The Snowball

by Alice Schroeder

  “This crowd was sitting there expecting big news. And I was thinking about the old story about the reporter sent to file a story on a wedding, and he went back and told the editor, ‘Well, there wasn’t any story, because the groom didn’t show up.’ That was the mood those reporters were in.”

  As the minutes passed, a white and shaken Meriwether arrived. He had gone, as instructed, to see Dick Breeden, chairman of the SEC, asking for help. Meriwether reported that Breeden had turned them down flat. Twice in the conversation, Breeden had said Salomon was “rotten to the core.”

  “Rotten to the core,” Meriwether repeated in shock, “rotten to the core.” All of them suddenly realized that the Treasury’s move had been a joint decision among the Federal Reserve, the Treasury, and the SEC, their condemnation a sudden reversal of the world’s opinion of Salomon, a dramatic payback for years of pride and arrogance.

  The hour of the press conference came and went, while the reporters fidgeted and grew more irritable downstairs. Brady did not call. The phone sat unblinking.

  Finally, Jerome Powell, assistant secretary of the Treasury, called. The Treasury would not fully reverse itself, he said. Salomon could not bid in Treasury auctions for customers. Yet it would compromise on Salomon’s most important point: The firm could bid for its own accounts.

  “Will that do?” Powell asked.

  “I think it will,” Buffett said.

  He loped back into the boardroom and told them. The room erupted with relief and joy. As rapidly as he could talk, Buffett oversaw the election of himself as interim chairman and Deryck Maughan as director and operating head of Salomon Brothers. At about a quarter to three, he walked outside and had somebody call downstairs to the trading floor.

  Maughan was sitting with the traders, watching the clock. At a nearby desk, John Macfarlane’s team was working on a contingency plan to dump the firm’s assets in Japan as fast as they could work the phones. Somebody called from upstairs and told Maughan to meet Buffett at the elevator bank for a talk. Maughan was uncertain whether he was about to be made the boss—or told he had a new one. He walked over to the elevator. The door opened, and he saw Buffett standing inside. “You’ve been tagged,” Buffett said, and motioned for Maughan to get in. Instead of riding back up to the boardroom, they descended two more floors into the jaws of the waiting press.93

  “The press was unruly. They were like animals. Every question was a trick question. It was a big story, and they wouldn’t have minded if it had gotten bigger. It was their chance to shine. The TV people were particularly obnoxious. They wanted us to hurry up for the five o’clock news, or the six o’ clock news, and I wouldn’t cooperate with them. And I could just feel it. I could just tell it. I had to fall on my face. I had to be found a phony. They wanted it to develop that way. There were all kinds of book contracts floating around that room, but only if somehow Salomon failed.”

  Sitting on the dais, Buffett crossed his arms; he looked weary. Maughan, his light brown hair brushed into a neat pouf, stared wide-eyed at the crowd like the proverbial deer caught in the headlights. Both were clad in navy suits, white shirts, and funereal ties. “I had no preparation, zero,” Maughan says. “‘You’re tagged’ was my complete set of instructions.” He did not know a single detail that had transpired upstairs. They began.

  What happened? the reporters wanted to know.

  Buffett, suit jacket bunched up around his ears, explained: “The failure to report is, in my view, inexplicable and inexcusable. I have seen similar dumb things happen in other operations that I am more intimately involved in but not with such consequences.”

  Had the culture contributed to the scandal? “I don’t think the same thing would have happened in a monastery,” Buffett said.

  Somebody asked him what he would get paid. “I’m going to do this for a dollar,” he said. The board, sitting in the audience, was dumbfounded. This was the first they had heard of it.

  The reporters declined to be soothed. Were records altered? Who altered them? Was there a cover-up? Who participated in the cover-up?

  Yes, some records had been altered. There had been something resembling a cover-up. At that, the pack grew excited, throwing questions hard and fast. Here, perhaps, was the stumbling prey they were hunting, close to capture, ready to be torn apart by their sharp teeth. Alas, the trail grew cold when the cover-up included no one significant beyond those who had already been sacked.

  Someone came out to the stage and told Buffett he had a phone call from the Treasury. He hurried from the dais, leaving Maughan, astonished, twisting in the wind alone. Nevertheless, Maughan managed to answer some questions in the perfectly articulated monotones of a BBC announcer narrating a documentary about the mating habits of the wildebeest.

  Buffett returned with a press release from the Treasury Department, announcing that Salomon had part of its credibility back. The journalists were not mollified. They pressed on.

  Did the ex-executives really resign or had they left through arm-twisting? Buffett assured them repeatedly that Gutfreund, Strauss, and Meriwether had resigned voluntarily. Were the ex-executives getting special compensation? Was Salomon paying their legal fees? How much money did illegal actions earn the firm?

  After well over an hour, one of the directors who was sitting next to Munger nudged him and said, “Isn’t Warren ever going to end this thing?”

  “Maybe he doesn’t really want to,” Munger said. “Warren knows what he’s doing.”94

  How much did the phony trades cost the government? How many customers had told Salomon they wouldn’t do business with the firm? What severance would be paid to the ex-executives? Why didn’t Wachtell, Lipton take the situation more seriously? What were the details of the strange fraudulent trade the investigators had discovered, the one referred to in the press release as the “billion-dollar practical joke”?

  “It is not a joke. I suppose if you had to characterize it in some way—” began Buffett.

  “Those were your words in the release,” retorted the reporter, sharply.

  “Those were not my words. It was in the release. My name is not on the bottom of the release. You can characterize it as a bizarre incident. My definition of a practical joke is one you can laugh at after hearing it. I don’t see it as the least bit funny.”

  The reporters, most of whom had read Liar’s Poker, waited for an explanation. Salomon, they knew, was famous for its “goofs.” Traders were constantly stealing the clothes out of each other’s suitcases and replacing them with wet paper towels or lacy pink panties. The most famous goof at Salomon concerned the game of liar’s poker itself, which Gutfreund once allegedly offered to play Meriwether for a million dollars on a single bet, no tears. Meriwether supposedly countered with ten million, causing Gutfreund to stand down. While even this story was thought to be a sort of goof, containing apocryphal elements, until now ten million dollars was the outside limit that anyone had ever imagined for a Salomon goof.

  But for a billion dollars, you could fill New York Harbor with rubber chickens as high as the Statue of Liberty’s thighs. What, then, could have been the “billion-dollar practical joke”?

  “Apparently a woman was leaving the department after many, many years—retiring, I guess,” Buffett said. “An order was worked out with somebody, to give her a very large order. A billion dollars. A billion-dollar order on a new offering of thirty-year Treasury bonds. Then—and this gets vague—I guess the plan was to maybe convince her somehow that the order was not submitted and have the client question the fact that it was not submitted. It was to try to scare the hell out of her or something. I don’t know.

  “The bid actually did get submitted.”

  A hundred fifty reporters sat in silence. Salomon had bought a billion dollars’ worth of bonds in a practical joke gone wrong. Buffett was not kidding that the culture of Salomon was going to have to change.

  “It should have been crossed out. My guess is that whoever did it did intend to c
ross it out. It has to be the dumbest joke ever attempted to be perpetrated.”

  No one said a word.

  Maughan: “Any more questions?”

  The hot air had been let out of the room. After this bit of truth-telling, what could anyone ask? Only a few more mild questions followed.

  The press conference ended. Buffett looked at his watch as they walked off the stage. “I’ve got to get back to Omaha,” he said.

  “Warren, what’s happening here?” asked Maughan. He had never spoken to any of the angry government officials, had never attended a Salomon board meeting, and the ship was sinking. “Do you have any views on who should form the management? Is there any direction you want to give me as a strategy?”

  “If you have to ask me questions like that, I picked the wrong guy,” Buffett said. He walked away without another word, leaving his $700 million and his reputation in the hands of a man he had met thirty hours before.95

  “And then, when it was over, they were swinging cameras in our faces and banging us. It was a mob scene. I went out and got in a cab. And one or two reporters noticed that, which they felt was the new Salomon. Instead of a string of black cars waiting for us out there.”

  On Monday morning, Maughan went out to The Room to shore up the staff’s devastated morale. He took off his jacket and rolled up his sleeves. The firm, he said, had faced three tests. The first was character. By firing Mozer and his number two, Thomas Murphy, and accepting the others’ resignations, the firm had passed that test.

  The second was confidence. By regaining at least partially the Treasury Department’s good graces, Salomon had passed that test.

  The third was will. “This is not the same firm,” said Maughan, “but we must keep aspects of the old culture while we bring in a new one.”96

  Some of the traders stirred uneasily. What did that mean, a new culture?

  But at least Salomon had gotten one lucky break. Overnight, news had flashed over the wire that Soviet Premier Mikhail Gorbachev had been ousted in a coup. The stock market immediately dropped 107 points. Business coverage, which had been drilling on Salomon all day Friday, suddenly shifted focus as the world turned its attention toward Gorbachev, held under house arrest by eight of his own military and state officials. With tanks rolling into Moscow and Russians demonstrating in Parliament and protesting in Leningrad, customers got on the phones, and the bond desk did a brisk business that morning.

  “There are lots of ways of getting off the front page,” said a salesman, “but sending in the Red Army has got to be the most creative.”97

  49

  The Angry Gods

  New York City • 1991–1994

  The regulators’ confidence that Salomon could survive on Buffett’s reputation alone was almost certainly misplaced. Salomon barely survived even after the Treasury partially reversed itself. Some of its biggest customers simply felt revulsion toward the firm. First the huge and influential California Public Employees’ Retirement System, then the World Bank washed their hands of Salomon. Buffett fell asleep each night with visions of the hundreds of billions of dollars of Salomon debt that would fall due over the next few weeks staggering through his dreams like sickly sheep. He had a sense that, for once, matters were simply not under his control. “Events could do me in, and I couldn’t get off the train. I didn’t know where the train was going to go.

  “I couldn’t do anything about what the troops were going to do every day. I couldn’t do anything about discovering things that I didn’t know existed when I went in. I couldn’t do anything about what Jerry Corrigan felt about everything that had taken place, or what the U.S. Attorney for the Southern District of New York or the Antitrust Division of the Justice Department would do. I knew it was terribly important that it get worked out right, and I knew that was something that—no matter how hard I worked—I had no control over. I could stay up all night and think about things, but that wasn’t necessarily going to guarantee a good outcome. And it made a lot of difference to a lot of people. It would change my whole future life.”

  Buffett had to return to New York the following week. Senator Daniel Patrick Moynihan wanted to see him about Salomon, and there were many other matters that required his presence. He and Munger took Moynihan up to a private dining room on Salomon’s forty-seventh floor, where the chef prepared a proper Wall Street meal for Moynihan, including the correct wines. Moynihan looked at Buffett and Munger, who had ordered sandwiches, in disgust. The aftermath of Hurricane Bob was still pounding the East Coast. Suddenly, cascades of rain began pouring in through a leak in the windows. “The gods are angry with Salomon,” Buffett remarked.1

  Later that week, he and Munger went down to Washington to see Bill McLucas and Dick Breeden at the SEC. They came into the office looking like “two guys you would see at the Greyhound bus station,” according to McLucas. Then they started talking and laying out their plan to save Salomon; McLucas then understood, he says, why one person he was talking to was considered a legend and the other could finish the legend’s sentences.2

  Afterward, Buffett visited the Treasury Department himself to see Nick Brady, who told him that he had thought Buffett was bluffing. “Warren,” he said, “I knew you were going to take the job no matter what we did.”3 It was only the sincerity of Buffett’s plea that had touched him. Wind up the job as fast as you can, Brady said, and get out of there.

  Buffett was determined that whatever was wrong at Salomon be found, confessed, and fixed right away. “Get it right, get it fast, get it out,” he said. When he said fast, he meant fast; he talked to his new secretary, who had worked for Gutfreund and knew everybody well. Paula, he suggested, why don’t you start talking to the board members and ask them questions about what they knew and when.4 Bob Denham, the cautious, thorough Munger, Tolles lawyer who had been airlifted in from Los Angeles to head the investigation, got wind of this plan and put a stop to it. The investigating would be done by lawyers.

  The first thing Denham did was interview Don Feuerstein. Afterward, Feuerstein was fired summarily. He asked to talk to Buffett, who told him only “You could have done more.” Since Buffett had known that from the beginning, Feuerstein couldn’t understand the about-face.5 Buffett, however, had gradually settled on the conclusion that in his loyalty to Gutfreund, Feuerstein had put his boss’s interests ahead of Salomon’s. Now Denham got the job of general counsel. As Buffett began to assume control, he discovered how much the board had been subjected to what he called adroit “information rationing” by Salomon’s management. He and Munger now learned that when Mozer had first admitted in April to submitting an unauthorized bid, the firm had also discovered that he had tried to cover it up, and had misled the customer whose name he had used by claiming their falsely submitted order for Treasury bonds was a clerical error.

  “It was as if Mozer had lit a match. And Mr. Gutfreund could, on April twenty-ninth, have blown out that match that Mozer lit, and instead he did nothing about it.

  “And it turned out that Mozer had certain characteristics of a pyromaniac and tended to light matches more often than we thought. Mr. Gutfreund’s responsibility was to do something about that when he saw it. He at first did nothing and then later started, perhaps in panic, pouring gasoline on it.

  “The end result was that the shareholders of Salomon would be cost hundreds of millions of dollars, and eight thousand employees and their families would fear for their jobs.

  “I think it was the simplest thing in the world to do. Here you have a fellow, Paul Mozer, who admits submitting false bids to the most important client and regulator in the world, the U.S. government. And then you know he’s tried to cover it up by dragging in a customer and trying to get that customer to cooperate with a cover-up so that the government won’t find out.

  “None of that was Mr. Gutfreund’s fault at all.

  “But when you hear about an action like that, it is very obvious in ten seconds that you pick up the phone and say, Mozer, you’re fire
d. Then you go right over to Jerry Corrigan and say, Jerry, you know, this is the problem of running a place with eight thousand employees. This guy went off the reservation, and I fired him as soon as I heard about it. What do you want me to do next?”6

  Of course, it wouldn’t be obvious in ten seconds to many people. They would be thinking about all sorts of other things. Mozer was so valuable to the firm; he had turned around the foreign-exchange department; firing him would be unpleasant; might it be possible to rehabilitate him; it was going to be painful to confess to the regulators; their reaction might be scorching; and no less than a major law firm had said that reporting it wasn’t technically required. Buffett skipped all that. He thought in probabilities; he extrapolated right away to whether a catastrophic outcome was possible—then worked out very fast what it would take to get to the lowest probability of catastrophe. Here, it was firing Mozer and confessing right away. Buffett also thought in black-and-white terms about honesty; he had no tolerance for liars and cheaters. So that was that.

  Now he found that the situation unfortunately involved more lying and cheating than he had previously been told. The investigators reported to him that Feuerstein had said at the time that Mozer’s actions were “criminal in nature”—a startling contrast to the firm’s agreeable response to later legal advice that no disclosure was required. And nobody had ever told the firm’s compliance department—which was charged with overseeing regulatory conduct—of Mozer’s behavior. True, Salomon had an attitude toward compliance that was best described as loose. There would later even be an argument over who should be considered a member of the compliance committee.7 Nevertheless, the head of compliance had been disturbed when he found out that he was out of the loop and was angry that such procedures as did exist had been ignored.