The Buffetts arrived late in the evening and spent the first night in one of the hand-hewn cedar-shake log cabins that encircled the central lodge. They began the next morning greeting other early arrivals over breakfast, which for Warren usually meant last night’s leftover dessert. The rest of the day, as guests trickled in, he relaxed in the lodge or his cabin, reading books, playing bridge on the computer, and reading the newspapers that Allen had printed off the Internet for him. The others began to entertain themselves with trail rides up the canyon on some of Allen’s ranch geldings to see the elk and deer. Some people headed off on mountain-bike expeditions or went fishing in the river that ran through the property. Buffett skipped all of this. But at mealtime he appeared at the long rectangular table in the lodge, where the guests sat surrounded by dark leather furniture and romantic rustic paintings by Thomas Hart Benton and Frederic Remington. Buffett presided over a salon at the dinner table, talking politics, money, and world affairs. While the rest ate fish, chicken, game, and salads, the cook at Cody challenged his appetite with huge slabs of meat.1
After dinner, Allen’s friend Al Oehrle took over at the piano. The guests sang from Candice Bergen’s songbook, standards by Gershwin, Irving Berlin, and Cole Porter. Susie often sang solos. Buffett played his ukulele, and, as he did every year, sang a duet of “The Hut-Sut Song”—an appalling number from the 1941 Hit Parade—with movie producer Sydney Pollack—a performance always dreaded by the audience, which made him look forward to singing it all the more.
Hut-Sut Rawlson on the rillerah and a brawla, brawla sooit.
Hut-Sut Rawlson on the rillerah and a brawla sooit.2
The return from Cody effectively marked the end of Buffett’s summer vacation. His birthday would be arriving in a few weeks, something to which he feigned indifference but actually dreaded. The one highlight was hundreds of cards, gifts, and letters from friends—or, by now, mostly strangers—that poured into Kiewit Plaza every year for weeks beforehand. Buffett was far from jaded, but it was hard to thrill a multibillionaire—one who didn’t want to be a year older and cared nothing about possessions—with a birthday gift. He appreciated the cards and letters, the sentimental, and was touched by anything unique that reminded him of past episodes of his life. Otherwise, he had so much Coca-Cola memorabilia by now, so many Nebraska football posters, so many flags, quilts, paintings, collages, and other tributes to him and photographs of himself with other famous people that there was hardly any space left on an entire floor of hallways. His actual birthday was a low-key event, usually just dinner at someplace like the Olive Garden with family and perhaps a few friends.
This year he was turning seventy-one. He could not believe he was seventy-one. He could not believe it, either, when he’d turned forty, and fifty, and sixty, and seventy. But this year, especially, he did not want to think about his birthday, because he did not want any reminders of time passing so soon after Kay’s death.
Fortunately, the Omaha Classic golf tournament, an annual event that the Buffetts sponsored to benefit various local institutions, followed his birthday like recess after study hall. Corporate CEOs and celebrities, friends and relatives, people he knew and enjoyed, were coming to play golf and tennis at the Omaha Country Club.3 The guests at this event were another collection, like his shareholders, like the people who came to Omaha for his shareholder meeting, like the members of the Buffett Group. As the days counted down, the staff juggled shifting guest lists, airport transportation, and food and entertainment for golfers at the club. Buffett enjoyed knowing the details: who would come, how many times a guest had come before, who was attending for the first time, and how much money the event would raise.
Most of the guests arrived Monday evening for a dinner at the Omaha Country Club with entertainment by Academy Award–winning songwriter Marvin Hamlisch.4 Every year he sat at the piano and made up personal songs on the spot for anyone who asked.
“He didn’t play golf. He came to the tournament some years ago, and he likes Little Sooz, and she likes him. And he said, ‘Why don’t you let me do a little show the night before for the people who come in early?’ It got to be the best part of the golf tournament. You say, ‘I wish I could get rid of that damn hook that I have with my three wood,’ and it’s a song. People thought it was rigged. It wasn’t rigged. If you said, ‘I can’t believe my mother-in-law steals the sugar packets from restaurants,’ thirty seconds later he’s banging out a little tune and singing a song to that refrain.”
The next morning dawned under a flawless blue dome of sky. Around eight o’clock, Buffett’s phone rang. It was Devon Spurgeon, a Wall Street Journal reporter who had been covering Berkshire Hathaway. “Oh, my God, Warren, turn on the TV,” she said. He turned it on to a news channel. At opposite ends of the phone line they watched what appeared to be a horrible aviation accident. The cameras were running footage that panned across the North Tower of the World Trade Center, whose upper stories were slashed through by a jagged, gaping wedge of flames. An airplane appeared, circled toward the building, and plunged into the side of the South Tower, exploding in a corona of flames like a bomb going off. They watched in silence as the news channel began repeating the footage: Plane turns, dives into building. Plane turns, dives into building. “Devon,” said Buffett, “the world has changed.” He started asking her about her office, which was two blocks from the Sears Tower in Chicago. Listen, he said, that’s not a safe place to be. The Wall Street Journal headquarters in New York was across the street from the World Trade Center. They discussed the fact that the Journal staff must be evacuating and reporting at the same time. Spurgeon could hear Buffett switching, as they spoke, into his fastest-thinking, most rational, problem-solving mode.5
As he was hanging up the phone, the FAA halted all flight operations at U.S. airports, and minutes later American Flight 77 crashed into the Pentagon. About fifteen minutes after that, while the White House was evacuating, Buffett, his mind latticing bits of information into a plan, called General Re, where he was supposed to be speaking the next day to a group of employees. He said that he was still planning to fly out to Connecticut if the airports reopened and flights resumed.6 General Re and its neighbor in Connecticut, Ajit Jain’s Berkshire Re, were both international gateways to insuring potential losses from terrorism. Meeting with them now would enable him to talk with his managers about suddenly significant issues at a critical time.
While Buffett was working out logistics with General Re, the South Tower, burning from inside, collapsed, as did a portion of the Pentagon. Within minutes, United Airlines Flight 93 crashed near Shanksville, Pennsylvania. Over the next half hour, government buildings were evacuated, and the North Tower collapsed. The New York Stock Exchange closed and civilians fled the clouds of smoke and debris in lower Manhattan.
Almost everyone in Omaha at the golf tournament was affected in some way or another, however remotely. Many had friends, relatives, neighbors, or business acquaintances who worked in the towers. The tournament staff took care of their needs and helped them with logistics. One, Ann Tatlock, the CEO of Fiduciary Trust, which was headquartered in the Trade Center, spent the rest of the day in her hotel room, making phone calls.7 About a hundred Fiduciary Trust employees would prove to be missing. Berkshire, of course, had employees in businesses scattered all across the country. In the end Buffett would find that Berkshire had lost no employees—only money.
Some people decided to leave the golf tournament immediately, but with all airports closed this was not easy. A few started making arrangements to rent cars and leave. Others stayed, some because they didn’t want to insult Buffett, many because they had no choice.8 Radio commentator Rush Limbaugh, on the way to the tournament, had turned his plane around in midair and headed back to New York.9
While these momentous events were occurring, Buffett proceeded with his schedule, compartmentalizing as he did under stress even in extreme situations. He arranged to complete the acquisition of a small business that was al
ready in process. Then he went ahead with a meeting that had been scheduled with the head of Home Depot, Bob Nardelli.10 Afterward he showed up at the Omaha Country Club, where about a hundred guests were milling around or dining on hamburgers and ice cream. Buffett said that things would go on as planned but people should do whatever they needed or wanted to do. Guests wandered in and out of the club making calls and checking the news on television. Tony Pesavento and Gary Wiren, the local pros, followed lunch with a golf lesson, and the tournament got rolling in a surreal atmosphere. Buffett rode a golf cart through a planned circuit of stops at different tees so guests could have their picture taken with him.11 A strange calm hung over the event, which was like a celebrity golf tournament the day Pearl Harbor was attacked. And in fact, like Buffett, more than a few of the golfers could remember Pearl Harbor and its aftermath. This was not an excitable crowd. Most of them were prominent businessmen accustomed to stress and pressure, from a generation of men that considered poise and equanimity in the face of disaster as essential as the suits and ties they wore every day to work.
Buffett had fallen automatically into statesman mode, moving through his routine with smooth composure. Even so, his brain was busy turning over the threat of terrorism and its broader implications for weapons of mass destruction, as well as the possible effect this would have on the economy.
He was more prepared for this than most because he had already been thinking about terrorism risk. In May, he had told General Re and Berkshire Re to cut back on insuring buildings and clients that represented a concentration of exposure to terrorism risk, his mind working as it always did to extrapolate toward potential catastrophes. He had actually cited the World Trade Center as an example of a building complex where a cluster of clients might create too much risk.12 While the rising threat of terrorism in the late 1990s and early-millennium years was no secret, Buffett’s attempt to protect Berkshire against the danger had been unusually prescient, and probably unique among insurers.13
All day long Buffett had been thinking about what to say that evening after dinner. He knew that the stock market, which was closed, would plunge as soon as it reopened. He realized that the innocence of the United States had now been shattered, and the government would be grappling with an unseen enemy. He saw his role as to convey his thoughts on what all of this meant.
The guests who attended the dinner that night watched President Bush’s speech on a giant TV screen, then heard Buffett speak about terrorism, contrasting it with conventional war. “Terrorists have a huge advantage. They pick the time, the place, and the means. It’s very difficult to defend against fanatics…. This is just the start of things. We don’t know who our enemy is. Now, it’s us versus a shadow. There could be many shadows.”14
The following morning and over the next few days, as airports gradually began to allow flights to resume on a limited schedule, the Buffetts organized dinners, tennis, and golf for the remaining guests until everyone was able to straggle home from Omaha.15 With the cleanup under way in lower Manhattan, and “Missing” posters going up all over New York City, Buffett considered how he could use his nationally recognized reputation to help the country. The stock market was about to reopen after its longest recess since the Great Depression. He agreed to go on 60 Minutes with former Treasury Secretary Robert Rubin and Jack Welch, the recently retired CEO of General Electric. Americans would recognize him as an expert on investing and the stock market, more than anyone else. On the show that Sunday evening, Buffett said that he would not be selling stocks—he might be a buyer if they declined enough—and explained that he had confidence in the ability of the United States economy to surmount the ripples from the terrorist attack. By now Warren Buffett’s reputation for honesty, built over decades, was known to anyone who cared about the stock market. When he said something, people knew he meant it. At Sun Valley, of course, Buffett had said the value of the market would need to fall by half before he would get really excited. So when he said he might be a buyer if stocks declined enough, the savvy knew he meant it—but they also knew “enough” meant “a hell of a lot.”
The next day, the Dow fell 684 points, or seven percent, its largest point decline ever in a single day. The Federal Reserve began to take action after the market plunged on its reopening, cutting interest rates fifty basis points (half a percent). By the end of the week, the Dow had fallen more than fourteen percent, its largest one-week drop in history. Yet the drop as a percent of investors’ wealth was less than half that of 1987, when the market plunged by one-third. From the time trading opened, sellers concentrated on sectors like insurers and airlines, where the most serious financial consequences would be. People were less panicked than they were groping in the dark to try to make intelligent guesses about the unknowable.
Within days, as barricades and new security gates were installed all over Manhattan amid bomb scares and the Buffett Group trip to Biarritz was canceled, Buffett talked to Berkshire’s insurers and tried to assess the damage to Berkshire Hathaway. The initial estimates, which would later be revised slightly upward, indicated that Berkshire had lost $2.3 billion.16 This was many times its largest loss from any earthquake, hurricane, tornado, or other natural disaster to date. Of the total, $1.7 billion came from General Re.
Buffett had had enough. He went to work writing a special letter that he posted on his Web site, excoriating General Re for having broken the “basic rules of underwriting.” Since he had never, in the history of Berkshire Hathaway, publicly dressed down the management of one of his companies, the effect was to brand General Re with a red-ink scarlet letter, which remained posted on the Web site for all to see. It was now in a precarious situation. Having publicly embarrassed Buffett in such a dramatic way, it risked becoming the next Salomon—a business that he could never embrace, that would instead become only another cautionary tale.
After the stock market crash of 1987 and then again after the collapse of Long-Term, the Federal Reserve had slashed interest rates three times within seven weeks, priming the market pump with easy money. Now, to prevent panic, the Fed took interest rates down to historically low levels once again. The Fed’s role was to maintain the banking system’s liquidity. This time, however, the Fed would keep interest rates artifically low for three years.17 Fueled by cheap money, one month after the attacks, stocks completed a full recovery, restoring $1.38 trillion in market value. But the upheaval was far from over, and the market remained in a nervous mood, partly due to uncertainty over the outcome of the United States and British invasion of Afghanistan a few weeks after 9/11. Then, in November, an energy trading company called Enron stuck a pin in the remains of the late 1990s stock-market bubble, which had shrunk but not burst. As the Justice Department moved in, Enron melted into bankruptcy in the heat of an accounting fraud.
Enron was an extreme but not isolated situation. The excesses of the stock-market bubble and the opportunity for executives to pillage their companies led to a whole series of accounting-fraud and securities-violation cases: WorldCom, Adelphia Communications, Tyco, ImClone. As 2002 began, New York Attorney General Eliot Spitzer mounted a blitzkrieg assault against the Wall Street banks for having inflated stock prices by touting new offerings during the Internet bubble using biased stock research.18 Valuations of stocks and bonds began to fall apart as investors lost confidence in the numbers reported to them by managements.
Berkshire’s best opportunities always came at times of uncertainty, when others lacked the insight, resources, and fortitude to make the right judgments and commit. “Cash combined with courage in a crisis is priceless,” said Buffett. Now his time had come round again. Anyone of normal energy might have been overwhelmed, but Buffett had been waiting for years for the kind of opportunities that sleeted down upon Kiewit Plaza. Every one of his faculties seemed engaged at once. He bought a group of junk bonds, which had become cigar butts, for Berkshire. He bought the underwear maker Fruit of the Loom, quipping, “We cover the asses of the masses.”19 He bo
ught Larson-Juhl, which made picture frames. Berkshire’s MidAmerican Energy subsidiary invested in the troubled Williams Companies and bought its Kern River Pipeline.20 Berkshire bought Garan, the maker of Garanimals children’s clothing. It picked up the Northern Natural Gas pipeline from Dynegy, another troubled energy company.21 Within days, MidAmerican lent more money to Williams Companies.22 It bought The Pampered Chef, which sold cookware at parties through a sales-force of 70,000 independent “kitchen consultants.” It bought farm-equipment maker CTB Industries and teamed with investment bank Lehman Brothers to lend $1.3 billion to struggling Reliant Energy.
Ajit Jain quickly moved into the terrorism-insurance business, filling a sudden vacuum by insuring airlines, Rockefeller Center, the Chrysler Building, a South American oil refinery, a North Sea oil platform, and the Sears Tower in Chicago. Berkshire was paid to unburden the Olympics of the dubious risk that either the Games would be canceled or the U.S. would not show up at least twice before 2012. It insured the Winter Olympics in Salt Lake City against a terrorist attack. It insured the FIFA World Cup soccer championship against terrorism.23 Buffett was handicapping.
Some of Berkshire’s businesses struggled in a weak economy. Buffett had always said he’d rather have a lumpy fifteen percent return than a steady ten percent. It didn’t bother him. Most would naturally right themselves over time. NetJets, however, was struggling, not just because of the economy but because the premise for buying it—the uniqueness of its franchise—was looking less unique. Other people who forgot to call the Air-aholic hotline kept setting up businesses to compete with NetJets, even though the economics of the fractional aviation business were unattractive. Buffett now realized that it was testosterone that caused Air-aholism. “If only women could be CEOs of companies that flew planes,” he said, “I think it would be a lot better. It’s like sports franchises. If only women could own sports franchises, they’d sell for one-tenth what they sell for now.” He told the shareholders that NetJets would return to profitability and would dominate its market. He did not point out, however, that it might not earn the margin on capital he had hoped, at least not any time soon. It was a letdown, but still a lot better than a money-losing textile mill. Besides, NetJets was fun. He knew mountains of minutiae about how the planes were purchased, managed, scheduled, routed, maintained, insured, piloted, crewed, and even how the pilots were trained. NetJets was cool. He did a lot of elephant-bumping at NetJets events. He would never sell it, even if the world’s other mega-billionaires tried to arm-wrestle him for it.
The Snowball Page 94