency plan as before this investigation started.”41
In considering the proffer, says Sporkin today, much depended on Rickershauser. He “was one of those few lawyers that I’ve met in life that, whatever he told you, you could go to the bank on.” Sporkin viewed Rickershauser as not only a brilliant lawyer but truthful, straightforward, and upright, incapable of being disingenuous. Rickershauser told Sporkin that Buffett was “going to be the greatest person that Wall Street has ever seen” and that “he was the most decent, honorable person you would ever meet.” Coming from almost anyone else, Sporkin would have dismissed this as rhetoric, but coming from Rickershauser, he took these statements to be both sincere and probably well-judged.42 Sporkin felt he had as great a duty to absolve as to convict. He thought that a prosecutor had to differentiate between a fundamentally honest person who had made a misstep and a crook. When it came to crooks, his job was to put ’em away. His view of Buffett and Munger was that they had certainly misstepped, but that they were not crooks.43
And so the giant tapped Blue Chip gently on the wrist.44
The company consented to an SEC finding in which it neither admitted nor denied that it failed to notify investors it was trying to bust the Santa Barbara merger in buying Wesco’s stock and that Blue Chip had artificially propped up Wesco’s market price over the course of three weeks.45 Blue Chip promised never again to do what it had not admitted it had done.46 The consent decree named no individuals. The publicity over the event had been trivial and would fade. Buffett’s and Munger’s records and reputations stayed clean.
Two weeks later, the SEC named Buffett to a blue-ribbon panel to study corporate disclosure practices. It was forgiveness and, above all, a fresh start.47
40
How Not to Run a Public Library
Washington, D.C. • 1975–1976
One day in early 1975, Susie Buffett’s friend Eunice Denenberg came over to the house and sat on the dog-hair-covered sofa in the family room. Susie turned her back so she wouldn’t have to face her friend and turned on the tape deck. Then she sang. Denenberg pronounced approval. They talked about Susie’s dream of singing professionally, which she was too diffident to do anything about herself. Denenberg went home; then she called back the next day and said, “This is your agent.” She enlisted Bob Edson, an assistant music professor at Midland College, to create a backup band and got Susie a gig at the Steam Shed, a nightclub in Irvington, the tiny town on Omaha’s outskirts where she and Dottie had once formed the choir in her father’s church. Susie was nervous, but the rest of the family was enthusiastic. Only Doc Thompson, who said, “I don’t know why you want to sing in bars,” had any doubts.
The night of Susie’s first public performance, before a crowd made up of about thirty-five friends, she was so anxious that she asked Warren not to come. Talking and greeting people in a long sequined dress, she stalled until Denenberg pushed her out onto the stage. From Aretha Franklin’s “Call Me,” to Sinatra’s “You Make Me Feel So Young,” to Blood, Sweat & Tears’s “You’ve Made Me So Very Happy,” to what she said was one of her favorites, Roberta Flack’s “The First Time Ever I Saw Your Face,” her choice of music was soulful, passionate, and romantic. Susie found that the audience responded to and returned her warmth.1 The same pulse and flow she got from connecting with people individually came through in a wave when she sang to a group in an intimate space. This was her special gift, transmuted and magnified. She wanted to become a cabaret singer.
A few weeks later, however, Susie was pulled away from rehearsals for her next performance to go to Carmel, California, to help her sister-in-law Bertie, whose youngest daughter, Sally, was dying of a brain tumor. Bertie’s marriage to Charlie Snorf was crumbling at the same time.
When Sally died, Bertie discovered that the tragedy had unlocked her frozen emotions. “Sally was a wonderful person, amazing and intuitive and so strangely insightful about people and feelings for a seven-year-old,” Bertie says. “Once she told me, Mom, you and Dad are lonely together. I think when someone dies who’s very close to you, they will you something. When Sally died, what she willed to me was that I couldn’t deny my feelings to myself anymore. It was like a copper wire went straight into my heart, and I couldn’t cover up my feelings from then on.”
Bertie had always had a special relationship with Susie, but when her heart opened after Sally died, suddenly they connected on a different level. “Susie was somebody I loved who was so important to me,” says Bertie. “She was the only person I could talk to about my feelings when there was nobody else in my family whom I could do that with.”
Her brother, however, reacted differently to his niece’s death. He called some friends who had visited the Buffetts in Laguna and told them about Sally. “We were so shocked because we’d all been together a week or two before,” says Mary Holland. “I asked him what happened, and he said, ‘I can’t talk anymore,’ and got off the phone.”
Warren at the time had many distractions to assist him in evading his feelings. He was finishing up the SEC investigation. He was so fascinated with Kay Graham that he literally could not get enough of her. When Warren got obsessed with something—especially someone new—he could not stop thinking about it or them; this came across to a new person as a wholehearted, flattering, and even overwhelming attentiveness. When business arose, however, he snapped back to it in a split second with all the fierce intensity his steely mind could muster. As Munger put it, Buffett “never let his minor obsessions interfere with his major obsession.”2 Katharine Graham, however, was no minor obsession. Some time earlier, he had decided to see what sparks would fly when she brushed up against Munger, the greatest smart-ass he knew. “Kay was the kind, if I gave topics of things for her to do, she was very dutiful. If I told her to read some terribly complicated financial statements, she was going to follow my instructions, no matter what. I told her, ‘You have to meet Charlie.’ I was laying it on thick. Finally, she was out in Los Angeles and went to meet Charlie.
“So she sat down in that scrubby office of Charlie’s, and immediately she pulls out a yellow pad so she can take notes on what he’s saying. Charlie just loved it—the idea that everything he was saying was so important that the most powerful woman in the world had to be taking it down as fast as he could talk.”
Munger could not resist this encouragement to show off. He had been corresponding with Graham, and wrote to her, “You are taking me back thirty years or more and making me behave like Tom Sawyer with Becky Thatcher, and I figure that Warren is silly enough for both of us.”3
Buffett felt that Kay was “very, very smart, and in many ways wise, as long as you didn’t go into those areas where the wounds were. But she understood people well.” As they grew more intimate, he felt he could say something to her about the way she presented herself to her board. He knew she was less needy than she herself realized. One day he took her aside and said, “You can’t plead for help anymore from the board. It’s just not the position you want to be in.” And so, he says, she quit.
The business and personal ties between the Grahams and Buffett had become close enough that Warren invited Katharine and Don to join the Graham Group at their 1975 meeting, at Hilton Head. Don made an immediate impression with his unpretentious manner, while raising its already high average IQ. Many people quickly saw beneath Kay’s brittle, patrician veneer to the vulnerability and humility that had endeared her to Warren. Thus she fit easily with most of the group despite her queenly presence, worldliness, and connections. She made a sincere effort to get along with everyone—although her deep belief that men were far superior to women wasn’t lost on the women at the meeting. The beautifully dressed, perfectly coiffed Graham, an icon among them, would slide casually into a chair amid the men with a cocktail in her hand; somebody would utter a political opinion, and she would respond “Henry thinks thus-and-so”—speaking of Kissinger. It was impossible not to be impressed.
Susie Buffett sang for the group for the first time at Hilton Head. Bill Ruane brought a chart showing the price of gold, which for five years had surged past Berkshire Hathaway’s. He asked, the others thought jokingly, whether he should be buying metal. It would turn out that he had, in fact, been buying gold coins, and made a nice bit of money on it.4
Henry Brandt pulled Buffett into a separate room and asked him to promise that Berkshire stock wouldn’t drop below $40. By October 1975, the stock had been cut in half after trading at $93 just two years before. “Look, I love you,” Buffett recalls saying, “but I can’t promise you that.” “The world is ending,” said Brandt, or words to that effect. “I’ve got every dollar I own in this stock.”
The world continued to end. Even though the rest of the stock market was recovering, Berkshire was not. Brandt panicked and called Buffett, who offered him $40 a share. Then Brandt called Walter Schloss and said, “Warren will pay me forty dollars and I want fifty. What should I do?”
Schloss was the last champion of cigar butts. At the Graham Group meetings, the others razzed him about his “buggy-whip” portfolio of bankrupt steel companies and destitute auto-parts makers. “So what,” said Schloss. “I don’t like stress and I sleep well at night.” He filled out the simple checklists, applying Graham’s philosophy in its purest form. He went home from his desk in the closet at Tweedy, Browne at five o’clock every evening, and his results were phenomenal.
Now Schloss was dismayed to hear Brandt telling himself he was better off without Berkshire stock in a way that contravened this whole cigar-butt philosophy. Schloss worked on him for two hours, saying, You’ve got the smartest guy in the world managing your money, in effect, and Warren doesn’t charge you anything, you’re making a big mistake to sell. “I thought I convinced him,” says Schloss. But the U.S. economy by then was in so much trouble that New York City was almost bankrupt; the country was in a mood of such profound pessimism that it affected people’s judgment. “On Monday he called his broker,” says Schloss, and began selling—his wife’s shares, not his own—until half their shares were gone.5
Immediately afterward, President Ford refused a bailout of the New York City economy; the New York Daily News captured the feeling of the times in a huge headline: “Ford to City: Drop Dead.”6
The partners who had been given Berkshire stock in 1970 when it was trading around $40 seemed no better off five years later. “To anybody who held our stock,” says Munger, “it looked like not much was happening favorably for a long, long time. And that was not the way our partners, by and large, had previously experienced things. The paper record looked terrible, yet the future, what you might call the intrinsic record, the real business momentum, was gaining all the while.”
Buffett’s own net worth, based on where the stock was trading, had likewise been sliced to the level of when he closed the partnership. Yet despite this apparent destruction of wealth—which would have frightened almost anyone else—his pulse never seemed to flutter. He just had the companies he controlled keep buying, and buying, and buying. In 1974, before the SEC investigation began, Berkshire owned twenty-six percent of Blue Chip. Although he put the brakes on at Berkshire during the 1975 Omni aviation affair, through Diversified, he bought Berkshire stock. By 1976, he was buying both Berkshire and Blue Chip through Diversified. When all was said and done, Berkshire would own more than forty-one percent of Blue Chip—so much that he and Susie owned, personally and through Berkshire Hathaway, thirty-seven percent of the stock all by themselves.
And as long as Berkshire was cheap in 1976, he thought of another way to capitalize on the situation, getting his mother, “who cared nothing about money,” to sell her 5,272 shares of Berkshire to Doris and Bertie. For $5,440 plus a $100,000 note, they each got 2,636 shares of Berkshire—paying the equivalent of $2 a share in cash.7 Buffett, who viewed debt as almost sinful, thought Berkshire was so cheap at $40 a share that he was willing to have his sisters borrow an extraordinary ninety-five percent of the purchase price to buy it. At the rate he obviously thought he could compound the stock’s value, buying on these terms would make his sisters rich.8 And it would also avoid an enormous estate tax bill.
“It’s what my mother wanted to do, but it was the perfect time. That was probably the greatest move of all time. It will never happen again. That was a once-in-a-lifetime situation.”
Valuable properties were being sold everywhere for a pittance. Around the same time, Tom Murphy came to Warren with the chance to buy a television station. Buffett realized it would be a terrific deal but that he couldn’t buy it because it would conflict with the Washington Post Company, which also owned television stations. Since he sat on the Post board, it would put the Post over the limit the FCC allowed.9 “What am I involved with that I don’t own?” he asked himself. He actually had to think about it to find something. Then he remembered that he didn’t own Grinnell College. The first station they looked at had already sold, but at Buffett’s recommendation, Grinnell bought a Dayton, Ohio, station for $13 million, putting down only $2 million. Sandy Gottesman arranged debt financing for the rest. The broker who sold it to Grinnell called it the best deal he had seen in the past twenty years.10
There were some good reasons, however, why stocks were cheap and cities like New York were close to bankruptcy. Along with rampant inflation, out-of-control labor costs and unstable labor relations were strangling the economy. Newspapers were among the most severely affected businesses. Right after the Hilton Head meeting, on October 1, 1975, at four a.m., the Washington Post’s union contracts expired. Some of the Post’s pressmen disabled the fire extinguishers, drained the oil, stripped the gears, and ripped electrical wiring and operating machinery out of the presses. They slashed the rolls of newsprint, set fires, and left one pressroom foreman bleeding from a gaping head wound.11 Graham arrived within an hour to a building glaring under the
lights of television cameras and engulfed with fire engines, police, and hundreds of picketers.
The Post’s relations with some of its unions “were almost literally on a drunk,” recalls Don Graham.12 The militant workers viewed management as “incompetent,” Kay was to later write, “yet able enough to deviously make them scapegoats for all of the problems that could more clearly be laid at management’s own door.”13 After years of surrendering to sabotage and work slowdowns, with nine union contracts set to expire at once, management negotiators armwrestled with labor in an atmosphere of tension and frustration.
Most of the unions other than the pressmen had stayed at work, especially the all-important Newspaper Guild of journalists. Using borrowed printing plants and helicopters to move key people past picket lines, the Post started getting out an attenuated paper after only one day’s disruption. But as the strike ground on, Graham became paralyzed with fears that her paper was committing suicide. The managers and scab workers could produce only half the number of papers at a quarter of their normal size, and advertisers marched steadily over to the Post’s archrival, the Evening Star. Within days, the Star was “so thick with advertising that we could hardly lift it.”14
“They called me back because they were actually afraid Kay would fall apart. We crossed the picket line together. Kay was gutsy about that. But I saw her burst into tears when she picked up the Star. The Star was trying to out-Post the Post, copying their format, hiring their people. She’d wake up and call me in the middle of the night.”