The Snowball

by Alice Schroeder

  9. Berkshire owned so much Washington Post stock and Buffett’s position on the board was such that, if it bought a TV station, its ownership would be attributed to the Washington Post, pushing it over the limit of five stations that it could own.

  10. Howard E. Stark letter to Warren Buffett, June 18, 1975. Also see Lee Smith, “A Small College Scores Big in the Investment Game,” Fortune, December 18, 1978.

  11. Katharine Graham, Personal History. New York: Alfred A. Knopf, 1997.

  12. The new printing-press technology that owners had installed made management hostage to the skilled employees who knew how to run the complex equipment.

  13. Katharine Graham, Personal History.

  14. Ibid.

  15. Interview with George Gillespie.

  16. According to Personal History, this contract would have given the pressmen the highest wages in the nation and security from layoffs. Negotiations broke down in part because the Post refused to hire back the workers who had damaged the presses.

  17. According to Personal History, fifteen former Post pressmen pleaded guilty to various misdemeanor charges. Six who had damaged presses and committed more serious crimes were jailed.

  18. They sold their interest in Source Capital to its managers.

  19. With the press strikes and Watergate affair behind her, Katharine Graham began to focus on growth at the Washington Post in the mid-1970s. Up until then, the company didn’t have sufficient profits and there was “little more than a hit-or-miss strategy” for growth (Personal History). Sales and earnings started to take off in 1976, around the time that they started buying back company stock. Earnings per share were $1.36 in 1976 vs. $0.36 in 1970. Return on equity was 20% compared to 13%. Profit margin grew to 6.5% from 3.2%. And it kept improving from there (Value Line report, March 23, 1979).

  20. Charles Munger letter to Katharine Graham, November 13, 1974.

  21. Interview with Don Graham.

  22. C. David Heymann, The Georgetown Ladies’ Social Club. New York: Atria Books, 2003.

  23. Interview with Don Graham.

  24. Interview with Susie Buffett Jr., who credits her parents for not interfering.

  25. Interview with Susie Buffett Jr.

  26. Interview with Dick and Mary Holland.

  27. Interview with Susie Buffett Jr.

  28. Ibid.

  29. Interview with Howie Buffett.

  30. In an interview Peter Buffett described his routine at this time.

  31. According to friends of Susie’s who say she blamed Graham for the relationship.

  32. Al Pagel, “What Makes Susie Sing?” Omaha World-Herald, April 17, 1977.

  33. Ibid.

  34. This is Jack Byrne’s recollection of Davidson’s remonstration in an interview. Jack being a colorful guy, it is possible that his recollection is a bit more colorful than what Davidson actually said.

  35. Interview with Tony Nicely.

  36. Warren Buffett memo to Carol Loomis, July 6, 1988.

  37. By 1974, the whole insurance industry was producing what rating agency A. M. Best called “unbearable” losses of $2.5 billion from a vicious price war and inflation of everything from car repairs to lawsuits. (A.M. Best Company Comment on the State of and Prospects for the Property/Liability Insurance Industry, June 1975.) The states were also passing “no-fault” insurance legislation, which meant that insurers had to pay for an accident regardless of who caused it. The federal government also slapped price controls on the industry during the Middle East war. Meanwhile, the devastating stock market of 1973–74 had wiped so much value from GEICO’s stock portfolio that for every share of stock, investments that had once been worth $3.90 were now worth a dime a share (Leonard Curry, “Policy Renewed: How GEICO Came Back from the Dead,” Regardie’s, October/November 1982).

  38. GEICO had $500 million in premiums and would have needed capital of $125 million to meet regulatory and rating agency standards for leverage.

  39. Interview with Sam Butler.

  40. Interview with Jack Byrne. “The bastards at Travelers had passed me over for president for Ed Budd,” recalls Byrne (who likes to tell this story and tells it often). “A million dollars invested with me is now worth a billion, and a million dollars invested with Ed Budd is now worth $750,000. And I used to be pissed, but obviously I’m more mature about it now. Well, I’m still pissed.” This story is also recounted in William K. Klingaman, GEICO, The First Forty Years. Washington, D.C.: GEICO Corporation, 1994.

  41. Interview with Jack Byrne.

  42. “GEICO’s Plans to Stay in the Black,” BusinessWeek, June 20, 1977. It is Byrne’s impression that Wallach did not like him.

  43. GEICO had too little capital under regulatory standards to ensure its ability to pay claims on all its policies. By transferring some of its business to competitors, the company would relieve the strain on capital.

  44. Interview with Rhoda and Bernie Sarnat.

  45. Interview with Lou Simpson.

  46. “Leo Goodwin Jr. Is Dead at 63; Headed GEICO Insurance Concern,” New York Times, January 18, 1978; “Leo Goodwin, Financier, Son of Founder of GEICO,” Washington Post, January 18, 1978.

  47. Interview with Don Graham.

  48. Leonard Curry, “Policy Renewed.”

  49. Warren Buffett memo to Carol Loomis, July 6, 1988.

  50. Blue Chip bought 14% of Pinkerton’s in March 1976 and Buffett went on the board, a thrill to the erstwhile boy detective who had also busted open Boys Town’s hidden war chest.

  51. Interview with Bill Scott.

  52. Wallach had invited big insurers to buy up 40% of GEICO’s reinsurance treaties, giving them until June 22 to make their decision to participate. Not enough insurers signed up. Wallach was supposed to decide by Friday, June 25, whether to shut GEICO down. He extended the deadline and, in mid-July, revised his rescue plan—requiring only 25% of GEICO’s premiums to be taken up by the insurance pool and lowering the amount of capital they needed to raise by year-end to $50 million. Reginald Stuart, “Bankruptcy Threat Fails to Change Status of GEICO,” New York Times, June 26, 1976; Reginald Stuart, “The GEICO Case Has Landed in His Lap,” New York Times, July 4, 1976; Matthew L. Wald, “GEICO Plan Is Revised by Wallach,” New York Times, July 16, 1976.

  53. National Indemnity was a specialty company, not yet so large or well-known that it would cause too much push-back on the grounds of helping a competitor. Buffett’s other insurers, as will be seen, were struggling.

  54. Who knows what General McDermott actually wrote, but any endorsement at all from him would have carried weight among insurers.

  55. Some of the people instrumental in making it happen were former GEICO employees, according to Byrne.

  56. Interview with Jack Byrne.

  57. John Gutfreund quoting Frinquelli in an interview. Frinquelli did not return calls requesting an interview.

  58. Interview with Sam Butler.

  59. Leonard Curry, “Policy Renewed.” According to some sources, Butler also had an instrumental role in convincing Gutfreund to underwrite the deal.

  60. Without a doubt it had not. Among other things, GEICO had failed to disclose a change in method of calculating loss reserves, which had enabled it to boost profits by $25 million during the second and third quarters of 1975. “In the Matter of GEICO et. al.,” October 27, 1976.

  61. Leonard Curry, “Policy Renewed.”

  62. Interview with John Gutfreund.

  63. An indication of “aftermarket support” was a principal component in underwriters’ assessments of how a stock might trade once it was listed. The presence of aftermarket support helped prevent a “busted deal” in which the underwriter had to buy back the offering with the firm’s own capital.

  64. Byrne’s recollection is that Tom Harnett, the New York superintendent, helped rally the industry to get behind the reinsurance. Harnett, he believes, had an incentive because the New York guaranty fund was prefunded and had invested in Big Mac New York Cit
y bonds, which were selling at a fraction of their par value. The insolvency funds in effect had evaporated in the wake of New York City’s financial crisis.

  65. Byrne has told this story more vividly in times past. In Roger Lowenstein’s Buffett: The Making of a American Capitalist (New York: Doubleday, 1996), he supposedly said to Sheeran, “Here’s your fucking license. We are no longer a citizen of the state of New Jersey.” He calls Sheeran “the worst insurance commissioner ever.”

  66. Disgruntled employees, hearing the news about their jobs, started throwing policies out the top-story window. “Files were floating all around North Jersey in the air,” says Byrne. Nobody knew this until GEICO moved the claims office to Philadelphia, “when we went to move the files and they weren’t there.” Byrne estimates the lost data cost the company as much as $30–40 million in excess claims. GEICO also gave up its license in Massachusetts. It stopped writing business in many other states without surrendering the right to do so in the future. In total, the company nonrenewed 400,000 out of its 2.2 million policyholders.

  67. Interview with Jack Byrne. The author first heard this story from a secretary who formerly worked for Byrne.

  68. Interview with Tony Nicely. The length of these meetings sounds incredible, but Byrne seemed to have an almost superhuman energy.

  69. Interview with Jack Byrne.

  70. James L. Rowe Jr., “Fireman’s Fund Picks Byrne,” Washington Post, July 24, 1985; Sarah Oates, “Byrne Pulled GEICO Back from Edge of Bankruptcy,” Washington Post, July 24, 1985.

  71. Graham Group members, Buffett friends, and Berkshire employees such as Marshall Weinberg, Wyndham Robertson, Verne McKenzie, Gladys Kaiser, Bob Goldfarb, Tom Bolt, Hallie Smith, Howie Buffett, and Peter Buffett all remember Grossman fondly.

  Chapter 41

  1. Christopher Ogden, Legacy, A Biography of Moses and Walter Annenberg. Boston: Little, Brown, 1999; John Cooney, The Annenbergs: The Salvaging of a Tainted Dynasty. New York: Simon & Schuster, 1982.

  2. Ogden, in Legacy, cites Annenberg as saying he declined to buy the Washington Times-Herald from Colonel McCormick and convinced McCormick to sell to the Grahams despite their reservations about Phil Graham’s drinking and mental stability. Thus, he felt responsible for putting together the newspaper marriage that made the Washington Post what it had become. He felt slighted because the Grahams had never credited him. Buffett says that Annenberg was exaggerating his role and that Graham viewed this notion as ridiculous.

  3. Drew Pearson, “Washington Merry-Go-Round: Annenberg Lifts Some British Brows,” Washington Post, February 24, 1969.

  4. Buffett’s recollection of Annenberg’s perspective on Nixon.

  5. Description of the Annenbergs’ reactions is from Legacy. Drew Pearson, “Senators Wary on Choice of Annenberg,” Washington Post, March 5, 1969.

  6. The comparison with Nixon was made by Annenberg’s biographers.

  7. In fact, the Annenbergs’ investment of time, personal funds, and good judgment in a thoughtful restoration of Winfield House, the ambassadorial residence, played a key role in their acceptance in Britain.

  8. C. David Heymann, The Georgetown Ladies’ Social Club (New York: Atria Books, 2003) and Legacy. This is Walter Annenberg’s account, and there is no telling what was really said. But, by all accounts, he was offended.

  9. In the end, he gave most of his money to the Annenberg Foundation and his art collection to the Metropolitan Museum of Art.

  10. Lally Weymouth, “Foundation Woes: The Saga of Henry Ford II, Part II,” New York Times Magazine, March 12, 1978.

  11. Walter Annenberg letter to Warren Buffett, October 1, 1992.

  12. Donner was not entirely obliterated. In 1960, seven years after he died at age eighty-nine, the $44 million in assets in his foundation was divided equally—between a newly formed Donner Foundation and the original foundation, which changed its name to the Independence Foundation (www.independencefoundation.org).

  13. Walter Annenberg letter to Warren Buffett, October 1, 1992.

  14. Said to the author in an interview in 2003—an indicator of the direction of his thoughts at the time.

  15. While most mergers are done for stock (if only for tax reasons), this subtle underlying psychology gives the seller a slight advantage. The willingness to issue stock implies, by its nature, that the buyer prefers the seller’s business to his own. The exception is using an overpriced stock to buy an underpriced company from a naive seller, which aggressive buyers sometimes do, although not nearly as often as they think.

  16. Graham’s term, from her autobiography. Liz Smith called Graham Buffett’s “frequent hostess” and Diana McLellan said, “All the way up in New York, they’re talking about Kay Graham and Warren Buffet [sic]…but oh, so discreetly.” Diana McLellan, “The Ear,” Washington Star, March 12, 1977; Liz Smith, “Mystery Entwined in Cassidy Tragedy,” Chicago Tribune, March 6, 1977.

  17. Heymann, The Georgetown Ladies’ Social Club.

  18. See, for example, her relationships with Jean Monnet, Adlai Stevenson.

  19. The letter was described this way in Lowenstein, Buffett.

  20. Graham showed Dan Grossman a copy of this letter. Susan Buffett also showed Doris Buffett a copy of this letter. Graham’s papers currently are under seal.

  21. Roger Lowenstein, Buffett.

  22. “Interview with Susan Buffett,” Gateway, March 5, 1976.

  23. Peter Citron, “Seasoning Susie,” Omaha World-Herald, April 7, 1976.

  24. “Buffett Serious,” Omaha World-Herald, September 14, 1976.

  25. Buffett considered buying Alfred Knopf’s apartment at 24 West 55th Street, later one of two landmarked Rockefeller apartments.

  26. Interview with Susie Buffett Jr.

  27. Interview with Al “Bud” Pagel.

  28. Denenberg declined to be interviewed.

  29. Al Pagel, “What Makes Susie Sing?” Omaha World-Herald, April 17, 1977.

  30. Ibid.

  31. Interview with Al “Bud” Pagel.

  32. Ibid.

  33. Peter Citron, “Seasoning Susie.”

  34. Interview with Stan Lipsey. See Leo Litwak, “Joy Is the Prize: A Trip to Esalen Institute,” New York Times Magazine, December 31, 1967.

  35. Steve Millburg, “Williams’ Songs Outshine Voice,” Omaha World-Herald, September 5, 1977.

  36. Interview with Astrid Menks Buffett. The sleeping Warren famously did not notice whether Susie was there. In one story related by Racquel Newman, she decided to drive to Dottie’s to play music at around ten or eleven at night, ran out of gas in a snowstorm at midnight on her way home, and instead of waking Warren, called a friend and went on an all-night obstacle-filled expedition to a gas station on the interstate, delayed by a tractor-trailer jackknifed on the freeway. She finally got home shortly before dawn. Warren never knew she was gone.

  37. Said to a friend of the couple’s who believes that Susie was probably sincere, both because she believed Warren really was that dependent on her and because of his preoccupation with suicide, linked to the many suicides among the Stahl family and the Buffetts’ friends.

  38. Warren Buffett, “How Inflation Swindles the Equity Investor,” Fortune, May 1977. In a letter to the Graham Group, September 27, 1977, Bill Ruane describes how “This article can well serve as a basis for a discussion of so many things which are central to our economic concerns today. The article not only deals with the central theme of inflation but also with the effects of taxes, rate of return, dividend paying capacity and other elements which are crucial to the appraisal of aggregate values in our economic system.”

  39. The Buffett Group would take this problem up again and again. Its members were pessimistic about whether the problem could be solved, for they doubted, with good reason, that Congress had the necessary resolve to control the federal budget over the long term.

  40. Interview with Marshall Weinberg.

  41. The $72 million includes his holdings in BRK, DRC, and Blue C
hip Stamps at year-end 1977. Susie added another $6.5 million to this total. This does not include his indirect holdings through the three companies’ cross-holdings of each other.

  42. Interview with Peter Buffett.

  43. Interview with Tom Newman.

  44. Two sources have confirmed this.

  45. Interview with Astrid Buffett.

  46. Ibid.

  47. Interview with Michael Adams.

  48. Interview with Astrid Buffett.

  49. The 1977 letter contains significantly more “teaching” content than its predecessor. Although Buffett had control of Berkshire for twelve years previously, the 1977 letter was the first to be collected in a bound collection of letters he used to hand out to friends and is the first year featured on Berkshire’s website.

  Chapter 42

  1. Interview with Astrid Buffett.

  2. Interview with Michael Adams.

  3. Interview with Kelly Muchemore.

  4. From a close friend of the family.

  5. Buffett explained in conversation and a letter to the author how he felt, separating his life into two stages with age forty-seven as the turning point.

  6. To the end of her life, Estey wrote letters with “Mrs. Benjamin Graham” embossed on her stationery.

  7. Interview with the author, 2003.

  8. Katharine Graham, Personal History. New York: Alfred A. Knopf, 1997.

  9. Interview with Stan Lipsey.

  10. Interview with Sharon Osberg.

  11. Astrid Buffett recalled the VCR conversation in an interview.

  12. Jeannie Lipsey Rosenblum and others recall the details in interviews.

  13. Interview with Peter Buffett.

  14. Bryant campaigned to make it illegal for gays to teach in public schools in Dade County, Florida, and succeeded in passing a civil-rights ordinance against gays.

  15. The price included $1.5 million in pension liabilities. Blue Chip Stamps Annual Report, 1977. Blue Chip borrowed $30 million from a bank in April 1977 to finance the purchase.

  16. Berkshire had assets of $379 million, Blue Chip had $200 million, DRC had $67.5 million at year-end 1977.