Susie’s own life in San Francisco was something of a high-wire act, requiring a sure sense of balance. She had remained Mrs. Warren Buffett publicly for six years now while privately teetering on the fence of divorce and remarriage. Some who were aware of her situation thought Susie chose to stay in this limbo as a way to please everyone else and avoid having to figure out what she herself wanted. Susie, they thought, was a woman who could never speak her own truth. Yet her life history suggests otherwise: that she preferred never to give all of herself to anyone, that she would rather divide her attention among more than one relationship. Susie—who had reason to be confident in her ability to manage people—on occasion could be overconfident. As the circle of those who knew Susie’s secrets grew, it became harder for her to control what the two main men in her life knew themselves about the state of their relationships with her.
Susie and her former tennis coach spent part of 1983 and early 1984 traveling in Europe, where she made new friends, but also ran into people she knew from Omaha. Suddenly, her two lives had collided on the Continent. In March 1984, she came to Omaha for Leila’s eightieth birthday party; during her visit she admitted to Warren for the first time that part of the reason she had moved to San Francisco involved another man. Somehow, however, Warren wound up with the impression that this relationship was in the past, and that it involved someone she had met after she left Omaha.7
Even while confessing, therefore, Susie kept her secrets. Yet she had finally committed herself to one course. By telling Warren, she had chosen his side of the fence. She would never leave him. They would stay married.
And Warren did not kill himself when he found out—as if that had ever been likely. But he did lose what appeared to be ten pounds almost overnight. Among the several shocks he had to absorb, he now knew that Susie had been spending some of the money he had dispensed to her with such a liberal hand in ways he would never have approved—had he known. His fondness for the Laguna house, never strong to begin with, also diminished noticeably.
At Leila’s birthday party, he looked thin, but behaved as he always did with the family gathered around. At home, there was no change in his relationship with Astrid, who knew nothing of what had transpired. At Berkshire headquarters, he sealed himself inside his office, protected by Gladys, and immersed himself in work. He never told anyone what he felt about the end of the beautiful illusion that had been his marriage. Instead, the bathtub memory went to work.
The dream of sustaining some remnant of Berkshire Hathaway was also dying, even though the ancient spinning frames still puffed and wheezed. Looms that looked like they were made from salvaged scrap metal, antique sewing machines, and old locomotive wheels creaked wearily in the weaving room. Only four hundred workers remained. Most were of Portuguese descent, with specialized skills, many in their fifties or older, some speaking limited English, some deaf from the roar of the machines. Buffett could not squeeze another ounce of rayon out of the equipment without buying new spinning frames and looms. That was the end; in 1985 he pulled the plug on Berkshire’s life support.8 The equipment would have cost as much as $50 million to replace. Put to the auction block, it sold for $163,122.9
The workers asked for severance above their contract guarantee and got a couple of months’ extra pay. They wanted to see Buffett to discuss it with him. He said no. They thought he was heartless. Probably, he couldn’t face them.
“Through no fault of their own, they were in a position of being a horse when the tractor arrived. The free market did them in. If you’re fifty-five and you speak Portuguese, and you’ve been working on a loom for thirty years and your hearing is shot, you’ve had it. And there wasn’t any answer. When you talk about retraining people—it’s not like they’ll all go become computer technicians by taking junior-college courses or something like that.
“But you’ve also got to deal with the people that are displaced. The free market does all kinds of good things in this country, but we need a safety net. Society is getting the benefits, and it should pick up the tab.” Warren, of course, was not going to pick up the tab because society lacked a proper safety net. Whatever pension the workers were entitled to under their terms of employment, that was exactly what they would get. “The market isn’t perfect. You can’t rely on the market to give every single person a decent living.”
By the time he shut it down, the textile business had become a flyspeck on the holding company that bore the Berkshire Hathaway name. Buffett’s plan was that insurance would drive that Berkshire Hathaway—the one that swallowed up whole businesses like the Nebraska Furniture Mart. During the 1970s, he had cobbled together a diverse group of insurance companies and loaded them onto the back of National Indemnity to give it an extra kick. It was a brilliant strategy, but for a number of years, they had mostly been going wrong.
First, Jet Jack Ringwalt had retired. Then, the “Omni affair,” when National Indemnity was swindled by a crooked agent, had threatened to explode into losses that could have cost the company $10 million or more. Although the final tab had settled into a couple of miserable millions, this was only the first of a series of problems with the insurance companies. Buffett had bought a small home-and auto-insurance company in the early 1970s that promptly skidded into a ditch, until a new manager towed it out. That was to be the pattern with all the rest of Buffett’s insurance investments—straight into the ditch, then call the tow truck. It would take a mighty winch and a heavy engine to dig some of them out of the muck. Berkshire had gotten involved in California workers’ compensation insurance—coverage that pays for lost wages and health benefits when people are injured on the job. By 1977, one of its two workers’ comp companies was in a full-blown “disaster,” with its manager taking kickbacks from brokers.10 Buffett’s protégé Dan Grossman, sent to L.A. to save it, quickly realized that he did not understand insurance, a complex business that is rougher than it sounds. (Verne McKenzie, for example, had once led a trip to personally repossess an agent’s house and car.11) Turning your controller into a repo man was not the typical CEO’s management style, but in Buffett’s world, after all, a smart person could do anything. Faced with a wrecked company to salvage, Grossman’s solution, therefore, was to call the tow truck and hire an experienced manager, Frank DeNardo, who began to straighten things out. Buffett larded praise on DeNardo in Berkshire’s annual report.
Buffett had also started a reinsurer—a company that insures other insurers—as a sort of experiment. He hired George Young, a gentle, professorial man, to run it. Young seemed to know what he was doing, and money came in the door, but too many losses flowed back out. Buffett tried to work with Young to solve the problem, then Hail-Maryed Grossman to New York on a rescue mission. It was “kind of vague,” says Grossman. “He said, go talk to Lloyd’s of London, go find some reinsurance deals that you can do.” Grossman figured out fast that reinsurance was a business for specialists. Given no instructions, he camped out at Ruane, Cunniff and started to learn investing.
Another of Buffett’s insurance ventures was the creation of the Homestate Companies—a batch of little insurers scattered among a number of different states. The idea here was that somebody wearing the title of president would make customers feel better served than the same person as branch manager of a big national insurance company. In 1978, Buffett wrote that these companies had done a “disappointing” job. The customers liked doing business with a president, but the big national companies had certain other advantages, such as experience. The Homestate Companies needed new management. Buffett had no plans to solve this problem himself. Nor did his standard management technique of taking out all the cash and raising prices release a flood of profits in insurance (although it was a good starting point). His friend Tom Murphy liked to tell him that he “delegated to the point of abdication.”12 Now he put Verne McKenzie in charge of one of these companies, until McKenzie, recognizing that he did not understand insurance either, threw up his hands and backed out.13 Meanwhile Fra
nk DeNardo, at age thirty-seven, had died tragically from a heart attack. Now the workers’ compensation business in California was rudderless again. Buffett snatched Grossman back from New York to run it.
Grossman found himself a company president at age twenty-six, in a business where fraud prevention is more important than sales. He faced customers with decades of experience cheating insurers. His calls for help only splattered against Buffett’s Teflon pleasantries, adding to the already considerable mess. Grossman was one of many who learned that it was his job to figure it out. Bright and hardworking, he felt “totally unqualified” to run an insurer at his age and level of experience, and explained that he was in over his head. Buffett said he had confidence in him and was sure that he could rise to the occasion. Instead, the stress overwhelmed him, and his marriage fell apart. Finally, he told Buffett he simply couldn’t handle it, moved to the San Francisco Bay Area, and began to manage investments on his own.14
Buffett, who hated to let anyone go, urged him to remain in the Buffett Group. Grossman was well liked, and various members of the group called to try to dissuade him from leaving. But he felt he was not strong enough to maintain his autonomy within the entanglements that bound people to the Buffetts—Susie with her crowd of dependent worshippers, Warren with his network of supportive protectors. Knowing what he was giving up, he cut everyone off. “He divorced the Buffetts,” said one former friend, who understood why but thought it was too bad.
Now headquarters had one fewer person to support the growing insurance empire. Verne McKenzie was so overworked figuring out how to slide the Furniture Mart into Berkshire’s numbers without showing Mrs. B’s financial underwear that he rarely saw Buffett. During Grossman’s peripatetics, Buffett had installed Mike Goldberg, a former McKinsey consultant who had once worked with Rickershauser at the Pacific Coast Stock Exchange, in Grossman’s onetime office. A wiry Brooklynite of sardonic intensity and the subtlest humor, Goldberg turned out to have the so-called insurance gene, which is made up of one part knack for handicapping mixed with two parts dark skepticism about human nature. Thus he was able to teach himself the business—just as well, since it had been out of character for Buffett to spend time on one protégé, let alone two.
With Goldberg’s arrival, the polite, restrained Midwestern way of doing things at headquarters changed abruptly. Managers that Goldberg decided were only ninety percent of grade were swiftly sent packing. As the packing cases flew out the doors of the failing Homestate Companies, Goldberg gained a fearsome reputation. He brought in new people for workers’ compensation and reinsurance. Some survived, some wearied of the high-amp atmosphere and left, and others didn’t make the cut.
Goldberg’s method was to call his managers and talk to them at length every day, quizzing them mercilessly to understand their attitudes and to reinforce how they should think about the business. The value of Goldberg’s hands-on approach in an atmosphere of chaos was hard to overstate. One former manager referred to it as working in a “Socratic wind tunnel.” People learned a lot from Goldberg if they could withstand the stress. He was the type, an ex-employee said, who “yelled when hailing a cab.”
Throughout the early 1980s, Goldberg worked against the tide to right the ship. Unlike the disappointing Hochschild-Kohn or the pathetic Berkshire Hathaway—businesses that Buffett simply should not have bought—for the first time, perfectly decent businesses were unaccountably floundering on Buffett’s watch. He had confidence that Goldberg would do what was necessary. However, the pleasant but unskeptical George Young, who ran the reinsurance division, had been taken by unscrupulous brokers, a problem endemic to the industry.15 Buffett by now had a clear-cut pattern: He rationalized to avoid the confrontation of firing losing managers. He gave criticism to his managers indirectly, often by withholding, sometimes resources, but especially by withholding praise. As the number of things he owned expanded, he used that technique ever more frequently. Trying to parse his shareholder letters for news about the insurance companies, one had to be Sherlock Holmes attending to the curious incident of the dog in the night-time—the dog that didn’t bark.16 Having lavished individual insurance managers with praise in the 1970s, Buffett gradually ceased to cite by name any of the insurers or their managers, except the superbly performing GEICO and National Indemnity.
Buffett did not stop writing about the insurance industry, however. In fact, in the 1984 letter he wrote about it more than ever. But he lumped all of Berkshire’s insurance companies together and took the blame for their poor performance himself, without naming a single company or a single manager who had been responsible for the hemorrhage of losses. He went on like this for an excruciating seven pages, citing the “walking dead” competition and the losses coming back to haunt him like bill collections for the man who was “buried in a rented suit.” Although it was appropriate for him, as CEO, to feel accountable, he seemed almost to be trying to forestall criticism through self-flagellation.
And he was writing these things even as he knew that, underlying the terrible numbers, substantial improvements were already taking place. By the next year, the insurers began coming together into the powerful engine that Buffett had envisioned. They started to produce the cash flows that would be the raw material to fuel the rest of his career.
By 1985 the unique business model that Buffett had designed began rising to its potential. No other business resembled it, and this structure would enable the dramatic compounding effect that propelled the shareholders’ wealth.
Then there came the moment when Goldberg found the capstone to the structure. Afterward, the numbers would gush blacker than an oil well.
One day, says Buffett, “I was down here on a Saturday, and Mike Goldberg walked in with Ajit.”
Ajit Jain, born in 1951, had an engineering degree from the prestigious Indian Institute of Technology in Kharagpur and had worked for IBM in India for three years before getting his business degree from Harvard. Ajit was skeptical and hard-nosed like Buffett and Munger. Nobody would ever put one over on Ajit. Buffett saw himself in Ajit, who quickly rose in his esteem to share Mrs. B’s pinnacle. “He had no background in insurance. I just liked the guy. I would love to glue myself to Ajit. You can argue that Ajit was when we discovered the electric light. It was huge. It was huge compared to anything we’d ever done at Berkshire.”
Buffett claimed that he “added nothing” to the quality of Ajit’s decisions. But he was far from a passive participant in those phone conversations, and if there was any job at Berkshire Hathaway he would have liked to do himself, it was Jain’s. He loved the handicapping aspect of the deals, the tough negotiating in which temperament mattered and huge sums of money were won or lost based on pure intellect and will. This supremely rational business in which psychology gave the right person an edge drew together all of Buffett’s skills. Buffetting by proxy through Ajit was as close to the old “under-the-counter” market way of trading as he could get these days, and he loved doing it.
With Buffett glued to Ajit, and the chaos sorted out, Goldberg’s job was finished. He soon moved over to start a credit and real estate business for Berkshire.
Ajit did not seem to need much sleep; when he got up around five or six a.m., he apparently asked himself, “Who’s awake? Who can I call?” His colleagues learned to be prepared for lengthy predawn talks about reinsurance deals on Saturdays and Sundays. He and Buffett followed a routine of nightly ten o’clock phone calls, which Ajit maintained in every time zone throughout a ceaseless routine of globe-trotting.
Ajit had arrived at an opportune time. Insurance prices were peaking. He took an ad in Business Insurance magazine: “We are looking for more—more casualty risks where the premium exceeds one million.” The ad combined the showmanship and sharp thinking that were Buffett hallmarks. “We didn’t have a reputation, we didn’t have the distribution system,” says Buffett. But business came pouring in the door after that ad, and Ajit did deals, deals, deals.17
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Rubicon
Omaha • 1982–1987
The 1980s would be an era of deals, deals, deals—most financed with debt, debt, debt. The Dow hadn’t budged in seventeen years.1 Grinding inflation had decimated corporate profits, yet companies had eiderdowned their payrolls so that every white-collar worker but the lowliest rested on a comfy cushion stuffed with flunkies. Executives treated themselves and their employees to golf courses and hunting lodges. They dribbled away much of their earnings in sloppy operations, loose engineering, and unthinking bureaucracy.2 By the early 1980s, stocks were on sale like polyester suits. Then, under Federal Reserve Chairman Paul Volcker, interest rates, recently an astronomical fifteen percent, started to fall as inflation came under control. Astute money men noticed the bloated state of American business. With debt now cheap, would-be buyers of a company could use the company’s own assets as collateral for a lender to finance its purchase—like getting a hundred percent mortgage on a house. The buyer didn’t have to put up any cash; it cost no more to buy a huge company than to set up a lemonade stand.3 A rush of financiers returned to Wall Street, intent on slaughtering the fatted calves using the carving knife of borrowed money. The merger boom had begun.
“We were taking earnings or value that should’ve gone to the shareholders and bringing it unto ourselves,” said Jerome Kohlberg, one of the first buyout financiers. “Corporate America was responsible for a lot of this. You have to ask the question, Why didn’t they do it [cost-cutting] themselves?”4
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