The Snowball

by Alice Schroeder

  In 1984, the burner under managements turned up another notch when “junk bonds” became respectable. More politely called “fallen angels,” these were the bonds of companies like the Penn Central Railroad that were climbing out of the bankruptcy dustbin or teetering on its edge.5 Only occasionally did a company issue junk bonds on purpose, paying a high interest rate because it was considered a dicey credit risk. Junk bonds were sort of shady, a little desperate.

  The people who worked in the junk-bond departments on Wall Street were junk peddlers or ragpickers—the few bankers who scouted for hag-ridden executives willing to issue junk bonds, and “distressed debt” analysts who spent their careers grading papers in the gloomy school of hard knocks, looking over picked-clean balance sheets and scuttlebutting bankruptcy lawyers, angry investors, and desperate managements.

  Everything changed when Michael Milken, chief junk peddler of the upstart investment bank Drexel Burnham Lambert, rose to become the most influential man on Wall Street through a simple proposition: that while individual “fallen angel” junk bonds were risky, buying a bushel of them was not, because on average, the higher interest rate more than compensated for the risk. In other words, junk bonds in the aggregate had a margin of safety—like cigar butts.

  Soon, money managers no longer looked as though they were playing roulette with investors’ money by putting high-paying junk bonds in their portfolios. Indeed, it quickly became more respectable to issue new junk bonds—quite a different thing. Another short hop and takeovers of strong, well-financed companies could be financed with junk, turning formerly sound balance sheets into debt-riddled Swiss cheese. Corporate raiders armed with junk bonds, intent on “hostile takeovers” whose goal was to pluck a company clean, suddenly stalked companies that had been waddling along complacently. Their targets lunged toward any buyer who might conceivably be more friendly; in the end the target company was usually sold to someone or another and financially gutted. The bankers’ fees became so staggering that, instead of waiting for deals to present themselves, the bankers went a-huntin’ on their own, flipping through the ranks of the S&P 1000 the way Buffett had once used his Moody’s Manuals to find cigar-butt stocks. This orgy of mergers that often took place with the consent of only one party riveted the public; the clashes of titanic egos filled the daily papers. Michael Milken’s annual junk-bond conference, the Predators’ Ball,6 lent its name to the entire era.

  Buffett scorned the way these deals transferred riches from shareholders to managers and corporate raiders, helped by a long, long line of toll-taking bankers, brokers, and lawyers.7 “We don’t do hostile takeovers,” he said. The deals of the 1980s repelled him above all because they were loaded with debt. To those reared during the Depression, debt was something to be used only with a careful eye for the worst-case scenario. In the 1980s, however, debt became mere “leverage,” a way of boosting profits using borrowed money. “Leverage” arrived at the same time that the U.S. government began running large deficits courtesy of “Reaganomics”—the “supply-side” idea that cutting taxes would ultimately increase tax revenues by stoking the economy. Fierce debates raged among economists over whether tax cuts could actually pay for themselves and, if so, by how much. The economy was heating up at the time from consumer spending, also fueled by debt; John and Jane Q. Public had gradually been accustoming themselves to buying everything with credit cards, building up a balance that they would never pay off until from their plastic death did them part. The Depression-era culture of hoarding and saving had turned turtle, into a culture of buy now, pay later.

  Buffett still paid cash and chose the role of the white knight in takeovers. Early one morning in February 1985, while he was in Washington, Tom Murphy called and woke him to say he had just bought the ABC television network.

  “You’ve got to come and tell me how I’m going to pay for it,” Murphy said.8 ABC was caught in the crosshairs of the corporate raiders. The company had hung a lure out to see whether Murphy would save it by doing a friendly deal—and Murphy bit.9

  “Think about how it will change your life,” Buffett said. Murphy was a devout Catholic who never wasted money on anything—and this was Hollywood. Buffett may well have been thinking about the incongruity between the modest, retiring Murphy and the glamorous world of television, as Murphy believed10—but Buffett’s next move signaled that he wouldn’t mind such a change himself. Or so it seemed, since he recommended to Murphy that Cap Cities/ABC recruit a “gorilla” investor who could protect it if its turn came to be gobbled up by the corporate raiders. To no one’s surprise, Murphy suggested that this investor should be Buffett himself. Likewise, Buffett had no trouble quickly agreeing to spend $517 million of Berkshire’s money for fifteen percent of Cap Cities.11

  By saving Cap Cities from prospective raiders, Buffett had now become a player in the biggest media deal in history; Berkshire’s share alone was six times the size of the Nebraska Furniture Mart. At a total of $3.5 billion, he and Murphy had also paid a fancy price for ABC,12 which was struggling and had slipped to third place in the ratings. “The network business is no lollapalooza,” Buffett would later say.13 Yet he had watched the awesome ascendance of television from its infancy and knew well both its power to shape public opinion and its business potential. The combined assets were formidable: Together ABC and Cap Cities would own nearly a hundred publications, twenty-four radio stations, twelve major TV stations, and more than fifty cable systems.14 Buffett wanted Cap Cities/ABC so much that he was willing to leave the board of the Washington Post, as was required by FCC regulations because of the potential conflict between the two companies’ television interests.15 He did so, however, knowing that Kay and Don Graham would need only permission, not encouragement, to call on him informally for advice. He went to bed that night a happy man.

  The year 1985 would be a humdinger. During the same week that Buffett’s investing yielded Berkshire $332 million from a single stock—General Foods, when it was taken over by Philip Morris—Forbes caught on to how rich he was and added him to its list of America’s 400 richest people. At the time, it took $150 million to make that list. But Buffett, at age fifty-five, was now a billionaire, one of only fourteen ranked by Forbes. His favorite childhood book could be retitled One Thousand Ways to Make a Million Dollars. The cascading, compounding slew of pennies from weighing machines and other ventures had never, in his boyhood dreams, looked like this.

  Berkshire Hathaway, its first few shares originally bought for $7.50, was now trading at more than $2,000 a share. But Buffett refused to “split”*29 the stock into smaller pieces, citing the way brokerage fees would multiply needlessly along with the number of shares. While this was certainly true, there was also no denying that this policy made Berkshire more like a partnership—or even a club, and the high stock price drew attention to Berkshire like nothing else.

  His fame ascended with Berkshire’s stock price. Now when he entered a room of investors, an energy filled the air as all attention gravitated toward him. The purchase of ABC by Cap Cities did indeed begin to change his life, adding a Hollywood sheen to the elephant-bumping of Kay Graham. Meeting soap opera impresario Agnes Nixon at a dinner with Murphy, he got invited to do a gig on the show Loving. A lot of CEOs would have feigned a mortal illness before doing something so undignified, but Buffett loved doing his cameo on Loving so much that he showed off the paycheck from his show-business debut. It was all of a piece with the Buffett who loved to play dress-up and would soon be appearing costumed as Elvis at his friends’ parties. This same Buffett reveled in putting on black tie to take Susie Jr. to a state dinner at the Reagan White House, where Sylvester Stallone and fashion designer Donna Karan were seated at the same table. Jetting off to the Academy Awards with Astrid—who made a rare public appearance, proudly wearing a thrift-shop gown—he dined with Dolly Parton. But Buffett, who found Parton likable as well as hugely attractive, failed to make the lasting impression on her that he managed with most other women.r />
  At the Kay Parties, where Graham always seated him between the two most important or interesting women, he did better. Still, he had never grown to love small talk, and found it challenging—or just plain tiresome.

  “The truth is, you’re sitting next to two people that you’ve never seen before and you’re never going to see again. It’s kind of strained, no matter what. Whether it was Babe Paley, or Marella Agnelli, or Princess Di, Kay always saw in these women what she aspired to be. I didn’t have the faintest idea what to talk about. Princess Di was not as easy to talk to as Dolly Parton. What do you say to Princess Di—‘How’s Chuck? Anything new at the castle?’”

  Still, by 1987 a billionaire commanded a certain cool respect; Buffett had become something of an elephant himself, no longer so dependent on Graham for invitations to bump. And Graham no longer needed him so much as a regular escort, for their mutual obsession had cooled. Now her attraction to powerful men had heated up her longtime friendship with the recently widowed, paper-dry, encyclopedically brilliant, alpha-squared Robert McNamara, who had been defense secretary during the Kennedy and Johnson administrations. McNamara was the onetime architect of the military’s “war of attrition” strategy; many people considered Vietnam “McNamara’s War.” It was also he who had ordered the study of U.S. government involvement in Southeast Asia known as the Pentagon Papers—the very same Pentagon Papers that had catapulted Graham and her newspaper into journalism textbooks for their courageous reporting. Before long, McNamara became Graham’s “Husband Number Three,” as one of her board members referred to him. True to form, she put him on the Post board. From the beginning, McNamara and Buffett “were not the best of friends,” though over time, their relationship resolved into a sort of mutually respectful truce.

  Buffett could handle people like McNamara through diplomacy; a greater—and unanticipated—problem was the physical danger he found himself in because of his fame. Two men arrived at Kiewit Plaza, one waving a chrome-plated replica of a .45, intending to kidnap Buffett and hold him for $100,000 ransom, which the kidnapper later explained would be a “loan” to buy a ranch.16 The security guards and police handled it, and Buffett, unharmed, started jokingly referring to the man as “Billy Bob” to Gladys. He would not hear of hiring a bodyguard, for that would restrict his cherished privacy and freedom, but he did have a security camera installed, along with a three-hundred-pound security door to shield the office.17

  Strangers called often now, insistent, wanting to speak with him. They’d only take a minute, nobody else could help them, they knew he’d be interested in what they had to say. Gladys told them in crisp tones to write a letter spelling out their requests.18 Buffett started getting letters asking for Berkshire stock—in exchange for advice to take hawthorn herbal remedies—or requesting funding to create an unspecified new type of ice cream. People wrote to say: Mr. Buffett, I am tired of living an average life. I have a burning desire to be rich. You have money, give me some.19 And a lot of letters said, I’ve gotten in over my head with credit cards or gambling debt.20

  Buffett the collector kept so many of the letters that they began to fill up his files. Many of them confirmed the way he thought of himself, as a role model, as a teacher. Occasionally, something touched him and struck him as real. If he thought it would do some good and he had time, he wrote a debtor or gambler back with firm but kind insistence that they take responsibility for their problems. As if they were his kids, he suggested they buy time to bail themselves out by telling their creditors how broke they were and negotiating easier payment terms. He always added a little soliloquy about the perils of too much debt—especially debt from credit cards, the junk bonds of the personal-finance world.

  His own kids had received little training about how to handle large sums of money, but one thing they had learned was the peril of debt—a fortunate lesson, because their father was almost as inflexible about requests for money from them as he was from strangers. He was still willing, however, to make financial deals with family members to manage their weight.

  With her shoulder-length brown bob and heart-shaped face, the thirty-something Susie Jr. could pass for twenty-five, but she struggled with a few extra pounds. Her father made a deal in which, for losing a certain amount of weight, she could shop for clothes for a month, no limit. The only catch was that she had to pay him back if she regained the weight in a year. This deal was better than the proverbial win/win: It was also a no-risk deal in which Buffett won either way. He was out the money only if Susie Jr. did as he wanted and kept the weight off. She got the clothes. So Susie Jr. dieted, and when she got down to the goal weight, Big Susie mailed credit cards to her daughter with a note—“Have fun!”

  Susie Jr. dared not spend a dime at first, frightened by the thought of asking her father to pay the bills. Bit by bit she worked herself up, until finally she shopped in the blind daze induced by having unlimited money for the first time in her life, tossing the receipts unread each day on the dining-room table, too afraid to add the total. “Oh, my God!” said her husband, Allen, each night as he returned home to his wife’s mounting pile of sales slips. After thirty days, she added them up. She had spent $47,000.

  “I thought he was going to die over how much it was,” she says of her father. Susie Jr. went for reinforcement. Her mother was powerful, but she knew who had even more leverage with Warren when it came to money. While Kay Graham barely knew Peter and was an “unreachable” figure to Howie—he was always afraid he would sit in the wrong place or break something in her house—Susie Jr. had developed a warm, close relationship with her.21 She called Graham, who agreed to parachute in as backup if needed.

  But since a deal was a deal, Buffett paid the bill without strong-arming. Then he immediately started polling his friends in shock, asking, “If your wife spent that much, what would you think?” The men all agreed it was outrageous, while their wives agreed that he should count his blessings because it could have been so much worse.22

  The deal that Buffett made with Howie concerning the rent for Howie’s farm was similarly linked with weight; the amount rose and fell with Howie’s poundage. Warren thought his son should weigh 182.5 pounds. When Howie was over the limit, he had to pay twenty-six percent of the farm’s gross receipts to his father. When he was under, he paid twenty-two percent. “It’s the family version of Weight Watchers,” Howie said. “I don’t mind it, really. He’s showing he’s concerned about my health. But what I do mind is that, even at twenty-two percent, he’s getting a bigger paycheck than almost anybody around.”23 So Warren couldn’t lose on this deal either. He got either more money or a thinner son.24 All of this was classic Buffett. As one of his friends put it, “He’s the master of win/win…but he never does anything that isn’t a win for him.”

  Peter and his family had moved from their apartment on Washington Street, in the building where his mother now lived, to a house on Scott Street. Peter got a gig writing music for some fifteen-second animated spots for a new cable channel, MTV. Success led to a business scoring commercials. Even though he was the least financially savvy of the Buffett kids, he had managed to tether his Berkshire stock to his musical talent and thus establish a career and a life that freed him from the money games. But by the mid-eighties, Peter pondered his father’s homily: “Nobody goes to the supermarket to buy Howie Buffett’s corn.” Nobody ever hired an ad agency because of Peter Buffett’s music either, he realized. If he wanted to pursue his own art, he needed to free himself from corporate lackeyship, whatever the cost. While he continued doing commercial work, he cut a demo record and signed with the New Age label Narada to do an album.25

  His mother, who still dabbled in music, was often at Peter’s studio; she liked to sing with Billy Rogers when he was in town from Los Angeles. Billy was trying to get his life in order; he wrote his uncle saying that he had “blown many chances” in life but was now ready for the next time that opportunity knocked.26 He asked Warren to help him with a down payment on a
house that he wanted to buy as a new start for his family. The letter was carefully prepared and showed unusual financial sophistication, considering that it was written by a jazz guitarist who was a heroin addict. Big Susie would not dare give out such a large sum herself without Warren’s permission, but her hand was clearly behind it.

  In a lengthy but kindly worded reply, Buffett said no. He quoted Munger’s saying that liquor, drugs, and debt are the main things that cause “smart fellows to go astray.” Borrowing the down payment for a house, he said, provided no margin of safety.

  “If you are going to drive 10,000-pound trucks across a bridge repeatedly, it is well to build one that can withstand 15,000-pound loads rather than one that can withstand 10,001 pounds…. It is a big mistake to have lots of financial obligations and no cash reserve…. Personally, I have never used more than twenty-five percent borrowed money in my life, including when I had only $10,000 and had ideas that made me wish I had $1,000,000.” 27

  Rogers soon sent another letter, chaotically handwritten, again asking for a loan, saying he was “pulling his life together piece by piece” and “trying to get custody of his son.”28 Again the answer was no. Buffett not only had boundaries of iron when it came to money but was realistic about relying on the promises of addicts. Susie, who always wanted to believe the best of people, was too soft-hearted to give up on anyone. She would not defy Warren to give Rogers the money, but she continued to support her nephew and his troubles with large amounts of energy and small handouts from time to time.

  Susie’s work as a “mobile Red Cross unit,” as one family member put it, had expanded after she had made her confession in 1984 and she and Warren reached a new understanding about their marriage. That year, she had suffered a painful abscess between the spleen and pancreas, and was hospitalized for exploratory surgery. Her doctors could find no cause, and she recovered without incident. Her self-image was as the healthy person whose role was to care for others, so she ministered to her usual collection of the ill, the needy, and the heartsick. She also threw masquerade parties in her tiny place on Washington Street, tried to learn to ride a bicycle, and gathered her impromptu family of gays and strays at large dinner parties and Thanksgiving celebrations. She wore jeans and sweatsuits and put away the wigs she had once worn, her hair now a lighter brown, released into a corona around her beaming face.