The Snowball

by Alice Schroeder

  When the time came for Gutfreund to discuss what money he would receive from the firm, he asked for the “fair treatment” he had been promised as long as Buffett and Munger were alive. Now, however, it turned out that the parties’ opinions of what was fair differed dramatically.

  Gutfreund’s lawyer thought that he had made a deal with Charlie Munger on that fateful weekend in August of the previous year, and that Munger had accepted a resignation letter conditioned on the lengthy list of severance terms. Gutfreund felt that he had fallen on his sword to save the firm and thought he was owed $35 million in back pay, stock, and severance. Salomon, however, took the position that Charlie Munger had made no deal at all. The board agreed to interpret Gutfreund’s employee-benefit plans strictly and also took back the stock options he had earned, even though the stock-option plan contained no provisions allowing for forfeiture under this or any circumstances. It countered with $8.6 million.

  Insulted and outraged, Gutfreund turned it down. “It seemed wrong,” he said. “As a matter of principle, I fought.”63 His lawyers interpreted the offer not as meant to inspire negotiation but as so insultingly low that it must be dismissed. In 1993, Gutfreund took Salomon to arbitration.

  Arbitration is a process in which a panel of neutral parties listens to both sides and reaches a binding decision to resolve a dispute. Arbitration is also a throw of the dice, for its very nature cuts off negotiation forever once a decision is reached.

  John Gutfreund had been reduced to sitting in a small three-room office, where he answered his own phone when his part-time secretary was away. He brooded over the fact that Susan, now dubbed “Marie Antoinette” by the press, had told him not to resign—as if he had had an option—saying it would make him unemployable. They had been cast out of the New York social set. The press had turned on him savagely, in a way he had never imagined could happen, comparing him to felons like Boesky and Milken.64 Many of his former friends had abandoned him. Unassisted by Salomon, he was running up huge bills to defend himself in civil lawsuits.

  Gutfreund wanted vindication through the arbitration. But a public raking and digging over the whole Salomon mess, which might have salved his wounded pride, was guaranteed to alienate Buffett and make him less likely to compromise. After Buffett had staked much of his image on Salomon, Gutfreund had let him down, and to retell this story in an arbitration, covered at full yelp by a dogged press, could not possibly inspire Buffett to reinterpret Gutfreund’s behavior more generously. Now that he and Gutfreund were no longer partners, in Buffett’s special sense of the word, transgressions he might once have eventually forgiven became larger with hindsight. They were many, and even without benefit of hindsight they were large:

  • The stock-option repricing in 1987, which had cost Buffett so much money.

  • The Sternlight “cocked gun” letter from the Fed, which Buffett had not learned about until it was too late.

  • The meeting with Bob Glauber at the Treasury, when Gutfreund had kept silent, which had also been kept from Buffett and the other board members.

  • An equity plan that allowed an employee to keep his stock if fired for cause, which Gutfreund had put before the board and shareholders late in that fateful spring of 1991.

  Buffett felt the whole thing was a tragedy that should never have happened and that Gutfreund’s behavior had been some sort of weird aberration. Although he normally avoided conflict, if forced into battle, his proxies fought for him like cornered hyenas. Charlie Munger, who was inclined to say things such as that Gutfreund made Napoleon look like a shrinking violet, was the appointed bad guy in the arbitration.65 His testimony would be crucial, because he was the one who had negotiated with Gutfreund’s lawyer, Philip Howard.

  It was the young president of the New York Stock Exchange, Dick Grasso, who chose the three graying arbitrators who would decide Gutfreund’s fate in a dingy conference room at the Exchange.66 A team of lawyers from Cravath—backed by testimony from Salomon board members, employees, ex-employees, Buffett, and Munger—began to pulverize Gutfreund in a process that took more than sixty sessions and several months before the arbitrators.

  Over and over, the arbitrators heard about the meeting between Munger and Philip Howard in which Howard reviewed the list of compensations Gutfreund wanted and Munger listened in some fashion or another. All agreed that Howard left without a signature on Gutfreund’s severance papers, but there was no agreement about how to interpret the rest of the events of that evening. Howard was certain that Munger had made a deal with him.

  Gutfreund’s lawyers called Charlie Munger as a witness. Frank Barron of Cravath, Swaine & Moore had attempted to prepare Munger, who was utterly impatient with the process. Although Barron had prepared Munger by himself, Munger, a lawyer who disliked paying legal bills, extemporized to the arbitrators that, in preparing him for testimony, Cravath had employed an excessive number of expensive paralegals and “aspirin-carriers.”67 When he began to testify, every word that came out of his mouth “had nothing to do with what we had gone over,” says Barron. “Putting Charlie Munger on the witness stand was the most nerve-racking, hair-raising experience I ever had as a lawyer.”68

  Munger’s confidence as a witness was unmatched. A number of times the lead abitrator, growing irritated, admonished him: “Mr. Munger, would you please listen to the questions before you answer them.”

  Munger insisted that on the night when he had met with Philip Howard, he was “deliberately not listening…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.”

  Gutfreund’s lawyers asked him whether he had made a conscious decision not to talk as well as not to listen.

  “No,” said Munger, “when the time came to talk, I talked. One of my faults—I am fairly outspoken. I may well have discussed some individual things that got through my band of indifference. This is one of my most irritating conversational habits. It followed me through the course of my life.

  “So every time something would get through and I would see a counterargument,” he said, he would give it. Howard had asked for an indemnification for Gutfreund against lawsuits. Being a legal matter, this had gotten through Munger’s band of indifference.

  “I think I said to him, You don’t even know what you are going to need. God knows there will be litigation, there will be a big mess, who knows how things are going to work out. You are misrepresenting your own client if you think it makes sense to get into any of those issues at this time.”

  Was that also a conversation in which you were tuning out? asked Gutfreund’s lawyer.

  “No, I tend to tune in when I am speaking myself,” said Munger, under oath. “I tend to remember what I say.”

  Was this also a conversation in which you were deliberately not listening at various times?

  “What did you say?” said Munger. “I just tuned out again, and I wasn’t doing it on purpose.”

  Was this also a conversation in which at various times you were deliberately not listening?

  “I am ashamed to say I have done it again. Will you please do it one more time? This time I will use an effort.”

  Gutfreund’s lawyer repeated the question for the third time.

  “You bet,” said Munger. “I was going through the motions.”

  In what mental state the arbitrators, the lawyers, and Gutfreund heard these words can only be imagined. Regrettably, much of the misunderstanding seems to have lain in Philip Howard’s unfamiliarity with the outward signs of the workings of Charlie Munger’s mind. He had labored that night under the illusion that he and Munger were having a conversation. He did not recognize Munger’s occasional replies as intermittent thought-bursts ignited by some random mite that had pierced Munger’s band of indifference. Whenever Munger objected, Howard assumed they were negotiating, not that he was simply being lectured. When Munger said nothing or emitted a grunt to move the conversation along, Howard inf
erred that Munger agreed, or at least that he had no objection to whatever had just been said. Nobody had explained to him that Munger’s head was turned off.

  Gutfreund’s lawyer reminded Munger of Buffett’s testimony, in which he had acknowledged saying to Gutfreund that he had the power to make all this happen. Did Mr. Munger recall Mr. Buffett saying that?

  “I don’t remember Mr. Buffett’s words as well as I remember my own,” said Munger. “But certainly the gist of the thing was that you can count on us to be fair.”69

  The issue was what was meant by fair. Salomon never disputed that the money was Gutfreund’s and that he had already earned it. The argument boiled down to whether Gutfreund would have been terminated had all the facts been known. Thus, the case became an exercise in proving that Gutfreund should have been terminated. Even Donald Feuerstein agreed that in concealing what he knew from Glauber, Gutfreund had been dishonest with the government. Although everyone thought this bizarre and out-of-character behavior, nonetheless, it had happened.

  In fairness to Salomon, Gutfreund understood why the firm was expending so much effort to prove he should have been fired. He knew it was in everybody’s interest to vilify him, but the lack of proportion bothered him. At some point it should have ended, he thought.

  Nonetheless, everyone, Buffett included, felt that Gutfreund was entitled to some of the money. Buffett had Sam Butler, a fellow GEICO board member and friend of Gutfreund’s, call him twice and offer $14 million. Butler whispered, “I can probably get you a little more.” Buffett would have gone to $18 million.70 But Gutfreund had been humiliated by the process. He considered Charlie Munger mean-spirited and self-righteous. He turned the offer down indignantly. The arbitrators would decide.

  After months of testimony, lasting until spring 1994, the arbitrators were showing their impatience at the endless, circular, and conflicting arguments, one side professing complete innocence and the other portraying Gutfreund as an archfiend. Then, at the closing statements, Gutfreund’s lawyers showed up with a chart, raising the demand to $56.3 million by adding interest, penalties, stock appreciation, and other items.

  The lawyers and people involved at Salomon had set up a betting pool as the arbitration crawled at an agonizingly slow pace toward its conclusion. How much money would the arbitrators give Gutfreund? The lowest bet was $12 million. The highest was $22 million.71

  No one will ever know what factors the arbitrators weighed in their decision. When the decision was announced, they awarded Gutfreund nothing, not a dime.

  50

  The Lottery

  Halfway Around the World • 1991–1995

  Buffett’s testimony in Congress as the reformer and savior of Salomon had turned him from a rich investor into a hero. Salomon was more than a simple white hats/black hats story. The success of his unorthodox approach to scandal—embracing regulators and law enforcers instead of hunkering down—touched the yearning for nobility in many people’s hearts: the dream that honesty is rewarded; that the besmirched can be redeemed through honor. Even as the furor from the crisis died, Buffett’s star rose. Berkshire stock took off on a meteoric streak, bursting past $10,000 a share. Buffett was now worth $4.4 billion. Susie’s stock alone was worth $500 million. His original partners would now have $3.5 million for every $1,000 they had laid out in 1957.

  When Buffett walked into a room, the electricity was palpable. In his presence people felt brushed by greatness. They wanted to touch him. They became dumbstruck before him, or babbled inane remarks. No matter what he said, people listened uncritically.

  “I was at my best at giving financial advice when I was twenty-one years old and people weren’t listening to me. I could have gotten up there and said the most brilliant things and not very much attention would have been paid to me. And now I can say the dumbest things in the world and a fair number of people will think there’s some great hidden meaning to it or something.”

  He went about surrounded by a little haze of fame. Reporters called all the time now. He was followed and asked for his autograph, and photographers started to shadow him. Zsa Zsa Gabor wrote and asked for a signed photo. As writers began working on books about Buffett, people who saw him every day—his protectors—found the frenzy incomprehensible. A woman showed up at Berkshire’s office and began bowing and scraping to him. Gladys Kaiser was overcome with annoyance. “Don’t bow to him!” she said.

  Many Salomon employees and ex-employees, of course, were less impressed with Buffett than was the rest of the world. He had reined in their freewheeling culture, ruined their bonus day; he disdained their business and they knew it. Plenty of employees had unhappy stories to tell. Soon enough, the contrast between Buffett’s aw-shucks image and his coldly rational side hit the radar screen of the national press. How to explain the dichotomy between Buffett figuratively sitting on a front porch with a glass of lemonade, telling folksy stories and teaching through homilies, and his long history of sophisticated business feats? What was he doing as interim chairman of an investment bank while talking and writing about Wall Street as a gang of con men, sharpies, and cheats?

  What he was doing was trying to align the way people were paid at Salomon with the interests of shareholders, but his concern about compensation was just one aspect of his fundamental objection to a business in which almost every department had some sort of inherent conflict of interest with its customers. And without decimating Salomon by jettisoning everything but proprietary trading, he could not do much about that. But even by 1991, the Wall Street Journal and the New Republic1 took note of his straddling of two worlds, and both ran stories pointing out the disparities between them. The mismatch between Buffett’s representation of himself as a middle-class Midwesterner who had woken up in Oz and the elephant-bumping in which he routinely engaged with his collection of jumbo-dumbo celebrity friends only heightened the press’s eagerness to do some debunking. The Wall Street Journal story ran a sidebar to its article, “Buffett’s Circle Includes the Moneyed and Powerful,” namedropping people like Walter Annenberg.2 Several of those mentioned in the story later said they were misquoted. Among them were Tom Murphy and a new friend, Bill Gates, CEO of Microsoft Corporation, who had gotten into a casual discussion with Murphy about how he was being “ripped off,” as Charlie Munger put it, by the cost of producing television commercials. This conversation, which took place at a Buffett Group meeting, was portrayed by the Journal as musing over where the price of advertising was headed and what advertising rates should be, which might fall into a “gray area of antitrust.”3 Buffett and his friends sparred with the Journal’s editors with little effect. Meanwhile, Gates—who might have gotten annoyed at finding himself tangled in this public-relations mess involving antitrust issues less than a year after the Federal Trade Commission had launched a probe into possible collusion between Microsoft and IBM in the PC software marketplace—instead wrote Buffett an earnest letter apologizing for having embarrassed him.4 At the time, Gates had known Buffett for less than five months.

  The two had met that summer over the Fourth of July holiday, when Kay Graham and her Washington Post editorial-page editor and friend Meg Greenfield had dragged Buffett to Greenfield’s house on Bainbridge Island for a long holiday weekend. To Buffett, a weekend on an island a half-hour ferry ride from Seattle that could be escaped only by boat, seaplane, or hitching a ride over the bridge by car was an “anything for Kay” event. Greenfield had also recruited him for an all-day visit at the nearby four-house compound on the Hood Canal that Bill Gates had built for his family. Gates, twenty-five years Buffett’s junior, was appealing to Buffett mainly because he was known to be brilliant and because the two of them were neck-and-neck in the Forbes race. But computers looked like Brussels sprouts to Buffett; no, he did not want to try them this once. Greenfield, however, had assured him that he would like Gates’s parents, Bill Sr. and Mary, and that other interesting people would be there. With some reluctance, Buffett had agreed to go.

 
Kay and Warren drove down the dirt-and-gravel road to Meg’s glass-walled contemporary house, where silky pink and purple sweet peas waved like pocket squares next to the front door. The weekend opened inauspiciously when Buffett learned that Graham and journalist Rollie Evans and his wife would be staying in the two guest rooms of Greenfield’s house, which faced out toward Puget Sound. He, however, would be staying in a little guest house some distance away. When he got there, he saw that the owners had put a temporary bed in a sitting room downstairs for him, since the other rooms were fully occupied.

  Buffett, who didn’t really care about his surroundings, was a good sport about this sort of thing. Greenfield had stocked his room with Cherry Coke, See’s Candies, and honey-roasted peanuts to make him more comfortable. The bathroom he was supposed to use, however, had a sign in it that said, “No TP.” Baffled, he enlisted Graham and Greenfield, who had accompanied him to the bed-and-breakfast, as interpreters, since no one was around to explain. Neither of them could figure out what “No TP” meant either. They decided that there was probably something wrong with the plumbing. The facilities at Greenfield’s house were too far away for Buffett to use except when he was visiting during the day. Greenfield pointed out a bathroom at the gas station nearby and suggested this alternative.

  Buffett sat in his room that evening, eating his honey-roasted peanuts and drinking his Cherry Coke. Memories differ as to whether he visited the gas-station facilities in the small hours, only to find that the door was locked.5 Either way, the next morning, at Greenfield’s house, all of them puzzled again over what “No TP” meant.

  After breakfast, Greenfield shepherded her guests into town to stand at the roadside among a small crowd of people sprawled in lawn chairs for the Fourth of July parade. Uncle Sam in a blue tailcoat and Stars and Stripes top hat oversaw a little brass band; fire trucks, an ambulance, and antique cars idled by; dogs trotted past in homemade costumes, led by their couturiers; high-kicking high school cheerleaders preceded a troupe of dozens who struggled to control a giant U.S. flag hoisted overhead. Another antique car or two rolled by, then a group of people dressed as strawberries, followed by the Kiwanis Citizen of the Year. Afterward, Greenfield held her annual garden party, at which guests in summery dresses and sport coats and ties played a vicious croquet match before the vivid backdrop of flowers rising from the lawn to her house.