“After listening to all of this, my reaction was not to ask for his resignation. As best I knew at the time, and this is still my belief, when he had heard of his subordinate’s misdeeds, he had gone straight upstairs to his superiors and the general counsel and had reported it. It seemed to me that it was the job of his superiors and the general counsel of the firm to then take action. No one, at this point, was suggesting that the general counsel should resign.”
Then Gutfreund called. His flight to Nantucket had been thwarted by Hurricane Bob and he was headed back to New York. “I have no future,” he said, agitated.79 They made plans to go to dinner. Gutfreund insisted that first they talk to his newly hired lawyer, Philip Howard, about severance pay.
Buffett and Munger called Howard, with Munger doing most of the talking. Gutfreund felt the firm owed him $35 million.
“As he was laying all this out, I was listening like the Japanese, saying, ‘Yes, I understand your position.’ Not ‘Yes, I agree with you.’ We had no interest whatsoever in trying to arrange a compensation agreement with anyone who was in the middle of a scandal of this proportion without knowing the full facts.”
Buffett then said that they could not agree upon an overall number, because no matter what the figure was, “Salomon Gives $XX Severance Package to Gutfreund” would “be the headline,” rather than the break with former management.80 They laid on praise of Gutfreund’s character, however; they told Howard that Gutfreund would be treated fairly, that they had the power to make it happen and had never broken a promise before. Buffett said, “The only way this won’t happen is if both Charlie and I die.” He later explained that this was a way of avoiding confrontation; that is, “deflecting Mr. Howard and getting him off this kick” because it would be a “little abrupt” to say they didn’t want to reach a settlement because “we don’t know the full facts” yet.
Buffett and Munger then went out for a steak with Gutfreund at Christ Cella. Gutfreund offered to stay on as a consultant at no charge in the days ahead. “I’m going to need all the help I can get,” Buffett said fervently. They talked about the problems of the firm, and Gutfreund said he thought Deryck Maughan was the right guy to run Salomon.
At one point, however, Gutfreund—who still knew a number of facts of which Buffett was not yet aware—said something that contradicted the warm and cozy scene of a few minutes before. “You guys are smarter than I am,” he told them. “You guys are going to fuck me.”81
It was with relief that Buffett and Munger escaped and went back to Kay Graham’s apartment. A large suite filled with Asian art, it had many happy associations for Buffett. Graham always kept the kitchen stocked with his favorite foods. He, Carol Loomis, and George Gillespie often got together there for a bridge game, ordering in deli sandwiches on the side. But he was not having nearly as much fun tonight.
Almost as soon as they arrived, Philip Howard showed up, carrying a sheaf of papers about Gutfreund’s severance, which he wanted Munger to sign.82 He talked to both of them for a while, until Buffett left them alone and went off to make some phone calls. Munger started getting irritable. They discussed the matter for perhaps an hour or more.
Munger had already made up his mind that he was going to say no to this deal. As he recalled later, “I was deliberately not listening. I was being polite, but I wasn’t paying much attention…. I sort of turned off my mind…. I was just sitting there politely with my head turned off.”
When Howard reached the end of his lengthy list of demands, Munger refused to sign the papers, but stressed that Gutfreund would eventually be treated fairly.83 On the way out the door, Howard hesitated. It bothered him that he still had nothing in writing. “You can’t get paid after the divorce,” he said. Munger reassured him: “Phil, you have to practice law the way my father did, by trusting in a man’s word.”84
While Howard and Munger were talking, Meriwether and his lawyer, Ted Levine, arrived. Meriwether had changed his mind. He said that he was in an impossible position and had to leave Salomon.
He “at least partially understood the seriousness of the company’s situation. He was pacing back and forth, and he was smoking cigarettes as fast as he could light them. He said that the best thing for him to do was to resign.”
Munger would later express feelings of guilt over agreeing to put Meriwether’s name in the press release, which he viewed as a mistake he had made under pressure.85 Both he and Buffett thought Meriwether could stay and fight it out, but they accepted his resignation.
“We talked for a considerable length of time. They stayed until midnight.”
Finally, it was just Buffett and Munger. Buffett went to bed, feeling that matters were, if not under control, at least starting to be straightened out.
The next day, Sunday, August 18, no one would rest.
Early in the morning, Buffett, Gutfreund, and Strauss met in one of the many conference rooms on the forty-fifth floor of Salomon’s office downtown before the meeting at which the board would ratify Buffett’s role as interim chairman. The board gathered outside, and one of the members, Gedale Horowitz, took Marty Lipton aside and told him that he and several others had been talking for two days. He said that Meriwether had failed to keep Mozer under control and they would resign unless Meriwether was fired for the good of the firm. He told Buffett a softer version—that he would not attend the board meeting if Meriwether was still employed. Buffett said the situation had resolved itself, because Meriwether was going to step down on his own.86
Suddenly, a lawyer appeared in the conference room where Buffett was meeting with Gutfreund and Strauss, waving a message from the Treasury Department. It was going to announce in a few minutes that Salomon was barred from bidding at Treasury auctions, both for customers and for its own account. All of them understood that in minutes, Salomon would be shot in the head. “We immediately saw that this would put us out of business—not because of the economic loss, but because the message that would go out to the rest of the world in headlines in the papers on Monday would be ‘Treasury to Salomon: Drop Dead.’ In effect, the response to installation of new management and banishment of the old would be an extraordinary censure delivered at an equally extraordinary time exactly coincident with the first actions of the new management.”
Buffett went off to another conference room to call the Treasury, seeking a stay of execution. The phone was busy. He got the phone company to agree to interrupt the call. They called back and said it was not a working phone. After many minutes of confusion, problems, and delays, Buffett finally spoke to someone in the Treasury Department. It was too late, he was told; the announcement had already gone out. The world now knew that Salomon was banned from doing business with the government.
Many of the board members were seeing their net worth evaporate in front of their eyes. Another slew of lawsuits, on top of those they already anticipated, would arrive on Salomon’s doorstep. Buffett appeared calm but determined. He had come to a realization. Gutfreund was being drummed out for having created a nightmare. Now he, Warren Buffett, was actually on the brink—not of overseeing the salvation of a business—but of steering a zombie Salomon through the night of the living dead. Buffett balked.
He said to the board that he was going to tell Treasury Secretary Brady he would not serve as interim chairman; he had come to save the firm, not to oversee its dismemberment. His reputation would be shot either way, he thought, and the fallout from resigning would be less than the grief from staying on. The board understood and agreed. It was the only card that Buffett had to play with Brady. Meanwhile, the board decided to pursue two other courses simultaneously. Buffett turned to Marty Lipton. “Do you know a bankruptcy lawyer?” he asked. Everyone sat frozen for a split second. Then Feuerstein and Lipton went off and began to set in motion the wheels of filing for bankruptcy. If necessary, the firm would fail in an orderly manner, rather than a rout.
Four and a half hours remained to try to reverse the Treasury’s decision before a
press conference that Salomon had already called for two-thirty p.m. to announce that Buffett would officially become interim chairman. Less than seven hours remained until the Japanese markets would begin to open for the week’s business, and London seven hours after that. When Tokyo opened, the landslide would begin.87 Lenders would start pulling their credits immediately. To plead for clemency had become immeasurably harder. They had not only to change the Treasury’s mind but to convince it to reverse itself in public.
John Macfarlane, Salomon’s treasurer, came in wearing a warm-up suit, directly from competing in a triathlon. He talked to the board about what the Treasury’s action meant to the firm.88 Banks had already started notifying Salomon they were pulling the firm’s commercial paper lines. Solly was careening toward what would almost certainly be the largest failure of a financial firm in history. If the government withdrew its endorsement of Salomon and the firm lost its funding, it would have to liquidate assets at fire-sale prices. That would be followed by severe consequences in the world markets, as some of Salomon’s creditors and counterparties, themselves unpaid, also began to fail. It was all going down the tubes. Buffett feared the regulators were going to regret their uncompromising stance.
“If I’d been free to act and wanted to maximize my gain in the ensuing week, not only would I have shorted any Salomon security that I could have in Tokyo that afternoon and in London late that night, but I would have also shorted equities everywhere.
“We were going to find a judge someplace in Manhattan, walk in on him while he’s watching baseball probably and eating popcorn at two in the afternoon, and tell him, we’re handing you the keys. You’re running the place now. By the way, what do you know about Japanese law, because we owe ten or twelve billion dollars in Japan? We owe ten or twelve billion in Europe. London will open at two in the morning. And as of this very moment, you’re running the place.”
Corrigan was hard to reach. Asking to speak directly to Treasury Secretary Nick Brady, Buffett found that he was not available either.
Brady was the patrician former CEO of brokerage firm Dillon, Read & Co., and Malcolm Chace Jr.’s nephew, thus a member of the family that had sold Berkshire Fine Spinning to Hathaway Manufacturing. It was he who had written his college thesis on Berkshire, which depressed him so much that he had decided to sell his stock. Through Malcolm Chace, Buffett had once gone to visit Brady at Dillon, Read. The two weren’t close friends, but they had a “fine feeling about each other,” Buffett says. There was no particular reason, however, why the blue-blooded Brady, who hailed from the old-line firm Dillon, Read, would have a fine feeling about a social parvenu like John Gutfreund—or a fine feeling about an arrogant upstart firm like Salomon.
Nonetheless, Brady called Buffett back. He expressed empathy but made it clear that reversing the decision was an enormous problem.
“They were going to look silly. And I felt they looked silly too, but they would look a whole lot sillier a few days later when financial carnage was spread from this act.”89
Brady said he thought Buffett was overreacting but agreed to call back again. He needed to consult with SEC Chairman Breeden, with Corrigan, and with Federal Reserve Chairman Alan Greenspan.
Buffett sat and waited for Brady’s call. He couldn’t call Brady. He didn’t know that Brady was sitting on Ogden Phipps’s porch in Saratoga Springs, at the horse races. It was Brady’s prerogative to call him—or not.
The phone system on the conference floor didn’t ring on Sundays. To keep from missing an incoming call, someone had to stare continually at the phone to see whether a little green light lit up. For a while, Buffett stared at the phone, “as depressed as I have ever been.” Finally, someone enlisted a hastily-called-in secretary to stare at the light.
Behind the scenes, the regulators were talking. Corrigan had contacted Paul Volcker, former chairman of the Federal Reserve Board and now chairman at a prestigious investment-banking firm. Volcker, like Breeden, was incensed at Salomon. None of the regulators believed that Buffett would walk; they felt he had too much money and reputation at stake. They knew the decision would have an adverse impact on Salomon and they thought that was appropriate. They didn’t believe that Salomon would fail even if the Treasury pulled its imprimatur. The markets had so much confidence in Buffett that they assumed that simply by standing over Salomon holding his umbrella, he could save the firm. But they could not be certain of that. They considered whether the financial markets could survive a meltdown of one of its largest firms. The Federal Reserve would have to pump huge sums of money into the market to keep other banks afloat after Salomon failed to pay them. No rescue on this order of magnitude had ever been attempted. They were well aware of the likely second-order effects. The global financial market could potentially collapse. Did they think the Federal Reserve could handle it? “I was always an optimist,” Corrigan says. “I always said to myself, ‘You do what you have to do.’”90
Hours passed while Buffett waited for the phone to ring. Alan Greenspan called once, saying, no matter what, he wanted Buffett to stay. “It was a plea to just sort of stand there at the bridge regardless of what happened.”
Little by little, the trading floor began to fill with people, as if summoned by some invisible jungle drum. They lit their cigarettes and their cigars, sat around The Room, and waited. The arbs huddled, mourning Meriwether. Nobody knew what was going on upstairs. Slowly, the clock ticked toward the hour when trading would begin in Tokyo, sounding the firm’s death knell.
Upstairs, the board milled around uselessly, waiting while the regulators talked. Brady called Buffett back periodically but had nothing meaningful to say. Several times Buffett repeated his case in the gravelly voice that always betrayed him when under stress. He told Brady that Salomon’s attorneys were working on a bankruptcy filing. He invoked Salomon’s importance to the markets. He told Brady of the domino effect that the firm’s failure could cause.
“I said to Nick, I’d talked to Jerry Corrigan. This thing was going to implode. Tokyo was going to open, and we weren’t going to buy back our paper. It was over. Hour after hour, from ten o’clock, I kept telling the consequences of all these things, and it didn’t mean anything to him.”
Brady went back to his fellow regulators and talked. Most of them felt that this was special pleading. Buffett was asking for some kind of gold-star treatment for Salomon, and the firm did not deserve it.91
Salomon’s board couldn’t understand why Buffett’s arguments weren’t getting through to the regulators. They ran the financial markets. Why wasn’t it obvious to them that Salomon was going down?
As the afternoon wore on, Buffett’s logic failed, on this most critical occasion, to win over a key ally.
He had only one choice left. Of all avenues open to him, of all resources on which he could draw, this one was the most precious, the huge pool of crystal essence that he was most reluctant to tap. Buffett would undertake almost any item from his short list of most-loathed tasks—get into an angry, critical confrontation; fire someone; cut off a long friendship carefully cultivated; eat Japanese food; give away a vast sum of money; almost anything—than make a withdrawal from the Bank of Reputation. For all these many decades, he had brooded over, nurtured, cultivated, and stored that priceless commodity in its vault. Never had he drawn down so much as a drop on behalf of himself or anyone else, except when the odds hugely favored getting back even more in return.
Now the debacle at Salomon had exposed him utterly, putting the entirety at stake. And the only remaining hope was to ask, to literally beg as a personal favor, drawn purely on his own credibility, for help.
He would be putting himself eternally in Brady’s debt. He was staking his entire reputation—the reputation that takes a lifetime to build and five minutes to lose—on whatever happened afterward.92 He had to summon more courage than he knew he had.
Buffett’s voice cracked. “Nick,” he said, anguished, “this is the most important day of my life.
”
Brady had his own problems to deal with. He didn’t think Buffett’s arguments were any good. But he heard the feelings behind the words. He could hear in Buffett’s voice that the man thought Salomon had thrown him over Niagara Falls in a barrel.
“Don’t worry, Warren,” Brady finally said. “We’ll get through this.” He hung up the phone and went off to consult.
But as the clock crawled toward two-thirty p.m., when the press conference was scheduled to begin, Brady had not called back.
Buffett decided to play the one card he could use with Corrigan. He picked up a phone. “Jerry,” he said, “I haven’t taken the job yet as interim chairman. We did not hold our meeting this morning because of what the Treasury did. So I am not the chairman of Salomon now. I could become the chairman in thirty seconds, but I am not going to spend the rest of my life shepherding the greatest financial disaster in history. I’m going to get sued either way by fifty people, but I don’t want to spend my life trying to mop up a total disaster on Wall Street. However, I don’t mind spending some of my life trying to save this damned place.”
Charlie Munger was telling him not to do it under any circumstances. “Forget it,” he said. “Some sort of surprise could happen the first day and you won’t be able to extricate yourself and will spend the next twenty years of your life in court.”
Corrigan took Buffett’s threat to leave more seriously than the other regulators had, however. “I’ll call you back,” he said.
Buffett sat and waited, envisioning his next move. He pictured himself getting on an elevator, riding down six floors, walking onto the stage at the press conference all alone, and opening with the words “We’ve just declared bankruptcy.”
Downstairs, in the August heat, more than a hundred reporters and photographers who had been pulled away unexpectedly from their baseball games and swimming pools and family picnics swarmed into Salomon’s auditorium for the press conference. The only thing they had to fill their interrupted Sunday afternoon was the sight of Salomon’s blood-drenched gladiators, gutted before their eyes on the sand of the Colosseum.
The Snowball Page 77