However much Buffett had changed and grown since Susie’s death, he was still very much the same in certain ways. Allen Greenberg, who ran the Buffett Foundation, found out that the foundation he would be running would be a $6 billion foundation, not the $45 billion foundation for which he had been preparing, not from Buffett, but by proxy through Allen’s new boss and ex-wife, Susie Jr. Warren had been unable to bring himself to confront Greenberg to tell him that all his plans and thinking about how to run the foundation in the future must be downsized. Susie Jr. had to convince Allen that this was in no way a grade on his performance. After his initial explosion over the fact that he hadn’t heard the news from the source, he conceded that he would still be administering one of the world’s ten largest charitable coffers, and peace ultimately reigned.
All involved had ample reason to behave well. Even though Buffett was giving away a vast sum, the money would be paid out over some years. And the stock he had not yet earmarked as a gift was estimated as worth more than $6 billion at the time. He still had plenty to give away.
The effects of Buffett’s announcement were immediate and sizable. Jackie Chan, the Hong Kong actor, announced that he would give away half his wealth. Li Ka-shing, Asia’s richest man, pledged a third of his $19 billion to his own charitable foundation. Carlos Slim, the Mexican communications monopolist, ridiculed Buffett and Gates for their philanthropy but, some months later, did a turnabout and announced that he, too, would begin giving money away. And the Gateses set up a new division within their foundation simply to handle people who wanted to make donations to them—such as a seven-year-old girl who sent the Gates Foundation her life savings of $35.
The newly enriched Gates Foundation was having a tectonic impact on the philanthropic world. Its “all-asset approach,” which greatly resembled Buffett’s ideas about concentration—and, indeed, his investing style—focused resources toward a short, carefully selected list of serious problems. That differed markedly from many other major foundations and community funds, at which a headquarters staff of philanthropoids circled around a series of supplicants, playing “eeny, meeny, miney, moe” as they doled out fragmentary sums. By the end of 2006, certain organizations such as the Rockefeller Foundation had begun modifying their policies to align them more closely with the Gates approach.20
Three thousand letters from needy people poured into Buffett’s office after the Gates announcement, with more coming every day. They had no insurance and were overwhelmed by medical bills, or they had gotten injured on the job and their homes were being repossessed. Their children had cataclysmic health problems that required special care, which prevented them from making enough money to pay their mortgage. Or their boyfriends had gotten them pregnant, cheated them out of money, tricked them into assuming the boyfriend’s debt, and then run off without paying child support. They were the losers in the Ovarian Lottery. Warren forwarded the letters to his sister Doris. Over the past ten years her Sunshine Lady Foundation, funded with the proceeds from Howard Buffett’s trust, had helped thousands of victims of domestic violence, the severely disadvantaged, and families in crisis. He enclosed $5 million with the letters to help fund Doris’s work.
She hired a group of women over age fifty to help sort out the letters where “bad luck rather than bad choices” had played a part, and relatively small amounts of money could give someone a hand up. They often gave advice to the gamblers and credit-card addicts and people who just didn’t want to work, but they never bailed out people who had other ways to solve their problems. And Doris never paid for everything. “I don’t want to be their mommy,” she said. She also made them write thank-you letters. Her type of philanthropy taught gratitude and self-respect.21
Buffett kept handing out more of his billions. He was already giving $5 million a year to Ted Turner’s Nuclear Threat Initiative (NTI), which he considered the most important of the U.S. organizations focused on dealing with the world’s nuclear threat, and he was willing to give more. Former Senator Sam Nunn, who ran NTI, had proposed a nuclear-fuel reserve to which countries could turn rather than developing their own nuclear enrichment programs, thereby reducing the likelihood of nuclear proliferation. Buffett felt that this idea had considerable merit, and he pledged $50 million as a matching gift if other funds could be raised. He would make huge amounts of money available to any antinuclear causes that seemed to him able to come up with realistic solutions to the problem.
Buffett also gave a donation to former President Jimmy Carter for the work of the Carter Center. After leaving office an unpopular president, Carter had become an example of someone fallen to the ninety-eighth floor who had looked forward, not back, rising to win the Nobel Peace Prize for his work in global health, democracy, and human rights. “Would love to have you join us in Ghana on Feb. 6–8, 2007,” Carter wrote him back warmly after the gift, “to see our guinea worm work.”22 Buffett considered Carter a friend, but nobody—not Howie, not Big Susie, not even Bill Gates—could have gotten him on a plane to go see a guinea worm.23
Thus, for a third time he avoided a trip to Africa. Some things did not change. But time moved on, and other things did change.
Astrid was now Warren’s official companion at events outside Omaha. She remained virtually unchanged—the same plainspoken, unpretentious person—but her world had expanded at stunning speed. She now socialized routinely with Bill and Melinda Gates. In the fall of 2005, she and Warren had flown to Tahiti to attend Bill Gates’s fiftieth-birthday party, which took place on Paul Allen’s sleek blue-and-white Octopus, one of the world’s largest yachts. A billionaire’s little-boy fantasy that belonged to the world’s sixth-richest man, the Octopus had a movie theater, a recording studio, two helicopters, a sixty-three-foot tender, and a small submarine that could sleep eight people for two weeks on the ocean floor. She and Warren stayed in Paul Allen’s mother’s stateroom, a large suite with a walk-in closet and a library in the sitting room. “Oh, my God,” says Astrid, “it was unbelievable. I have never experienced and will probably never experience a time like that again.”
“It beats home” was Warren’s reaction. He returned from the trip talking of the onboard bridge games.24
Two years after Susie’s death, on his seventy-sixth birthday, Warren married Astrid in an unfussy civil ceremony at Susie Jr.’s house with no guests other than family. Astrid wore a simple turquoise blouse and white pants, and Warren wore a business suit. Tears welled from her eyes as he placed a huge diamond solitaire ring on her finger. Afterward, they went to the Bonefish Grill next to Borsheim’s for dinner. Then they flew out to San Francisco for a wedding party and a traditional wedding cake at Sharon Osberg and David Smith’s. The Gateses joined them for the celebration.
Warren Buffett, the not-simple man of simple tastes, now had the simple life of the man that he had always believed himself to be. He had one wife, drove one car, occupied one house that hadn’t been redecorated in years, ran one business, and spent more and more time with his family.25
Buffett always said that trees don’t grow to the sky. But new saplings form.
The question of who would succeed him had long vexed his shareholders.
He sometimes quipped that Berkshire could be run by someone working five hours a week, or by Charlie’s bust of Ben Franklin, or by a cardboard cutout. He’d also joked about controlling it after his death: “Well, my backup plan is that I’ve figured out how to manage the company by seance.” No one was fooled by his banter. On other occasions he was just as likely to tell his listeners: “My psyche is all wrapped up in Berkshire.” And those who worked for and invested in Berkshire were all wrapped up in Buffett. He was not replaceable. And what would happen to all that capital? The question of either a dividend or a huge share repurchase would arise instantly when he was gone. His successor would have to change some things—for while parts of the Berkshire model should be preserved, other parts should not. The headquarters staff—famously minuscule—would probably grow as outsourc
ed functions were reclaimed. Meanwhile, the presumption continued to be that all of the succession candidates already worked at Berkshire. But that wasn’t necessarily true. In fact, the board would be obliged to consider outside candidates when the time came.
Buffett once said that he would be happy if Berkshire was still serving his shareholders thirty years after his death. That was his design. The elegant machine that he had created was built to last more than a generation beyond him. Yet to maintain it would be a remarkable accomplishment; he was the soul of that machine, and without him there would be a vacuum at the center, no matter what. For Buffett was the best there would ever be at the thing that only he could do perfectly, which was to be himself.
No group of shareholders in history had ever missed their CEO as much as Berkshire’s shareholders would miss Buffett when he was finally gone. None had ever thought of their CEO as a teacher and a friend the way Buffett’s shareholders had thought of him. The man who had made billions had touched thousands of people and had a relationship that felt personal to countless others whom he’d never even met or seen. But oddly enough, no matter how many fan letters Buffett got or how many autographs he signed, he never fully grasped how loved and admired he was. He got as excited about every letter and request for an autograph as though it were the first.
In July 2007, the Dow hit a new high of 14,000. Then it began to fall. House prices had already peaked, the way every great bubble peaks, partly because the Federal Reserve had finally started raising interest rates, and house prices had been sliding for some time. Unable to refinance, homeowners were defaulting on their mortgages at historically high rates.
The global margin call began in August. Over a period of eight months, the financial world imploded in a credit crisis of historic proportions. Not since the Great Depression had such a severe credit seizure occurred. Not since the Panic of 1907, when old J. P. Morgan himself had personally intervened to orchestrate a solution to the panic, had such extraordinary informal intervention in financial markets taken place as would occur in 2008.
The crisis progressed in fits and starts, with weeks and even months of apparent calm followed by convulsions that left victims scattered like broken shells on a beach. As it turned out, derivatives had indeed spread risk—banks reported tens of billions in losses; a hospital-management company in Australia lost a quarter of its investment portfolio; eight Norwegian towns lost millions on supposedly safe mortgages securities; estimates of total losses ranged from hundreds of billions to as high as $1 trillion from all sources combined. Like Long-Term Capital, the underlying bets were all made in the wrong direction. They had assumed a rational “efficient” market in which a decline in prices would be halted by cool-tempered, calculating buyers.
“They said all these derivatives made the world safer and spread the risk out. But it didn’t spread the risk in terms of how people reacted to a given stimulus. Now, you could argue that it might be way better to have that credit with just five banks, who could all work, than to have it with thousands around the globe, all of whom are going to rush out of it at the same time.”
The Federal Reserve cut interest rates once again, and worked with other central banks to activate other emergency sources of financing,26 yet the credit crisis continued to spread.
The reluctance to lend began to show signs of contagion. The Dow fell seventeen percent, to 11,740, from its October high. With each new announcement of a fire sale, bankruptcy, or collapse, the low rumbling panic grew louder. More people tried to sell assets behind the scenes and found no buyers; more lenders began to call in loans.
On Thursday, March 13, 2008, a run began, this time on Bear Stearns, the weakest of the investment banks, as its lenders started refusing to roll over its loans. In a near re-creation of the Salomon crisis seventeen years earlier, the following day, Friday, Bear nearly collapsed from lack of financing. But this time the Federal Reserve took the unprecedented step of guaranteeing $30 billion of Bear Stearns debt—the first time the Federal Reserve had ever bailed out an investment bank. Bear closed at $30 per share on Friday afternoon. Buffett pondered the situation that evening. Long-Term Capital Management’s bailout had been a dress rehearsal—on a much smaller scale—for this moment.
“The speed with which fear can spread—nobody has to have an account at Bear Stearns, nobody has to lend them money. It’s a version of what I went through at Salomon, where you were just inches away all the time from, in effect, an electronic run on the bank. Banks can’t stand runs. The Federal Reserve hasn’t bailed out investment banks before, and that was what I was sort of pleading back there in 1991 with Salomon. If Salomon went, who knows what kind of dominoes would set off. I don’t have good answers to what the Fed should do. Some parts of the market are pretty close to paralyzed. They don’t want contagion to spread to what they would regard as otherwise sound institutions; if Bear fails and two minutes later, people worry that Lehman fails, and two minutes after that they worry that Merrill will fail, and it spreads from there.”
The rational Buffett tried to unlock the puzzle embedded in the risky choices facing the Federal Reserve. It had no really good options. Either it allowed a financial meltdown or it took actions that would promote inflation by adding to downward pressure on the dollar. “It could all end on a dime if they flooded the system with enough liquidity, but there are consequences to doing that. If dramatic enough, the consequences would be the immediate expectation of huge inflation. A lot of things would happen that you might not like. The economy is definitely tanking. It’s not my game, but if I had to bet one way or another—everybody else says a recession will be short and shallow, but I would say long and deep.
“You absolutely never want to be in a position where tomorrow morning you have to depend on the kindness of strangers in the financial world. I spent a lot of time thinking about that. I never want to have to come up with a billion dollars tomorrow morning. Well, a billion I could. But any significant amount. Because you just cannot be sure of anything. You have to think about things that have never happened before. You always want to have plenty of money around.”
All weekend the regulators and bankers toiled, much as they had years earlier on Salomon. This time, however, it was with the almost certain knowledge that the bank’s failure would have catastrophic consequences to the global financial system. Whether Bear Stearns deserved its fate was not at issue. Just before the Tokyo markets opened on Sunday, the Federal Reserve announced that it had orchestrated a sale of Bear to investment bank JP Morgan Chase for a pittance. Buffett had been offered the deal, but thought it contained too much open-ended risk.
The same day that the Bear bailout was announced, the Federal Reserve, attempting to calm panic and prevent a run on Lehman Brothers, did indeed begin to flood the system with liquidity: It offered to let the largest investment banks borrow up to $200 billion at its “discount window,” using mortgage-backed securities as collateral. Use of the discount window, formerly a privilege restricted to commercial banks, had never before been extended to investment banks, which are not subject to the reporting and capital regulations that are a quid pro quo for such borrowing. The move didn’t calm the panic; then the government made the offer open-ended. The government was going to accept bad loans as collateral; it began to take a variety of once again unprecedented steps to try to unfreeze the mortgage markets and help struggling lenders. Market pundits praised the Fed’s rescue of Bear and pump-priming of the investment banks as the only way to prevent contagion, but argued whether these actions would hasten an economic recovery or only prolong the pain and plant the seeds of the next bubble. And for seven months, while these financial disasters were unfolding, the value of the dollar—which had been declining for some time—had continued to slide. Meanwhile, oil prices spiked: By July 2008, spot oil traded at $144 per barrel.
“It’s a weird time. We’ve gone into a different world, and nobody knows what will happen to the world, but Charlie and I looked at the dow
nside, and nobody else did, very much.” Deleveraging could be a painful process in which banks, hedge funds, financial-services companies, municipalities, the construction and travel industries, consumers, and indeed the whole economy withdrew—fast and painfully or slow and painfully—from the intoxicant of cheap debt. Asset returns could well stay subpar for a long time—what Charlie Munger called a “4% return world.” Beware of scams and charlatans, said Munger; they might proliferate because the easiest way to turn four percent into sixteen percent is thievery.
In the midst of all the chaos of the spring of 2008, there sat Buffett, whose thinking about value and risk had not changed in the nearly sixty years of his career. There are always people who say that the rules have changed. But it only looks that way, he said, if the time horizon is too short.
There was Buffett, stooping for cigar butts as if he were a child again. He took no joy from others’ pain, but in the business of life, everyone chooses a side to play. Times like these brought out his sharpest skills, the joy of doing what he loved most, true to himself. “We’re selling some credit default swaps [insurance against firms going bankrupt] in situations where it is underpriced. I’m sitting here with my newest daily paper that I read, the Bond Buyer, on my lap. Who the hell would have thought that I’d be reading the Bond Buyer every day? The Bond Buyer costs $2,400 a year. I felt like asking for a daily subscription rate. We get these bid lists on failed auctions of tax-exempt money-market funds and other auction rate bonds and have been just picking them off. The same fund will trade at the same time on the same day from the same dealer at interest rates of 5.4 percent and 8.2 percent. Which is crazy, they’re the exact same thing, and the underlying loans are perfectly good. There is no reason why it should trade at 820, but we bid 820 and we may get one, while concurrently someone else buys exactly the same issue at 540. If you’d told me ten weeks ago I’d be doing this, I’d have said that’s about as likely as me becoming a male stripper. We’ve put $4 billion into this stuff. It’s the most dramatic thing I’ve seen in my life. If this is an efficient market, dictionaries will have to redefine ‘efficient.’”
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