About a week after the Glauber meeting, Gutfreund, Strauss, and Meriwether met to consider whether the firm should now come clean with the Treasury about the February auction. Because the hue and cry over the squeeze had not abated, they decided to keep silent. They felt the time was not right. Days later, the SEC sent Salomon a letter asking for information about the May auction. This was the first indication that the problem of the two-year note auction might be escalating instead of fading away. Anyone receiving this inquiry letter might reasonably have gotten nervous about the SEC’s sudden interest in the operations of the government-bond trading desk.
Two days later, Gutfreund had flown to Omaha to visit Buffett, while on his way to Las Vegas to see some property that Salomon had financed. In telling the backstory to Maughan, Snow, who did not know about this trip, left it out. Buffett would later fill in these details.
“I picked him up at the airport. John was in the office for about an hour and a half. He spent about an hour making some calls, then we talked for about half an hour. He was sort of pacing around. We didn’t talk about anything in the end. It’s a pain in the neck to stop in Omaha, yet he really had nothing to say.”
Somewhat baffled as to the purpose of the visit, Buffett took Gutfreund to a quick lunch, then for a visit to the recently acquired Borsheim’s jewelry store, near the Furniture Mart. The proprietor, Ike Friedman, Mrs. B’s nephew, was cast in the same mold, and like her, somewhat larger than life.
Friedman took Gutfreund to Borsheim’s “center island,” where the really expensive goods were displayed. Gutfreund picked out a $60,000 item for Susan. It mattered to Buffett, Gutfreund said later, that he had made a purchase.32 Then he glanced at the expensive watches strategically displayed just behind the center island, and strolled over to look at the merchandise. Friedman preferred selling very expensive jewelry to timepieces. “Oh, watches,” he said to Gutfreund. “You lose them, you break them. Why pay a lot of money for a watch?” He looked at the fancy wristwatch on Gutfreund’s wrist and asked Gutfreund what he paid for it. Gutfreund told him.
“$1,995,”33 Friedman repeated. “Well. You got taken, John.”
“And you should have seen the look on John’s face.”
Wearing the watch on which he got taken, Gutfreund returned to New York at the end of June to present the burgundy-colored satin-lined Borsheim’s box to Susan.
Within days—by early July—the Antitrust Division of the Justice Department formally notified Salomon that it was investigating the squeeze in the May two-year-note auction, which the letter from the SEC had inquired about. Gutfreund now got serious, said Snow, and hired Marty Lipton’s firm Wachtell, Lipton, Salomon’s outside counsel, to begin its own investigation, on behalf of Salomon, of the circumstances surrounding the May squeeze.34 People within Salomon had mixed views about the squeeze. Some said the Treasury market was inherently designed to be collusive. The job of a dealer was to work with its customers to distribute huge blocks of bonds into the market. Little squeezes happened all the time. This one was big. So what? The Treasury was picking on Salomon. It was the years of hubris, the wildness depicted in Liar’s Poker, the gradual erosion of power that had made Salomon a punching bag.35
But others were furious that Mozer had once again defied the Treasury. They were baffled that he would pull a huge squeeze when it was well-known that he and Basham were already at loggerheads. Later, these questions would increase. Why did Mozer—on probation, told his behavior had been “probably criminal”—taunt the Treasury so outlandishly that his coup splashed headlines all over the financial press, in a way guaranteed to draw even more attention to himself?36
Snow, who reported to Feuerstein on trading operations, had been in charge of the internal investigation involving the May squeeze. In June, he was out of the office some of the time with knee surgery, and neither he nor Feuerstein was involved in the Glauber meeting, nor knew about the subsequent decision to further delay reporting Mozer’s actions.37 But once Snow returned full-time to the office in July, increasingly he started to realize that he was out of the loop. People began disappearing into meetings. The situation preyed on his mind. One night he had a dream. He walked into Feuerstein’s office the next morning and said he had dreamed that he and Feuerstein had actually called Warren Buffett and told him about the false bid, because they were both so frustrated that Gutfreund and Strauss had done nothing about it.
Feuerstein looked at Snow cross-eyed. “No, no,” he said. “It won’t come to that.” Feuerstein was still trying to influence Gutfreund. Going to Buffett would be throwing that relationship away.38 Snow had not intended his account of the dream to come across as a subtle threat to bypass his boss and call Buffett, but he thought Feuerstein seemed to have taken it that way.39
A few days after beginning their work, the Wachtell, Lipton investigators had returned with a preliminary report on the May squeeze. Only now, however, were the investigators told that senior management had known since April that Mozer had submitted an unauthorized bid in the February auction.
With hindsight, Salomon’s actions looked far worse. After learning of Mozer’s false bid in February, which Feuerstein had said was criminal in nature, management had taken Meriwether’s vouching for Mozer and Mozer’s word that he had never done it before, without investigating further or disciplining Mozer in any way. They had left him in place, which allowed the May squeeze to occur. Once it did occur, Salomon was in more trouble, because telling the government they knew about Mozer’s previous phony bids but had only now reported them would probably have conveyed the sense that Salomon was a gang of thieves. Worst of all, Gutfreund had met with Bob Glauber in mid-June about the May squeeze, but had said nothing about all these earlier events. Now, as Snow explained to Maughan, when things started blowing up, everyone involved started excusing the original delay by saying the matter was a single minor event that caused no customer any harm, cost the government nothing, and didn’t make sense, even from the standpoint of the trader involved.40 Given the pressure of business, Gutfreund said, he simply hadn’t deemed it that important.41
Unfortunately, he was wrong about that. The Wachtell investigators had discovered that the February auction was not the only one that Mozer had rigged. They now knew that five auctions had been compromised.42 Two of these false bids had only just been unearthed. Snow concluded by telling Maughan about the previous evening’s meeting with all the inside and outside lawyers that had followed the half-baked explanation given to all employees. Snow had argued that management’s prior knowledge had to be disclosed. He was batted down. “I’m going to take a lot of heat for this,” Gutfreund told him. “I don’t see why you can’t do your part.”43
Maughan had been deeply concerned even before hearing all this new information from Snow. Seven days had passed since the first press release—seven days that included a salvo of stories in the media, the firm’s falling stock price, trouble rolling over the commercial paper, the discovery of new false bids, and Gutfreund and Strauss feeding baked Alaska to the troops at an internal meeting. By the time Snow finished telling him all of this additional history of what Mozer had done and what others had not done, Maughan blew up and started pounding Snow to make sure there was nothing else. Then he went down to the trading floor and confronted Meriwether, Mozer’s boss. “What the hell is going on, John?” he asked.
Meriwether hung his head. “It’s too late,” he said. He refused to talk further.44
Too late or not, Snow and McIntosh had to spend the evening drafting a second press release to try to explain things. That same night, Strauss and Gutfreund called Corrigan to respond in some fashion to the Sternlight “cocked gun” letter, which the firm had received that morning. Realizing that he was on a speakerphone, Corrigan assumed that a room full of undisclosed lawyers was listening to everything he said. The conversation started out with Corrigan being told that the firm had done an investigation and that “industry practice” of other firms was to pad
their bids for new issuances of municipals and agency securities to get a bigger share. Corrigan viewed this opener as “a diversion, or worse.” It had nothing to do with the squeeze, nor with the more serious issue of phony bids—in fact, nothing to do with the Treasury market. His Irish temper ignited. He yelled into the phone at Strauss and Gutfreund: “I’m sure you’ve got a room full of [bleeping] lawyers. This is your last chance. Is there anything else you have to tell me?” They began to describe the other violations.
Corrigan meant to put an end to the obfuscations and rationalizations. “Well, goddammit,” he said, “get yourselves together and release all of this information to the public immediately. I don’t want to hear anything else from you, just get that goddamn press release out.”45
Late that evening, the lawyers met with senior management to go over the press release. Gutfreund and Strauss arrived. McIntosh said there needed to be heads on a plate. This idea was quickly dismissed, but other people, including a board member, Gedale Horowitz, and Steve Bell, who ran Salomon’s Washington office, pressed for fuller disclosure. Nobody could get hold of Buffett, but they reached Munger on the phone, who said, Look, you can’t put this second press release out without names. Gutfreund’s name went in automatically. Everyone knew that Strauss was not in charge and had not made any of these decisions; he had simply been present in the room. But he had gone along with his boss. His name went in. Feuerstein had tried to get Gutfreund to report it. Munger said that his name should stay out.
Meriwether was known as a brilliant, careful manager who was unusually close to his team and rarely left the desk. He had reported the matter exactly as he should.46 On the other hand, he had vouched for Mozer, pleaded his cause, then left Mozer’s responsibilities unchanged. When Munger said Meriwether’s name should go in, says McIntosh, Meriwether, listening and seeing the lawyers write down his name, said, “Oh, my God, I’m doomed.”47
The next day, Wednesday, August 14, a telephone meeting took place in which the board heard some of the story that was given to Corrigan the night before. Two board members called in from Europe, one from Alaska, Buffett from Omaha, and Munger from Minnesota to hear the first “orderly and halfway complete description” of the Mozer affair. Inside Salomon, a palace coup was well under way, with senior managers talking to one another on the assumption that Gutfreund and Strauss would have to resign.48 The arbs wanted Meriwether as CEO, which was clearly unacceptable to many people given that he was Mozer’s boss; the arbs then floated the idea that Deryck Maughan might serve as co-CEO with Meriwether. Meanwhile, no one on the board conference call said anything about management changes; they merely debated the wording of the new press release, which contained three pages of details and added the two additional violations that had been discovered by the investigators.
The draft release admitted that management had known about the February bids as far back as April but said that “the press of business” kept Salomon from reporting Mozer’s actions to the authorities. Buffett called this ridiculous, and as the board debated, Munger became incensed. Eventually, the press release was rewritten to say that the failure occurred due to “lack of sufficient attention to the matter,” leaving the impression that the names in the press release were the people who were not paying attention. Arrangements were made to put out the release that night.
As the meeting concluded, the board thought it had the full story. A number of things had not been mentioned, however. One was the “cocked gun” letter just received from Peter Sternlight at the Fed. Another was the June meeting with Bob Glauber at the Treasury Department, at which Gutfreund had failed to mention Mozer’s earlier activities.
That afternoon, Salomon held another all-hands-on-deck meeting in the auditorium. Bill McIntosh, who ran the daily sales meeting, stood at the front as usual and had the unenviable job of reading the new press release to the employees. With Gutfreund and Strauss in the front row, directly opposite him, McIntosh said, This is what happened. If customers call and want to know what’s going on, just tell them. Make no excuses for senior management, don’t apologize for them, they did what they did.
Afterward, the salespeople piled into McIntosh’s office. What are we supposed to say? they begged. Don’t make excuses for senior management, McIntosh repeated. In my view they’re not going to last very long; they’re gone; they’re yesterday’s news; we’ve got to keep this place together so we can survive and play another day. Focus on that.49
That evening the government-bond department showed up on the terrace of McIntosh’s duplex overlooking the Hudson River in the West Village for a previously scheduled barbecue. Eerily, Tom Strauss dropped by—and the temperature on the deck fell several degrees.50 Instead of hanging around until ten or eleven swigging beer as usual, everyone cleared out by eight o’clock.
The morning after the press release appeared, Thursday, August 15, rumors floated that the long knives were out and McIntosh was a goner. He stayed on the floor all day, figuring that Gutfreund and Strauss wouldn’t fire him for insubordination in front of the whole trading floor. Meanwhile, market confidence in Salomon cracked. The stock, which had been sinking all week from the previous Thursday’s close of almost $37, slumped to $27. It was trading down because shareholders were beginning to suspect a bigger problem than Mozer’s misdeeds: a “run on the bank.” And, indeed, one was beginning to take place.
Photo Insert Three
Image 48
Chuck Rickershauser, the lawyer who said around 1976 of the convoluted business created by Buffett: “There’s got to be an indictment in here somewhere.”
Image 49
Tooting a trumpet in his bathrobe. Ever since his boyhood fiasco at Rosehill Elementary, Buffett refuses to play the “echo.”
Image 50
Charlie Munger reading with his grandchildren.
Image 51
Buffett partnered with Sharon Osberg at his first bridge tournament, the 1994 world championships in Albuquerque, NM. They qualified for the finals but then withdrew because Warren was too exhausted to continue. The World Bridge Federation was appalled.
Image 52
Buffett and Bill Gates at their first meeting, in July 1991, at the Gates family compound on Washington’s Hood Canal.
Image 53
In 1993, Buffett places his hand on a computer mouse for the first time. He was “fearless,” says Sharon Osberg.
Image 54
Buffett and “Mr. Coca-Cola” Don Keough sit surrounded by Buffett’s favorite beverage (and Berkshire’s largest stock holding).
Image 55
With son Howie and daughter-in-law Devon. They were married in 1982.
Image 56
Buffett’s longtime friend Bill Ruane, who died in 2005.
Image 57
On Easter Sunday 1993, Bill Gates diverted his plane to Omaha and fooled Melinda French into a surprise meeting with Warren and Astrid at Borsheim’s to choose her engagement ring.
Image 58
Warren and Astrid attend the May 1996 wedding of Peter Buffett and Jennifer Heil.
Image 59
Buffett takes the wheel of a golf cart in Sun Valley, and Susie and Kay Graham take their lives in their hands.
Image 60
Munger and Buffett answer reporters’ questions during the Berkshire Hathaway sharehold meeting weekend.
Image 61
Buffett at Sun Valley with friends Diane von Furstenberg, Herbert Allen, and Barry Diller.
Image 62
Right to left, Coca-Cola CEO Roberto Goizueta, Bill Gates, and Warren Buffett on the 1997 panel moderated by Don Keough at which Gates offended Goizueta by paraphrasing Buffett’s view that Coca-Cola was easier to run than a technology company.
Image 63
Susie Jr. points out her father’s unobtrusive baseball jersey number—1/16 because stocks were once priced in “teenies”—1/16ths of a dollar.
Image 64
Warren and his sisters, Roberta Buffett Bial
ek (left) and Doris Buffett.
Image 65
Totally focused on bridge while playing for the Corporate America bridge team against the U.S. Congress team in 1989.
Image 66
With Kay Graham at her home on Martha’s Vineyard.
Image 67
Improvising a toast at Bill and Melinda Gates’s wedding reception in 1994.
Image 68
While on vacation with the Gateses during the Long-Term Capital Management crisis in 1998, Buffett tries to get satellite phone reception in the Grand Canyon.
Image 69
Reunion of the original Graham Group in 1995. From the left: Buffett, Tom Knapp, Munger, Roy Tolles, Sandy Gottesman, Bill Scott, Marshall Weinberg, Walter Schloss, Ed Anderson, Bill Ruane.
The Snowball Page 75