The Snowball

by Alice Schroeder

  23. Interview with Herbert Allen.

  24. Nikhil Deogun, James R. Hagerty, Steve Secklow, and Laura Johannes, “Coke Stains, Anatomy of a Recall: How Coke’s Controls Fizzled Out in Europe,” Wall Street Journal, June 29, 1999.

  25. Interview with Herbert Allen.

  26. Ibid.

  27. Through Project Infinity, partly cloaked in Y2K spending, Coca-Cola turned the soft-drink business into a technology-fed numbers game. In 1999, the company hired 150 experts for worldwide implementation of SAP’s programs. SAP, an acronym for Systems, Applications, and Products in Data Processing, provided business software solutions for process redesign in supply-chain management, customer-relationship management, and resource planning.

  28. Ivester did not respond to repeated requests for interviews.

  29. Betsy Morris and Patricia Sellers, “What Really Happened at Coke,” Fortune, January 10, 2000.

  30. Interview with Sharon Osberg.

  31. Betsy Morris, “Doug Is It,” Fortune, May 25, 1998, and Patricia Sellers, “Crunch Time for Coke,” Fortune, July 19, 1999.

  32. This is Herbert Allen’s version of the conversation. Buffett doesn’t recall the exact details.

  33. “They never sat down, never even removed their overcoats. In tones frostier than the air outside, they told him they had lost confidence in him.” Constance L. Hays, The Real Thing: Truth and Power at the Coca-Cola Company. New York: Random House, 2004. Buffett and Allen dispute this version and say they sat down and removed their coats. But, they say, it was indeed a very short meeting, with no chitchat.

  34. Had the board supported him, it would have left Ivester a weakened CEO. He would also have been gambling that Allen and Buffett would not resign from the board, an instantly fatal blow. Allen and Buffett were also gambling that if Ivester threw himself on the board’s mercy and survived, it would not be for long.

  35. Interview with James Robinson, former CEO of American Express and Coca-Cola board member.

  36. KO stock dropped 14% in two days.

  37. Betsy Morris and Patricia Sellers, “What Really Happened at Coke.”

  38. Martin Sosnoff, “Buffett: What Went Wrong?” Forbes, December 31, 1999.

  39. Andrew Barry, “What’s Wrong, Warren?” Barron’s, December 27, 1999.

  40. Andy Serwer, “The Oracle of Everything,” Fortune, November 11, 2002.

  41. Interview with Kathleen Cole.

  42. Interview with Susie Buffett Jr.

  43. Interview with Peter Buffett.

  44. Interview with Howie Buffett.

  45. Interviews with Howie Buffett, Peter Buffett, Susie Buffett Jr.

  Chapter 54

  1. Joe Lauria, “Buffett Bombs as High-Tech Funds Boom,” Sunday Times (London), January 2, 2000.

  2. The expected profit on the deal was 90%; i.e., the premium covered odds that the lottery would hit 1 out of 10 times whereas in fact it was expected to hit less than 1 out of 100 times.

  3. Every 10% change in KO was equivalent to 2.5% of BRK (a percentage that is representative over time), but the stocks often traded almost in tandem—especially when there was bad news at Coca-Cola—as if BRK and KO were one and the same.

  4. Beth Kwon, “Buffett Health Scrape Illustrates Power—or Myth—of Message Boards,” TheStreet.com, February 11, 2000. The story made the Financial Times say, “Warren Buffett may not be sick, but his share price is,” in the “Lex” column, February 12, 2000. Financial Times described the rap on Buffett not buying tech stocks as a “serious charge.”

  5. Berkshire Hathaway press release; also see “Berkshire Hathaway Denies Buffett Is Seriously Ill,” New York Times, February 11, 2000. The way that Buffett uses probabilities to describe things is one of his intriguing qualities; what if he had said that the rumors were 90% false?

  6. Ed Anderson, “Thesis vs. Antithesis: Hegel, Bagels, and Market Theories,” Computer Reseller News, March 13, 2000.

  7. Warren Buffett and Charlie Munger, “We Don’t Get Paid for Activity, Just for Being Right. As to How Long We’ll Wait, We’ll Wait Indefinitely,” Outstanding Investor Digest, Vol. XIII, Nos. 3 & 4, September 24, 1998, and “We Should All Have Lower Expectations—In Fact, Make That Dramatically Lower….,” Outstanding Investor Digest, Vol. XIV, Nos. 2 & 3, December 10, 1999.

  8. “Focus: Warren Buffett,” Guardian, March 15, 2000 (emphasis added).

  9. Some commentators understood that the bubble was bursting but since the averages continued to move higher, the general perception was slower to change. Federal Reserve Chairman Alan Greenspan’s comments were seized on as reason for concern or relief, depending on the listener’s perspective. See Matt Kranz and James Kim, “Bear Stages Sneak Attack on Net Stocks,” USA Today, February 16, 2000; Greg Ip, “Stalking a Bear Market,” Wall Street Journal, February 28, 2000; “Technology Stocks Continue to Dominate,” USA Today, March 2, 2000.

  10. E. S. Browning and Aaron Lucchetti, “The New Chips: Conservative Investors Finally Are Saying: Maybe Tech Isn’t a Fad,” Wall Street Journal, March 10, 2000. The Journal cited another investor as saying, “It’s like when the railroads started up and were changing the whole face of the nation.” Yes, it was much like that. Speculation in railroad stocks led directly to the financial panics of 1869, 1873, and 1901. The Erie railroad and Northern Pacific stock corners were only two episodes in the long history of colorful financial chicanery surrounding railroad stocks.

  11. Gretchen Morgenson, “If You Think Last Week Was Wild,” New York Times, March 19, 2000. Another sign that the game was up: On March 20, Fortune ran a cover story by Jeremy Garcia and Feliciano Kahn, “Presto Chango: Sales Are HUGE!” accusing many dotcoms of using accounting legerdemain to inflate sales—counting marketing expenses as sales, treating barter revenues as sales, and booking revenues before contracts were signed.

  12. Interview with Sue James Stewart.

  13. Buffett, who usually dealt with uncomfortable issues by joking about them, ended the 1999 Berkshire annual report (written winter 2000) by saying that he loved running Berkshire, and “if enjoying life promotes longevity, Methuselah’s record is in jeopardy.”

  14. This is sort of an inside joke at Berkshire Hathaway.

  15. David Henry, “Buffett Still Wary of Tech Stocks—Berkshire Hathaway Chief Happy to Skip ‘Manias,’” USA Today, May 1, 2000.

  16. Buffett owned 14 million barrels of oil at the end of 1997, bought 111 million ounces of silver, and owned $4.6 billion of zero-coupon bonds as well as U.S. Treasuries. The silver represented 20% of the world’s annual mine output and 30% of the above-ground vault inventory (Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett: More in ’04, California Edition. Alabama: AKPE, 2004), purchased on terms to avoid disrupting world supply.

  17. Interview with Sharon Osberg. The silver was at JP Morgan in London.

  18. Buffett measures his performance not by the company’s stock price, which he didn’t control, but by increase in net worth per share, which he did. There is a link between these two measures over long periods of time. In 1999, book value per share had grown only ½ of 1%. But for the acquisition of General Re, book value per share would have shrunk. Meanwhile, the stock market as a whole was up 21%. Buffett called it a fluke that book value had increased at all, pointing out that in some years it will inevitably decrease. Yet only 4 times in 35 years under Buffett, and not once since 1980, had Berkshire done worse than the market by this measure.

  19. James P. Miller, “Buffett Scoffs at Tech Sector’s High Valuation,” Wall Street Journal, May 1, 2000.

  20. David Henry, “Buffett Still Wary of Tech Stocks.”

  21. The Knight-Bagehot Fellows.

  22. Interviews with Joseph Brandon, Tad Montross.

  23. Interviews with Bill Gates, Sharon Osberg.

  24. Amy Kover, “Warren Buffett: Revivalist,” Fortune, May 29, 2000.

  25. Interview with Bill Gates.

  26. Berkshire Hathaway press release, June 21, 2000
.

  Chapter 55

  1. Philip J. Kaplan, F’d Companies: Spectacular Dot-com Flameouts. New York: Simon & Schuster, 2002.

  2. Purchase price not disclosed for these two acquisitions—but both were paid half in cash, half in BRK stock.

  3. For $570 million.

  4. For $2 billion; it became Berkshire’s largest business outside the insurance operations (2000 BRK annual report).

  5. For $1 billion.

  6. For $1.8 billion cash and $300 million in assumed debt.

  7. For $378 million.

  8. At the end of 2000, Berkshire had spent more than $8 billion buying companies and still had $5.2 billion in cash and cash equivalents, along with $33 billion in fixed maturity securities and $38 billion in stocks.

  9. Berkshire Hathaway letter to shareholders, 2000.

  10. Kilts joined Gillette after successfully turning around Nabisco, as only the second outsider in 100 years to run the company.

  11. Interview with Susie Buffett Jr.

  12. Interviews with Barry Diller, Don Graham, Susie Buffett Jr.

  13. “Disney Scrambling to Play Spoiler Role,” New York Post, July 14, 2001.

  14. Marcia Vickers, Geoffrey Smith, Peter Coy, Mara Der Hovanseian, “When Wealth Is Blown Away,” BusinessWeek, March 26, 2001; Allan Sloan, “The Downside of Momentum,” Newsweek, March 19, 2001.

  15. As of June 2001. From the Industry Standard’s Layoff Tracker, along with the Dot-Com Flop Tracker and the Ex-Exec Tracker.

  16. Buffett was not the only one concerned about the implication of this relationship. John Bogle, retired chairman of Vanguard, wrote of it in April 2001. However, he concluded that “some version of reality” had returned to the stock market. What made Buffett’s speech noteworthy was not use of this particular metric but rather his pessimistic projection of what it meant.

  17. One of Buffett’s main points was that companies—many of which had been taking gains from surpluses out of their pension plans—were irresponsibly using unrealistic rates of return assumptions and would have to adjust these to reality, which would show the plans to be less well funded or even underfunded.

  18. Herbert Stein was an American Enterprise Institute fellow and former chairman of the Council of Economic Advisors under Richard Nixon, a member of the board of contributors of the Wall Street Journal, and an economics professor at University of Virginia. He is known for the quote “If something cannot go on forever, it will stop,” and was father to financial writer and actor Ben Stein.

  19. As quoted in “Buffett Warns Sun Valley Against Internet Stocks,” Bloomberg, July 13, 2001.

  20. Vicente Fox worked for Coca-Cola for fifteen years, starting as a route supervisor in 1964, then being promoted ten years later to president of its Mexican, and ultimately its Latin American, operations.

  21. Interview with Midge Patzer.

  22. Interview with Don Graham.

  23. Dr. Griffith R. Harsh, IV, Director, Surgical Neuro-Oncology Program at Stanford University Medical School.

  24. Interview with Kathleen Cole.

  25. Interviews with Bill Gates, Peter Buffett, Howie Buffett.

  26. Interview with Susie Buffett Jr.

  27. Interviews with Susie Buffett Jr., Don Graham.

  28. Karlyn Barker, “Capacity Crowd Expected at Funeral; Schlesinger, Bradlee, Kissinger, Relatives Among Eulogists,” Washington Post, July 22, 2001.

  29. Paul Farhi, “Close Enough to See: TV Coverage Captures Small, Telling Moments,” Washington Post, July 24, 2001; Steve Twomey, “A Celebrated Life: Thousands Honor Katharine Graham at the Cathedral,” Washington Post, July 24, 2001; Mary Leonard, “Thousands Pay Tribute to Washington Post’s Katharine Graham,” Boston Globe, July 24, 2001.

  30. Karlyn Barker, “Capacity Crowd Expected at Funeral; Schlesinger, Bradlee, Kissinger, Relatives Among Eulogists.”

  31. Libby Copeland, “Kay Graham’s Last Party: At Her Georgetown Home, A Diverse Group Gathers,” Washington Post, July 24, 2001.

  32. The family sold the house shortly after Graham’s death.

  Chapter 56

  1. Interview with Herbert Allen.

  2. “The Hut-Sut Song” by Horace Heidt. Words and music by Leo V. Killion, Ted McMichael, and Jack Owens.

  3. The event benefited the Boys & Girls Clubs of Omaha, Omaha Children’s Museum, Girls Inc., and the Omaha Theater Company for Young People. Over ten years it raised approximately $10 million.

  4. Hamlisch was the first person to win three Academy Awards at once, in all three music categories, for the song “The Way We Were”(with co-writers Alan Bergman and Marilyn Bergman), the score to the movie The Way We Were (1973), and the adaptation of Scott Joplin’s ragtime music for The Sting (1973).

  5. Interview with Devon Spurgeon.

  6. Buffett does not recall the specifics of this call but thinks it probably occurred. The source is Joe Brandon at General Re.

  7. Grace Shim, “Warren Buffett, Others Speak About Terrorism at Omaha, Neb., Event,” Omaha World-Herald, September 12, 2001.

  8. Buffett recalled this, and said, “I think somebody even may have bought a car just because they ran out of rental cars.”

  9. According to “Killtown’s: Where Was Warren Buffett on 9/11?” (www.killtown.911review.org/buffett.htm), referencing rushlimbaugh.com from July 5, 2005.

  10. Interview with Bob Nardelli.

  11. Interview with Tony Pesavento.

  12. Buffett told the author this in 2001, shortly after the terrorist attack.

  13. The term “unforeseeable” as an explanation for large losses was virtually universal after 9/11 in the insurance industry.

  14. Grace Shim, “Warren Buffett, Others Speak About Terrorism at Omaha, Neb., Event.”

  15. Interview with Susie Buffett Jr.

  16. This initial estimate was revised to $2.4 billion in the December 31 annual report.

  17. Charles R. Morris, The Trillion Dollar Meltdown. New York: Public Affairs, 2008.

  18. Leading to reforms such as not allowing analysts to be compensated based on investment-banking work, and setting up “firewalls” between analysts and investment bankers.

  19. For $835 million.

  20. For just under $1 billion. Kern moved 850 million cubic feet of gas a day from the Rocky Mountains to Las Vegas and California.

  21. This pipeline moved 4.3 billion cubic feet of gas per day. Berkshire bought it for $928 million, after Dynegy had gotten it for $1.5 billion when Enron went bankrupt and NNG was being held as collateral (both had assumed $950 million of NNG’s debt). After MidAmerican’s two pipeline deals in 2002, it transported 8% of the gas in the U.S.

  22. Berkshire joined with Lehman and Citigroup to lend $2 billion to Williams at a 20% interest rate.

  23. Pre-9/11, Munich Re and AXA struck a derivatives deal valued at $50 million with Berkshire Hathaway Group to reinsure against an earthquake canceling 2002’s FIFA World Cup in South Korea and Japan. BRK would pay regardless of the actual cost of the loss, if the tournament was postponed or canceled because of an earthquake of a certain magnitude. Separately, after 9/11, AXA pulled out of insuring the tournament, and on October 30 National Indemnity stepped in to insure it, allowing the World Cup to proceed.

  24. Berkshire Hathaway letter to shareholders, 2007.

  25. Interview with Frank Rooney.

  26. Gifts of more than $12,000 are subject to this tax.

  27. Source: IRS, Statistics of Income Division, March 2007; Joint Committee on Taxation, Description and Analysis of Present Law and Proposals Relating to Federal Estate and Gift Taxation, Public Hearing Before the Subcommittee on Taxation and IRS Oversight of the Senate Committee on Finance, March 15, 2001.

  28. In 2007, over 8% of the federal budget, or $244 billion, was interest on federal debt. That is almost exactly ten times the amount collected through the estate tax.

  29. “I Didn’t Do It Alone,” a report by Responsible Wealth, describes the role of public investment, fam
ily, colleagues, luck, and grace in creating wealth. Organizations like United for a Fair Economy publish research on tax fairness, as do organizations such as the libertarian Cato Institute.

  30. “Defending the Estate Tax,” New York Times, February 16, 2001. In this article, Mr. Bush’s own director of Faith-Based and Community Initiatives, John DiIulio, told the Times that charitable contributions would likely decrease if the estate tax were repealed. “I don’t want to be the skunk at the picnic,” he said. “But no, I don’t think the estate tax should be eliminated—modified, maybe, but not eliminated.”

  31. See, for example, Melik Kaylan, “In Warren Buffett’s America…” Wall Street Journal, March 6, 2001; John Conlin, “Only Individual Freedom Can Transform the World,” Wall Street Journal, July 26, 2001; Steve Hornig, “The Super-Wealthy Typically Do Not Pay Estate Taxes,” Financial Times, June 15, 2006; Holman W. Jenkins Jr., “Let’s Have More Heirs and Heiresses,” Wall Street Journal, February 21, 2001.

  32. Warren Buffett letter to Senator Ken Salazar, June 8, 2001.

  33. William S. Broeksmit, “Begging to Differ with the Billionaire,” Washington Post, May 24, 2003.

  34. Daft had options to buy 650,000 shares, initially estimated as worth $38.1 million to $112.3 million in 2015, depending on how much the stock appreciated. He also got $87.3 million in restricted stock awards, totaling 1.5 million shares. Henry Unger, “If Coca-Cola Chief Daft Fizzles, He’ll Lose Millions,” Atlanta Journal-Constitution, March 3, 2001.

  35. The CEO–worker pay gap of 411-to-1 in 2001 was nearly ten times as high as the 1982 ratio of 42-to-1. “If the average annual pay for production workers had grown at the same rate since 1990 as it has for CEOs, their 2001 average annual earnings would have been $101,156 instead of $25,467. If the minimum wage, which stood at $3.80 an hour in 1990, had grown at the same rate as CEO pay, it would have been $21.41 an hour in 2001, rather than the current $5.15 an hour.” Scott Klinger, Chris Hartman, Sarah Anderson, and John Cavanagh, “Executive Excess 2002, CEOs Cook the Books, Skewer the Rest of Us, Ninth Annual CEO Compensation Survey.” Institute for Policy Studies, United for a Fair Economy, August 26, 2002.