“It bothered her that she thought I was teaching her all these things and she wasn’t doing anything for me. She was constantly laboring in terms of trying to think of something she could do to help me out, whether it was inviting me to fancy dinners or something else. You could call all these events glamorous or exotic. I found them quite interesting. I’m not knocking these things. There were probably people who were way more dying to do them, particularly in her presence, than I would be. But I had a good time doing it, you know.”
There undoubtedly were people who were “way more dying” to go. Nevertheless, Buffett did go, over and over again, no matter how ridiculous or awkward for him the events turned out to be.
One night Graham took him to a black-tie state dinner at the Iranian Embassy. She wore a golden gown to match the embassy’s decor. Reza Pahlavi, the Shah of Iran, was an important U.S. strategic ally and a charming host. His embassy sat at the apex of the Embassy Row Washington social scene, and its doings glittered with a fin de siècle magnificence.
After the cocktail hour, Buffett sat down at his assigned table and found himself between one of Empress Farah Pahlavi’s ladies-in-waiting and Illinois Senator Charles Percy’s wife. He turned toward Loraine Percy and found her locked in a tête-à-tête with her other dinner partner, Paul Newman. Seeing that it might be a while before she turned toward him, Buffett revolved toward his right and said something to the empress’s lady-in-waiting. She smiled politely. He said something else. She smiled again, then went blank. Ted Kennedy, seated on her other side, leaned over and uttered some bon mot in French. Her face brightened and they began conversing animatedly in French. Buffett sat stranded in the middle. He turned back to Loraine Percy and found that she was still engrossed in Paul Newman. He realized with a dull feeling that with Paul Newman sitting on her left, it might become a very long evening.
Kay had been seated next to the Shah, at another table. Among these circles, she was the most important and Warren the least important guest there. Kay was the queen and he was some hayseed investor from Nebraska whom Kay had towed along. Forget Supermoney; this was old money. After a while, Ted Kennedy noticed his plight and asked, “Don’t you speak any French?” Buffett felt like a poseur. He had landed in Bora-Bora with only a snowsuit to wear. The meal went on until one o’clock in the morning, and then the band began to play. To begin the dancing, one of the gentlemen waltzed the empress around the floor. Buffett grabbed Graham’s hand and escaped.
And yet, if she had asked him again, he would have gone. Because he was for sure not knocking it. The sightseeing was too good.
As he knew all too well by now, despite the fame from Supermoney and the articles in Forbes, many prominent people had never heard of him. In May 1976, Buffett was visiting Kay Graham in Washington when she said, I have someone I want you to meet. Jack Byrne, the person in question, was reluctant, however. When Graham called to arrange a meeting, he said, “Who’s Buffett?”
“Well, he’s a friend of mine,” Graham said. “He’s just bought a piece of the Washington Post.” Neither knowing nor caring, Byrne turned down the meeting. Then Buffett’s old friend Lorimer “Davy” Davidson, who had retired from GEICO in 1970, called Byrne. “God, what kind of ninny are you to pass up a meeting with Warren Buffett?” he asked.34
Byrne had been hired in 1976 to try to pull GEICO—on the brink of bankruptcy—out of the ditch. Once an insurer only of government employees, GEICO had taken on John Q. Public. “Millions more qualified” was the tagline. “Growth, growth, growth, the emphasis was all growth,” says a longtime executive.35 Fueled by growth, growth, growth, GEICO stock had traded as high as $61—far too rich for Buffett, but he had kept an eye on it anyway. In fact, he had never stopped following it for the past twenty years.
In 1975, “I looked again at GEICO and was startled by what I saw after a few rule-of-thumb calculations about loss reserves.” As an auto-insurance company grows, grows, grows, so does the number of accidents its customers have. If a company underestimates the payments for those claims, it has overstated profits by the same amount. “It was clear in a sixty-second examination that the company was far underreserved and the situation was getting worse. I went in to see [the CEO] Norm Gidden on one of my Washington Post trips. I had known and liked Norm for twenty years on a casual basis. He was friendly, but he had no interest at all in listening to my comments. They were in deep denial. He really sort of hustled me out of the office and would not respond on the subject.”36
That Buffett, who did not own the stock, was trying to help GEICO’s management says something about how attached he still was to the company from which Lorimer Davidson had recently retired, the stock that had been his first really big idea, the investment that had made so much money for his friends and family.
In early 1976, GEICO announced its worst year in history, a $190 million loss from underwriting operations during 1975.37 The company stopped paying dividends, a move that conveys to shareholders that the till is empty. Gidden cast about frantically to bolster the mere $25 million in capital that GEICO had in its coffers.38 That April, at Washington’s Statler Hilton, four hundred angry stockholders stormed the shareholder meeting, armed with questions and accusations. Shortly afterward, the insurance commissioners arrived in a squadron at GEICO’s offices. The board realized, a bit belatedly, that it had to fire the management.39 The board itself was in disarray, several of its members having lost their personal fortunes in the debacle. Without a capable CEO to steer the company, Sam Butler, a steady-handed lawyer from Cravath, Swaine & Moore, took charge as the lead board member—in effect, a temporary CEO.
Butler knew that Byrne had quit Travelers on impulse, bitter at having just been passed over for the job of CEO. A former actuary who became a millionaire at age twenty-nine through a start-up insurance company, Byrne had been instrumental in turning around the Travelers’ flailing home-and auto-insurance lines two years earlier. Butler called him in Hartford and played on his ego, explaining that if he took the job at GEICO it would prevent a national emergency that would throw the whole United States economy into jeopardy. The unemployed Byrne was easily recruited to audition for CEO.40 He came down to Washington in early May and pogo-sticked back and forth before the board, tearing through white flip-chart pages, covering them with marker pen while talking nonstop. “I came in and gave a sort of off-the-cuff five-hour blah, blah, blah, here’s five points, here’s what we have to do, boom boom boom speech,”41 he says. The desperate board had no trouble deciding that this ruddy, round-faced cannonball was the right guy.
Byrne’s first task when he took over as CEO was to run straight to the dusty Chinatown offices of the District of Columbia’s Insurance Superintendent Max Wallach. An old-school German who spoke with a thick accent, Wallach was “stubborn as hell, and he had this enormous interest in serving the public,” Byrne recalls. He was disgusted with GEICO’s former management and had refused to deal with them. Byrne perceived that Wallach was not wild about him either. Nevertheless, the two men began talking daily, sometimes hourly.42 Wallach insisted that the company put a deal in place by late June to raise money while simultaneously getting other insurance companies to take over some of its policies—that is, to “reinsure” GEICO.43 The idea was to increase the resources GEICO had available to pay claims and to cut the risk it was carrying so that they were more in balance. Thus, Byrne had to sell other insurers on the idea of putting up money to save a competitor.
Byrne’s prior experience was that he could sell anything. At first he was confident.
“My pitch was that insurance companies take care of themselves,” says Byrne. “We don’t want the regulators involved.” If GEICO failed, the regulators would just send the bill for GEICO’s unpaid claims to its competitors. So they would end up bailing it out anyway. But “Ed Rust, Senior, who ran State Farm,” says Byrne, “he was a cooney old bastard. He concluded—and he was probably pretty smart—‘I’ll pay a hundred million to cover any of the
ir unpaid claims if it puts GEICO out of business. They have a better mousetrap, and killing GEICO will save us money in the long run.’” So State Farm backed out of the reinsurance deal.
“In the end,” says Byrne, “a couple of really good friends reneged. The Travelers just said, ‘We’re not going to help.’ They didn’t have any principled idea behind this. Travelers was just wussy about it.”
Three weeks after he joined GEICO, “I was racing around, thinking I had made the biggest mistake of my life. My wife, Dorothy, was up in Hartford, crying and crying and crying. We had just moved for the nineteenth time.” The market was suggesting GEICO might not survive; its stock, so recently trading for $61 a share, had crashed to $2 a share. Somebody who owned, say, twenty-five thousand shares, had just seen their fortune dwindle by almost ninety-seven percent—from more than $1.5 million to $50,000—from enough to live on for the rest of your life to enough to buy a very good sports car.
The reaction of the company’s investors and shareholders to the calamity would, in not a few cases, literally determine their fate.
Many longtime shareholders had panicked and talked themselves into selling, which is how the stock got to $2 in the first place. Whoever was buying from them took a gamble on GEICO’s fate.
Ben Graham, now age eighty-two, did nothing and kept his stock. Graham’s cousin Rhoda and her husband, Bernie Sarnat, talked to the dean of the University of Chicago business school. He told them to sell it, since stocks that cheap rarely recover. They decided—au contraire—that a stock that had sunk so low was too cheap to sell. What would they gain by selling? They had little to lose by keeping it. So they did nothing.44 Likewise, Lorimer Davidson never sold a share.45
Leo Goodwin Jr., the son of GEICO’s founder, sold and destituted himself. Shortly thereafter, his son, Leo Goodwin III, died of a drug overdose, a presumed suicide.46
Buffett did not own the stock, but with GEICO trading at $2 a share, he had sniffed out another situation like American Express. Here, however, the company didn’t have a franchise strong enough to pull it out of the ditch. GEICO needed a tow truck. Buffett felt that only a brilliant, energetic manager had any chance of turning the situation around. He wanted to meet Byrne and size him up before committing any money to the stock. He had Katharine Graham call Byrne; after overcoming Byrne’s initial resistance, she set up the meeting.
Buffett waited at Graham’s Georgetown house after a Post board dinner for Byrne to arrive. “This is risky,” he told Don Graham. “It could go completely out of business. But in insurance it’s very hard to get an edge, and they have an edge. If they got the right person in to run it, I think he could turn it around.”47
In came Byrne, red-faced, effervescent, forty-three years old, like a firecracker exploding. The two men sat down by the fireplace in Graham’s high-ceilinged library. Buffett questioned Byrne for a couple of hours. Of all the Irish-Americans who would ever swing through Buffett’s orbit, Byrne had the greatest gift of blarney, and “by a wide margin,” Buffett says. “I was excited and babbling on and on and on,” says Byrne. “Warren asked a lot of questions about how I thought we were going to stay out of insolvency and what my plans would be after that.”
For Buffett, “the question was whether Byrne really was cool, unflappable, and professional, or whether he just didn’t know what was going on.”48 He decided that Byrne “understood insurance very well and had the analytical abilities. And he was a leader and a promoter. GEICO needed an analytical leader to figure out how to solve its problem and it needed a promoter to make that sale to all the constituencies that were involved.”49
The next morning, Buffett met up with George Gillespie, the lawyer who had sold him the Post stock, because the two men were on the board of Pinkerton’s, the detective company, and there was a board meeting that day.50 “George,” he said, “it’s pretty uncharacteristic of me, but today I bought some stock that really might be worthless tomorrow.” He had just called Bill Scott back in the office and placed an order for half a million shares of GEICO for Berkshire, leaving another order to buy millions more as stock became available. Scott put together a huge block trade, buying $4 million worth of GEICO for him.51
Buffett had waited years for the chance to buy GEICO at the right price. The tow truck had arrived, but GEICO still did not have reinsurance, it needed capital, and both depended on the goodwill of Max Wallach, the regulator.52 But now a new phenomenon took hold. Buffett’s margin of safety was his mere presence as an investor. Having Buffett as a backer—a now-legendary investor whose company already owned a successful insurer—gave Byrne a powerful card to play with the regulators.53 In addition, “General McDermott, the head of USAA, wrote a letter” to other insurers, says Byrne. The United States Automobile Association sold insurance only to military officers and behaved accordingly. Within the insurance industry, it was fabled, General Robert McDermott almost revered. He supposedly wrote that “in the military we never leave people behind; we have a fallen eagle here.”54
Buffett went to see Wallach to do what he could to convince the crusty old public servant to ease up on the June deadline. But assembling the reinsurance deal was like convincing two dozen shivering children to hold hands and jump into a lake.55 To pull it off, the story Byrne was selling was that the worthless former management, befoulers of GEICO, had been tossed out; that what was left of the termite-riddled house was now clean; that the seasoned Jack Byrne, rescuer of Travelers, had helicoptered in to restore the damage; and so confident was the infallible Warren Buffett in Jack Byrne that he had plunked down a whopping $4 million on the stock.
Nonetheless, when Byrne started hitting the banks on Wall Street, “people were walking out in the middle of lunch,” he says. “I got kicked out of everywhere.” Then Sam Butler took him down to Salomon Inc. An old, respected specialist bond house, Salomon had never done an equity deal but craved to enter the lucrative business of underwriting stocks. John Gutfreund, an influential Salomon executive, sent a junior research analyst, Michael Frinquelli, and his sidekick, Joe Barone, to Washington to check GEICO out. “I kept them waiting for an hour and a half, so they were furious,” says Byrne. “But I talked till the sun came up. And they were very blank-faced, but on the way to the airport, the company driver heard them talking, and he told me they were very, very enthused on the way back.”56
“The insurance industry can’t afford to let these guys go down,” Frinquelli told Gutfreund. “It would be a terrible black eye on the industry, and these assholes will not tolerate that.”57 But when Byrne and Butler arrived at Salomon’s offices for his last-ditch attempt to raise the money, Gutfreund opened with a bruising remark: “I don’t know who’d ever buy that fucking reinsurance treaty you’re trying to sell.”
“You don’t know any fucking thing you’re talking about,” said Byrne right back.58
Displays of testosterone out of the way, Byrne made a passionate speech, citing “God and the national interest” among reasons why Salomon should raise the money, and referring to Buffett’s investment. As Byrne waxed about GEICO’s prospects and approached liftoff, Gutfreund fiddled with a long, expensive cigar. Finally, wrung out and crestfallen, Byrne ground to a halt. Then Butler said his piece. Byrne thought, from Gutfreund’s demeanor, that they had failed. Then Gutfreund pointed at Byrne and said to Butler, “I will do this underwriting. I feel you’ve got the right guy, but you’ve got to keep him quiet.”59
Salomon agreed to underwrite a $76 million convertible stock offering by itself. No other investment bank would participate and share the risk. GEICO had to consent to an SEC decree in which it neither admitted nor denied the SEC’s conclusion that it had failed to disclose its losses to the shareholders—the mere description of which in a public offering prospectus would tend to poison the deal.60 To get the financing done, Salomon had to convince investors that GEICO would survive, yet the financing was what would enable GEICO to survive. The deal reeked of desperation, and investors could smell i
t. GEICO was getting such bad press, Byrne said, that if he had walked across the Potomac River, the headlines would have screamed, “Byrne Can’t Swim.”61
Buffett, the ace in the hole, was unperturbed by these events. When the offering looked as if it was not going to go off, he simply went to New York and met with Gutfreund, saying he stood ready to buy the whole deal—at a price. Having a backup buyer strengthened Salomon’s hand, but Gutfreund also got the impression that Buffett wouldn’t mind if the deal failed and he ended up buying all the stock.62 For Buffett, this was the ultimate no-risk deal. Naturally, the backup price he insisted on was low. Salomon told Byrne unequivocally that, given Buffett’s ceiling, the convertible offering would sell no higher than $9.20 per share, not $10.50 as Byrne wanted.
Buffett wanted as much of the stock as could be had. He asked Salomon to buy all that was available for him once the stock started trading. Buffett’s willingness to buy after the offering bolstered Salomon’s ability to market the deal. Otherwise, Salomon would have had to jam the stock down its customers’ throats.
Indeed, once the self-fulfilling prophecy of the sage of Omaha took hold, there was more demand for the stock than shares to be had.63 Buffett got only a quarter of the deal. Within a few weeks, after a total of twenty-seven reinsurers came forward to provide the required reinsurance, the common stock had quadrupled and was trading around $8 a share. And GEICO’s savior, John Gutfreund, became one of a tiny handful of modern Wall Street figures whom Buffett genuinely admired.
But GEICO was still not fixed. Byrne needed a thirty-five percent rate increase in New York—and speedily got it.64 In New Jersey, Byrne went to the decaying old capitol of Trenton to plead with Commissioner James Sheeran, a handsome ex-Marine who prided himself on being tough. Byrne marched into the commissioner’s office with a copy of the company’s license in his pocket and told Sheeran that GEICO must have a rate increase.
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