The Snowball

by Alice Schroeder

  35. Interviews with Sharon Osberg and Astrid Buffett, who recalls “Sharon was just beside herself.”

  36. Interview with Sharon Osberg.

  37. Interviews with Astrid Buffett, Dick and Mary Holland.

  38. Interview with Dody Waugh-Booth.

  39. Carol J. Loomis, “My 51 Years (and Counting) at Fortune,” Fortune, September 19, 2005.

  40. Depending on how rich they had gotten and how long ago they had been sunburned. Bill Scott, whom Buffett had made breathtakingly rich, had acquired a deep tan and had begun to resemble Buffett himself.

  41. Carnegie built 2,509 libraries (costing $56 million) and established other public works using over 90% of his $480 million steel-made wealth.

  42. Ruane’s first wife, Elizabeth, suffered from a mood disorder and committed suicide in 1988.

  43. Bill Ruane and others recalled this speech.

  44. Paul Ehrlich, The Population Bomb. New York: Ballantine Books, 1968; Thomas Malthus, An Essay on the Principles of Population. The Population Bomb was based on the work of the nineteenth-century demographer and statistician Thomas Malthus, who said that humans procreate in a geometric rather than arithmetic progression; thus the earth’s population would inevitably expand beyond the point at which its resources could support it. At some point, Malthus postulated, misery and vice (e.g., war, pandemic, famine, infant mortality, political unrest) would reduce the population to a sustainable level. Malthus’s theory had enormous influence on many scientists, including Charles Darwin. Because Malthus failed to take into account a number of factors—for example, simplistically assuming that economic development stimulated population growth—his ideas were and continued to be ridiculed as predicted catastrophes failed to materialize within a decade or two after 1970. The basic concepts of Malthus and the idea of the Malthusian catastrophe are being taken more seriously in some quarters today, however.

  45. Buffett, characteristically, uses both low and high numbers higher than the current population number (a margin of safety against looking like an alarmist) even though some experts argue that the “carrying capacity” has already been exceeded.

  46. Organizations such as the International Humanist and Ethical Union and Planned Parenthood routinely took this position before 1974. See Paige Whaley Eager, Global Population Policy: From Population Control to Reproductive Rights. Burlington, Vt.: Ashgate Publishing Ltd., 2004.

  47. This was the Belous case (People v. Belous, 71 Cal.2d 954, 458 P.2d 194, 80 Cal. Rptr. 354 [1969]), which declared laws against abortion unconstitutional in California. Munger helped write the opinion. Buffett says he has never seen Munger “so fired up,” the most unconventional thing he has ever seen Munger do.

  48. Buffett said Munger tempted him into running a church by offering him the job of sexton, until he found out the job description was not what he thought. “We held mock debates over who got to be the preacher.”

  49. Garrett Hardin, “The Tragedy of the Commons,” Science, Vol. 162, No. 3859, December 13, 1968. Hardin’s theory was essentially a restatement of the “prisoner’s dilemma,” which also addresses cooperation and “cheating” as covered in references on that subject. In the 1970s it was assumed that economic progress would accelerate population growth, that population growth would prevent economic growth. The earth’s “carrying capacity” was assumed to be essentially fixed, rather than at least somewhat flexible through the use of technology and market forces, incorrect assumptions that caused such forecasts to peg the dates of critical population levels too early.

  50. Garrett Hardin, “A Second Sermon on the Mount,” from Perspectives in Biology and Medicine, 1963.

  51. Nevertheless, some remnants of the eugenics movement remained alive, and by the millennial era, developments in genetic, genomic, and reproductive science had raised complicated questions about the idea.

  52. The historic linkage between “population control,” the eugenics movement, and racism is detailed by Allan Chase in The Legacy of Malthus: The Social Costs of the New Scientific Racism (New York: Alfred A. Knopf, 1977). While a full treatment of these issues is beyond the scope of this book, what seems clear, from his change in terminology, steering of the Buffett Foundation, and gradual distancing from the Hardin camp, was Buffett’s disenchantment with the Malthusian views of Hardin because of their eugenics implications. (Hardin’s personal stationery featured a small U.S. map around the words “Quality of the Population.”)

  53. In a highly controversial move, the Buffett Foundation had paid half the first-year costs to bring the RU-486 abortion pill to the United States.

  54. From Eager’s Global Population Policy: From Population Control to Reproductive Rights, which chronicles the gradual rejection of neo-Malthusianism and coercive population control methods in favor of voluntary, evolutionary changes in birth rates through economic development, reproductive rights, and an emphasis on women’s health.

  55. In “Foundation Grows: Buffetts Fund Efforts for Population Control” (Omaha World-Herald, January 10, 1988), Bob Dorr quotes Susie as saying, “Warren likes numbers…he likes to see concrete results, and you can see them [numbers] change” to explain her husband’s interest in groups such as Planned Parenthood and the Population Institute.

  56. A similar term, “Ovarian Roulette,” was apparently first used by Dr. Reginald Lourie of Children’s Hospital, Washington, D.C., at a hearing of the Committee on Government Operations, United States, “Effect of Population Growth on Natural Resources and the Environment,” September 15-16, 1969, in a discussion with Garrett Hardin, to describe a mother who takes the risk of an unwanted pregnancy by not using birth control (and the term has since been used by Responsible Wealth). However, it is the second word—“lottery” versus “roulette”—that changes a bad choice to bad luck: from a child who is born unwanted to a woman who trusts to random chance, to a child who is born in cruel circumstances because of random chance.

  57. “I Didn’t Do It Alone,” a report by Chuck Collins’s organization, Responsible Wealth.

  58. See John Rawls, A Theory of Justice, Cambridge: The Belknap Press of Harvard University Press, 1971. The Ovarian Lottery resembles Rawls’s view, which is a form of determinism—and assumes that much, though not necessarily all, of what happens to people is determined by the present and past, for example, through their genes, or the luck of where they are born and when. The opposite of determinism is free will. From the days of the earliest philosophers, mankind has been debating whether free will exists. Philosophers also debate whether it exists on a scale or is irreconcilable with determinism. Critic Robert Nozick, in Anarchy, State, and Utopia, gives the case for irreconcilability in a critique of Rawls that more or less says that economist Adam Smith’s invisible hand gives people what they have earned and deserved (Anarchy, State and Utopia. New York: Basic Books, 1974). All true libertarians believe in free will and deny absolutely that determinism exists. Since economic policy is so influenced by these ideas, the topic is worth understanding; for example, it sheds light on the debate over how Alan Greenspan’s libertarian leanings influenced Federal Reserve policy that led to recent debt-fueled asset bubbles. Likewise, the debate over eugenics in genomism and reprogenetics resounds with issues of determinism and free will.

  59. Interview with Bill Gates.

  60. In 2005 Oxnam published A Fractured Mind, his memoir of living with multiple personality disorder (New York: Hyperion).

  61. Interview with Bill Gates.

  Chapter 51

  1. Anthony Bianco, “The Warren Buffett You Don’t Know,” BusinessWeek, July 5, 1999.

  2. Interview with Tony Nicely.

  3. This was a 40% premium to where GEICO was trading.

  4. In 1993, 707 new issues raised $41.4 billion. In 1994, 608 IPOs raised $28.5 billion, the second-most-productive year in the past quarter century. The third-best year for IPOs had been 1992, when 517 issues raised $24.1 billion. (Securities Data Co. of Newark, N.J.)

  5. Molly B
aker, Joan Rigdon, “Netscape’s IPO Gets an Explosive Welcome,” Wall Street Journal, August 9, 1995.

  6. Interview with Sharon Osberg.

  7. The Buffetts made other philanthropic gifts using Susie’s stock, as well as funding the Buffett Foundation.

  8. Carol Loomis, “The Inside Story of Warren Buffett,” Fortune, April 11, 1988.

  9. Berkshire Hathaway press release, February 13, 1996.

  10. Interviews with Dana Neuman, Mark Millard.

  11. The employees’ pay could not really be fully aligned with shareholders. Unlike at the Buffalo News, for example, the employees’ base pay at a bank is too low to compensate for the labor value of their time that is owed by the shareholders. In effect, much of the bonus is really salary. The reason that a plan that requires employees to work almost for free in a bad year to compensate for “excessive” bonuses in other years cannot succeed is that it transfers some of the risk assumed by capital onto the backs of labor. The bonus structure of Wall Street—without the glue of partnership—is inherently problematic.

  12. To be considered an arbitrage, two trades must take place simultaneously to eliminate market risk. Buying a stock and selling it later is not an arbitrage. Buying cocoa beans in Ecuador and selling them in San Diego is not an arbitrage.

  13. Interview with Deryck Maughan.

  14. Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management. New York: Random House, 2000.

  15. In July 1998, Weill shut down Salomon’s bond arbitrage unit. One could argue that it was Travelers’ subsequent merger with Citicorp—which provided cheap capital—that made the firm a serious competitor in those businesses. Looked at another way, Travelers paid a high price to enter a business with high barriers to entry, and subsequently exploited its capital and scale advantage. Citigroup dropped the Salomon name in 2001.

  16. Carol Loomis, “A House Built on Sand,” Fortune, October 26, 1998.

  17. Interview with Charlie Munger.

  18. Lowenstein, in When Genius Failed, estimated that these returns were achieved through leverage; Long-Term’s cash-on-cash return was only about 1%. This low return, multiplied fifty to a hundred times through borrowing, appeared extraordinarily profitable.

  19. In When Genius Failed, Lowenstein drew this conclusion after extensive interviews with Meriwether’s former team.

  20. Roger Lowenstein, When Genius Failed. Shorting it as a collection of stocks would not work because of a basis mismatch between Berkshire and the offsetting hedgeable positions. Berkshire was a collection of wholly owned businesses fueled by an insurance company that also owned some stocks, not a quasi-mutual fund.

  21. Roger Lowenstein, When Genius Failed.

  22. Stock or merger arbitrage is a bet on whether a merger will close. Merger-arb specialists talk to lawyers and investment bankers and specialize in scuttlebutt. Their bets are based partly on knowledge about a deal, not just statistics about how typical deals have done.

  23. Interview with Eric Rosenfeld; Lowenstein, When Genius Failed.

  24. Michael Siconolfi, Anita Raghavan, and Mitchell Pacelle, “All Bets Are Off: How Salesmanship and Brainpower Failed at Long-Term Capital,” Wall Street Journal, November 16, 1998.

  25. Interview with Eric Rosenfeld.

  26. The Standard & Poor’s index was down 19% since July and the NASDAQ down by more than 25%.

  27. John Meriwether letter to investors, September 2, 1998.

  28. Warren Buffett letter to Ron Ferguson, September 2, 1998.

  29. Hence, don’t try to make it back the way you lost it.

  30. Interview with Joe Brandon.

  31. Craig Torres and Katherine Burton, “Fed Battled ‘Financial Maelstrom,’ 1998 Records Show,” Bloomberg News, April 22, 2004.

  32. Roger Lowenstein, in When Genius Failed, includes, as do other accounts, an interesting sidebar about the role of Goldman Sachs, which, as capital-raiser for the firm, also sent in a mysterious “trader” who spent days downloading Long-Term’s positions into a laptop and making mysterious cell-phone calls. Afterward, Long-Term’s partners bitterly blamed their demise on predatory behavior by competitors.

  33. According to one partner, the lawyer was dubious about the rushed process, saying maybe there was some trickery involved, and wanting to slow things down and take more time to look over the details.

  34. Roger Lowenstein, When Genius Failed.

  35. Michael Lewis, “How the Eggheads Cracked,” New York Times Magazine, January 24, 1999.

  36. Interview with Fred Gitelman, Sharon Osberg.

  37. After three 0.25% interest-rate cuts—September 29, October 15, and October 17—the market leapt 24% from its low on August 31 of 7,539 to an all-time high of 9,374 on October 23.

  38. Michael Lewis, “How the Eggheads Cracked.”

  39. Roger Lowenstein, When Genius Failed.

  40. Interview with Eric Rosenfeld.

  41. The Federal Reserve’s instant and dramatic cut of interest rates gave rise to a concept called the “Greenspan Put,” the idea that the Federal Reserve would swamp the market with liquidity to bail out investors in a crisis. The Greenspan Put theoretically encourages people to worry less about risk. Greenspan denied there was a Greenspan Put. “It takes a good deal longer for the cycle to expand than for it to contract,” he said. “Therefore we are innocent.” (Reuters, October 1, 2007, quoting Greenspan speaking in London.)

  Chapter 52

  1. Kurt Eichenwald, The Informant. New York: Broadway, 2000. Unbeknownst to Howie, Andreas reportedly made an illegal donation in response to at least one request that Howie had passed along, shrugging off the fine as the cost of doing business.

  2. Interview with Howie Buffett.

  3. Ibid.; Scott Kilman, Thomas M. Burton, and Richard Gibson, “Seeds of Doubt: An Executive Becomes Informant for the FBI, Stunning Giant ADM—Price Fixing in Agribusiness Is Focus of Major Probe; Other Firms Subpoenaed—A Microphone in the Briefcase,” Wall Street Journal, July 11, 1995; Sharon Walsh, “Tapes Aid U.S. in Archer Daniels Midland Probe; Recordings Made by Executive Acting as FBI Informant Lead to Seizure of Company Files,” Washington Post, July 11, 1995; Ronald Henkoff and Richard Behar, “Andreas’s Mole Problem Is Becoming a Mountain,” Fortune, August 21, 1995; Mark Whitacre, “My Life as a Corporate Mole for the FBI,” Fortune, September 4, 1995.

  4. Interview with Kathleen Cole.

  5. Astrid was going to be well taken care of by Warren, too, although, as he says about the apparent willingness of his fans to buy any article belonging to him—his wallet, his car; “She’s got one of my wisdom teeth. It’s the ugliest thing you’ve ever seen. That’s her ace in the hole.”

  6. Interview with Bill Gates.

  7. Every board member interviewed reached some variation of this conclusion, no matter where they stood on later events.

  8. Mark Pendergast, For God, Country, and Coca-Cola. New York: Charles Scribner’s Sons, 1993.

  9. Speaking at the 1998 Berkshire Hathaway shareholder meeting.

  10. At the time, NetJets marketed itself both as NetJets and by its legal name, Executive Jet, Inc. It was renamed NetJets in 2002.

  11. Interviews with sources; Anthony Bianco, “The Warren Buffett You Don’t Know,” BusinessWeek, July 5, 1999.

  12. The business requires a “core fleet” of redundant aircraft, so expensive that running a fractional jet company is by definition unprofitable unless done on a huge scale (or used as a loss-leader by an aircraft manufacturer or other company with a tie-in product).

  13. It cost Berkshire over nine times what it paid for the remaining half of GEICO almost three years earlier. The GEICO purchase doubled Berkshire’s existing float (to $7.6 billion), while Gen Re tripled that (to $22.7 billion).

  14. Interview with Tad Montross.

  15. BRK paid approximately three times book value, a premium to prevailing prices at the time. The reinsurance business became more competitive after this acquisition, and mul
tiples have since declined.

  16. Berkshire Hathaway 1997 annual shareholders’ meeting, May 5, 1997.

  17. Shawn Tully, “Stock May Be Surging Toward an Earnings Chasm,” Fortune, February 1, 1999.

  18. At the companies’ June 19, 1998, press conference, as quoted in “Is There a Bear on Mr. Buffett’s Farm?” New York Times, August 9, 1998.

  19. Buffett’s comments in Anthony Bianco’s July 5, 1999, BusinessWeek cover story, “The Warren Buffett You Don’t Know”: “‘Charlie and I don’t talk a lot anymore,’ acknowledges Buffett, who says he did not even bother to consult his vice-chairman before making the epochal Gen Re acquisition.”

  20. BRK dropped 4.2% on news of the deal. Over a month later, it was down 15% versus a flat market. Setting an exchange ratio implicitly required a view on equities and interest rates, as well as the underlying businesses’ prospects. What investors could not know was the relative weighting of these factors.

  21. James P. Miller, in “Buffett Again Declines to Flinch at Market’s High-Wire Act,” Wall Street Journal, May 5, 1998, got it. He attended the shareholder meeting at which Buffett reiterated his views and commented that maintaining return on equity was a particularly vexing issue. On the other hand, Justin Martin and Amy Kover, in “How Scary is this Market, Really?”(Fortune, April 27, 1998), wrote that “no less an authority than Warren Buffett” had endorsed the market bulls through his “not overvalued” statement.

  22. On August 22, 1997, Wells Fargo stock nosedived after Berkshire Hathaway reclassified it from the publicly filed form 13-F to the confidential disclosure to the SEC, creating the appearance that Buffett had sold his position in Wells Fargo. The SEC announced that it would consider tightening the confidentiality rules. In June 1998, the SEC announced it was tightening its “13F” rule that had allowed Buffett to file confidentially for a year while building large stock positions. Although the SEC did not absolutely rule out confidential filings, Buffett heard the footsteps. Berkshire Hathaway fought an aggressive battle with the SEC over this issue as its confidential filings were denied, and lost. In 1999, Berkshire filed confidentiality requests each quarter along with its regular 13-F forms containing positions that were not confidential. The SEC made a single announcement relating to these three filings that certain of the positions they contained must be publicly disclosed. Buffett’s right to make a profit presumably was not part of the SEC’s deliberations. The SEC’s interest is to protect investors. While the SEC staff had long held that it is desirable to prevent extraordinary fluctuations in stock prices unrelated to fundamental factors so that investors do not profit or suffer as a result, investors’ right to know the identity of a company’s largest shareholders outweighed that.