As Sanford I. Weill, 64, the dealmaking CEO of Travelers Group, steps up to his biggest acquisition ever—the purchase of Salomon Inc. For $9 billion—a famous Wall Street figure, Warren E.Buffett, 67, steps out of Salomon. His days there began almost precisely a decade ago, in the early fall of 1987, when his company, Berkshire Hathaway, became Salomon‘s largest shareholder and he moved in as a director. But that was training-wheels stuff, nothing to the high-wire unicycle act that came later: Buffett was physically, emotionally, and really at Salomon for nine months in 1991 and 1992, when the firm’s trading illegalities created a giant sucking sound that brought him in to run the place.
Though much has been written about Buffett and Salomon, a lot of what you will read here will be new. I have been a friend of Buffett‘s for about 30 years and have long been a shareholder of Berkshire (though never a shareholder of Salomon). As a friend, I do some editing every year on Buffett‘s well-known annual report, and we have for eons talked about collaborating on a book about his business life. All this has given me many opportunities to learn Buffett‘s thinking. Some of what I’ve gleaned has ended up in FORTUNE stories that I wrote, most especially in an April 11, 1988, article, “The Inside Story of Warren Buffett,” and in an accompanying box, “The Wisdom of Salomon?” But much of what I learned about Buffett‘s experiences at Salomon in 1991 was confidential, embargoed by him because Salomon was both struggling to regain its footing and dealing with big legal problems. Later on, though those emergencies eased and the embargo might have been lifted, there was no immediate reason to print the story. Now, with the Travelers deal, there is. To that reason, add another: This drama of 1991 sends a powerful message about the hazards lurking in a financial system that every day grows more complex.
This tale should begin with the thought that the ten months Buffett spent at Salomon were a profound break in the rhythm of his life. Warren Buffett is an executive accustomed to making maybe one big investment decision a year, but Salomon left him dealing with 25 operating decisions a day. At the center of this experience was a single day—what he has called “the most important day of my life,” Sunday, Aug. 18, 1991—in which the U.S. Treasury first banned Salomon from bidding in government securities auctions and then, because of Buffett‘s efforts, rescinded the ban. In the four hours of suspense between the two actions, Buffett struggled passionately to ward off a tragedy he saw threatening to unfold. In Buffett‘s opinion, the ban put Salomon, this company now being priced at $9 billion, in sure danger of having immediately to file for bankruptcy. Even more important, he believed on that day, as he does now, that the collapse of Salomon would have shaken the world’s financial system to its core.
Click to enlarge.
HOW IT BEGAN
That Sunday in August was a far cry from the commercialism of another Sunday, Sept. 27, 1987, when Buffett and John Gutfreund, then Salomon‘s chairman and CEO, agreed that Berkshire Hathaway would buy $700 million of Salomon convertible preferred stock, which equated to a 12% stake in the company. The deal allowed Gutfreund to stave off takeover artist Ronald Perelman, who seemed poised to buy a large block of Salomon common stock from certain South African investors wanting to sell. With Berkshire’s $700 million, Gutfreund was able to strike a deal that allowed Salomon itself to buy the South African stock—and with that, Perelman was dispatched.
It was easy to see why Gutfreund welcomed Warren Buffett, White Knight. It was less easy to see why Buffett wanted to hook up with Salomon, much less trust it with this mint, $700 million—the largest amount he’d ever invested in a single company. Over the years, Buffett had derided investment bankers, deploring their enthusiasm for deals that provided huge fees but that were turkeys for their clients. He has also spoken often of wanting to work only with people he likes. So here he was, handing over mountains of Berkshire’s carefully accumulated and husbanded cash to the high-living, cigar-chomping, corner-cutting crowd soon to be made infamous in Liar’s Poker?
Several reasons explain the move, none of them really good enough in the light of what followed. One is that Buffett had been having trouble for a couple of years finding stocks he thought reasonably priced and was looking for fixed-income alternatives. A second is that the Salomon proposal came from John Gutfreund, whom Buffett had seen do principled, non-greedy, client-friendly work for GEICO, in which Berkshire was then a major stockholder (and which is now owned 100% by Berkshire). Buffett liked Gutfreund—still does, in fact.
A third explanation was simply that Buffett thought the terms of the deal worth accepting. In effect, convertible preferreds are fixed-income investments with lottery tickets attached. In this case, the security was to pay 9% and be convertible after three years into Salomon common stock at $38 a share—against the $30 for which the stock had been selling. If Buffett did not convert the stock, it was to be redeemed over five years beginning in 1995. To Buffett, it looked like a decent proposition. “It’s not ‘a triple,’ which is what you’d like to have,” he said to me in 1987, “but it could work out okay.”
To some of the brainy, mathematical types at Salomon, that appraisal would have qualified as the understatement of the year. From Day One, they thought—and let it be known to the press—that Buffett had exploited Gutfreund’s fear of Perelman and had secured a dream security, with a too-high dividend or a too-low conversion price or some combination thereof. Over the next few years, this opinion did not die at Salomon, and more than once executives of the firm (though never Gutfreund) came to Buffett with propositions for deep-sixing the preferred.
It’s fair to say that Buffett might have taken those offers more seriously had he known that ahead lay the business-wrecking, profit-shredding scandal that broke in August 1991—and that turned the world upside down for both Salomon and him.
A little stage setting here: Before the crisis hit, Salomon was on its way to an excellent business year, marred only by a Treasury investigation into a May T-bill auction in which Salomon was thought perhaps to have engineered a short squeeze. Despite that sticky matter, Salomon‘s stock had climbed to $37 a share, a price very near Buffett‘s conversion point of $38.
Click to enlarge
THE PHONE CALL
For the story of what then happened, we may begin with Buffett in Reno. Yes, Reno, which was the spot two executives of a Berkshire subsidiary had picked for an annual getaway with Buffett. Arriving in Reno on the afternoon of Thursday, Aug. 8, Buffett checked with his office and found that John Gutfreund, en route at that moment from London to New York, wanted to talk to him that evening. Gutfreund’s office said he’d then be at Salomon‘s principal law firm, Wachtell Lipton Rosen & Katz, and Buffett agreed to call him there at 10:30 P.M. New York time.
Mulling this over, Buffett concluded that it couldn’t be bad news, because Gutfreund hadn’t been in New York to attend to it. Maybe, he thought, Gutfreund had made a deal to sell Salomon and needed a quick okay from the directors. Heading out to dinner in Lake Tahoe, Buffett actually told his group that he might be hearing “good news” before the evening was out—a characterization indicating Buffett was ready to bail from this supposedly plummy deal he’d got into four years earlier.
At the appointed time, breaking from dinner, Buffett stood at a pay phone to make his call. After a delay, he was put through to Salomon‘s president, Tom Strauss, and its inside lawyer, Donald Feuerstein, who told him that because Gutfreund’s plane had been held up, they would instead brief Buffett on “a problem” that had arisen. Speaking calmly, they said that a Wachtell Lipton investigation commissioned by Salomon had discovered that two of its government securities traders, including the top gun, managing director Paul Mozer (a name Buffett didn’t know), had broken the Treasury’s bidding rules on more than one occasion in 1990 and 1991.
Mozer and his colleague, said Strauss and Feuerstein, had been suspended, and the firm was now moving to notify its regulators and put out a press release. Feuerstein then read a draft of the release to Buffett and added that earlier in the day he had talked at some length to Salomon director Charles T. Munger, Berkshire’s vice-chairman and Buffett‘s sidekick in everything important.
The release contained only a few details about Mozer’s sins. But a fuller account dribbled out over the next few days, depicting a man at war with the Treasury over bidding rules that he despised. A new rule, promulgated in 1990 to prevent such behemoths as Salomon from cornering the market, said that a single firm could not bid for more than 35% of the Treasury securities being offered in a given auction. In December 1990 and again in February 1991, Mozer simply made hash of this rule by, first, bidding for Salomon‘s allowable of 35%; second, submitting, without authorization, separate bids for certain customers; and, third, simply stuffing the securities that these bidders won into Salomon‘s own account, never telling the customers a word about the whole exercise. From all this, Salomon emerged with more than 35% of the auctioned securities and with increased power to swing its weight around.
On that Thursday night, with other pay-phoners chattering all around him, Buffett did not hear nearly that much detail nor detect, in Strauss and Feuerstein’s matter-of-fact tones, any reason to be particularly alarmed. So he went back to dinner.
Only on Saturday, when he reached Munger, then vacationing on a northern Minnesota island, did Buffett get a sense of real trouble. Munger, a lawyer by training, had stopped Feuerstein’s recital two days earlier to explore what Feuerstein meant by saying—to use the words that were on a sheet of “talking points” drawn up by lawyers for these calls—that “one part of the problem has been known since late April.” In writer-speak, that is the “passive voice,” and it raises an obvious question: “Who knew?”
Munger bore down on that question and found out that Mozer, believing that he was about to be unmasked, had disclosed the February bidding infractions to his boss, John Meriwether, in late April. Calling Mozer’s behavior “career-threatening,” Meriwether immediately went to Strauss with the news and, days later, met with Strauss, Gutfreund, and Feuerstein to decide what to do. Feuerstein advised the others that Mozer’s act was probably “criminal,” and the group concluded that the New York Federal Reserve must be told what had happened. But then no one did a thing about telling—neither in April nor in May, June, or July. That was the inaction that Buffett later said was “inexplicable and inexcusable,” and that pushed the crisis to its limits.
Talking to Buffett on that Saturday, Munger called management’s extended failure to act “thumb sucking,” which is a term Buffett thinks he heard repeated when he himself was talking to Strauss and Feuerstein. But he does not otherwise think the two men made any effort to clearly inform him about top management’s part in this mess. Some of Salomon‘s regulators later voiced a similar complaint, saying they were told about top management’s dereliction, but in soft, shrouded words that failed to get the point across.
Even so, that left them better off than the public, which in the Aug. 9 press release learned absolutely nothing about management’s having known anything, at any time. In his phone conversation with Feuerstein, Munger sharply challenged the omission. But Feuerstein said that management and its lawyers worried that too much disclosure would threaten the firm’s “funding”—its ability to roll over the billions of dollars of short-term debt that became due every day. So Salomon‘s plan was to tell its directors and regulators that management had known of Mozer’s misconduct, but to avoid saying this publicly. Munger didn’t like it, finding this behavior neither candid nor smart. But not considering himself an expert on “funding,” he subsided.
When he and Buffett talked on Saturday, however—with the Salomon story played big on the front page of the New York Times—they resolved to insist on prompt disclosure of the full facts. On Monday, Munger delivered their strong opinions to Gutfreund’s close friend and adviser, Martin Lipton of Wachtell Lipton, and was told that the matter would be discussed at a telephone board meeting scheduled for Wednesday afternoon. Buffett, meanwhile, was talking to Gutfreund, who allowed that just about all the affair meant was “a few points on the stock.”
At the Wednesday board meeting, the directors heard a reading of a second press release, which included three pages of details and a straightforward admission that top management had learned of Mozer’s February transgression back in April. But a sentence that followed sent the directors into a telephonic uproar. It said that management had then failed to go to the regulators because of the “press of other business.” Buffett, listening in Omaha, remembers calling this impossibly lame excuse “ridiculous.” The explanation in the press release was later changed to incorporate the words “due to a lack of sufficient attention to the matter, this determination was not implemented promptly,” another passive-voice specimen slightly less lame but unflinching in its refusal to assign any blame.
Click to enlarge
‘THE ATOM BOMB’
The real offense of that Wednesday directors meeting, though, was not language but a flagrant omission: Gutfreund’s failure to tell the board that he had the day before received a letter from the Federal Reserve Bank of New York that contained some doomsday words. The letter was signed by an executive vice president of the bank, but anyone reading it would have known that behind it stood 6 feet 4 inches of Irish force and temper, Gerald Corrigan, the bank’s president. Corrigan by then knew enough to have become incensed by these doings on his watch. The letter said that Salomon‘s bidding “irregularities” called into question its “continuing business relationship” with the Fed and pronounced the Fed “deeply troubled” by the failure of Salomon‘s management to make a timely disclosure of what it had learned about Mozer. It asked for a comprehensive report within ten days of all “irregularities, violations, and oversights” Salomon knew to have occurred.
Buffett learned later that Corrigan expected the letter to be promptly given to Salomon‘s directors, whom he believed would just as promptly recognize that top management had to be changed. When the directors didn’t act, Corrigan thought they were being defiant—but instead, of course, they were simply in the dark. Buffett did not hear about any Fed letter until later in the week, when he spoke to Corrigan, and even then Buffett assumed the Fed had only sent a request for information. Buffett did not actually see the letter until more than a month later, after he heard Corrigan refer pointedly to it in congressional hearings.
In Buffett‘s opinion, the Fed’s belief that its letter had been ignored stoked the fury with which the regulators came down on Salomon a few days later. There is no shortage, Buffett says, of “vital matters” that Gutfreund, Strauss, and Feuerstein kept from the directors in the previous months, all the while acting as if things were perfectly normal. But not conveying the Fed letter to the board was in his thinking “the atom bomb.” Or maybe, he says, a more earthy description fits: “Understandably, the Fed felt at this point that the directors had joined with management in spitting in its face.”
Click to enlarge
A ‘RUN’ ON SALOMON
You may reasonably ask what was going on in Salomon‘s stock while all of this was transpiring. It was emphatically down, from above $36 per share on Friday to under $27 on Thursday, when the second press release rocked the market. But the stock was only the facade for a much graver matter, a corporate financial structure that by Thursday was beginning to crack because confidence in Salomon was eroding. It is not good for any securities firm to lose the world’s confidence. But if the firm is “credit dependent,” as Salomon was to an extreme, it cannot tolerate a negative change in perceptions. Buffett likens Salomon‘s need for confidence to a mortal’s need for air: When the required good is present, it’s never noticed. When it’s missing, that’s all that’s noticed.
Unfortunately, the erosion of confidence was occurring in a company grown enormous. Salomon in August of 1991 had bulged up to $150 billion in assets (not counting, of course, huge off-balance-sheet items) and was among the five largest financial institutions in the U.S. Propping the company on the right-hand side of the balance sheet was—are you ready?—only $4 billion in equity capital, and above that was about $16 billion in medium-term notes, bank debt, and commercial paper. This total of about $20 billion was the capital base that supported the remaining $130 billion in liabilities, most of these short-term, due to run off in one day to six months.
The paramount fact about those liabilities is that short-term lenders have their track shoes on at all times: They have absolutely no enthusiasm for earning an extra fraction of a percentage point in interest if they perceive that their capital is even slightly at risk. Just waving a premium rate in front of them is in fact counterproductive, since it makes them suspect there is hidden danger. Moreover, unlike commercial banks, whose creditors can look to the FDIC or to the “too big to fail” doctrine, securities firms have no declared “Big Daddy” whose mere presence is a deterrent to runs.
So on that Thursday, Salomon began to experience a run. It materialized out of left field in the form of investors who wished to sell this big-league trader and market maker, Salomon, its own debt securities—specifically, the medium-term notes that the company had outstanding. Salomon had always made a market in these securities, but that was ordinarily a yawn, since nobody wanted to sell. But now the sellers poured in. Salomon‘s traders responded by lowering their bids, trying to deter the traffic—dying to do that, in fact, because every repurchase of notes they made melted down the capital base that was holding up the whole Salomon structure. Finally, after the traders had bought about $700 million of the notes, Salomon did the unthinkable: It stopped trading in its own securities. That called a halt on the rest of the Street too. If Salomon wasn’t going to buy its own paper, it’s for sure nobody else would.
Click to enlarge
GUTFREUND FALLS
That Thursday evening, as newspapers cranked out their stories of the day’s extraordinary events at Salomon— when the teller’s window slams down, there’s no keeping it secret—John Gutfreund and Tom Strauss talked by phone to Gerry Corrigan. Trouble was all around, and in the conversation Gutfreund and Strauss questioned their ability to keep leading Salomon.
The next morning, at 6:45 A.M. Omaha time, Buffett was awakened by a phone call. On the line were Gutfreund, Strauss, and Marty Lipton. Gutfreund said that he and Strauss were resigning, and the question of who was going to take over sort of hung there. Gutfreund later said he asked Buffett to take the job. Buffett thinks he volunteered. He did not in any case nail down anything while at home, but instead said he would call the New Yorkers when he got to his office, five minutes away. Once there, he looked at a just-arrived fax of that day’s New York Times story, whose front-page headlines said: WALL STREET SEES A SERIOUS THREAT TO SALOMON BROS.; HIGH-LEVEL RESIGNATIONS AND CLIENT DEFECTIONS FEARED. And at 7:45 A.M. Omaha time, he called the Salomon group back and said he would take on the job until things got straightened out.
To this day, newspapers report that he went in to protect Berkshire’s $700 million, but that seems awfully simplistic. Sure, he wished for the safety of that investment. But beyond that, he was a director of a company in deep trouble and, in a way that few directors do, he felt an obligation to all of its shareholders. In addition, he had a job—CEO of Berkshire—that he could for a while run with one hand while picking up trouble in the other, and for the $1 a year he earned at Salomon, he didn’t need to waste time working out an employment contract. Okay, he knew he was changing his life, and not for the better. “But somebody had to take this job,” he said then and has said since, “and I was the logical person.”
On that Friday morning, Buffett made immediate plans to fly to New York. But the group from Salomon had asked him to stay at his office to await a call from Corrigan, and it was slow in coming. While Buffett waited, the stock market opened—but trading in Salomon stock did not. Then came the call from Corrigan. It was short and contained word that he was willing to let up a little on “the ten-day schedule” now that Buffett was entering the picture. Not having seen the Fed’s letter, Buffett didn’t have a clue what Corrigan was talking about, but grasped from the context that the Fed must be asking for information. When the conversation ended, Buffett flew to New York, arriving there around 4 P.M. By that time, Salomon had released the news that he was becoming interim chairman, and the New York Stock Exchange had opened up trading in the stock. In its brief exposure to the light, the stock traded heavily and moved up a dollar, closing just under $28.
Buffett‘s own exposure that day included an evening meeting with Corrigan at the Fed’s office. Gutfreund and Strauss went too, and the three men stepped into a session totally devoid of the cordiality that normally greets Buffett. Corrigan said soberly that he hadn’t found that interim chairmanships worked well; warned Buffett that he should not attempt to get around Corrigan by seeking help from “Washington friends”; and, in a dire but mysterious comment, told Buffett to prepare for “any eventuality.”
Then he asked Buffett to step out while he talked privately to Gutfreund and Strauss, two men who had long been—past tense needed here—friends of his. When the two emerged, Gutfreund told Buffett that Corrigan had emotionally expressed his personal regrets about the part he was playing in ending their careers. Gutfreund, iron tough to the end, angrily dismissed the incident when talking to Buffett, saying he wasn’t about to grant Corrigan “absolution.” Today, Buffett, recalling those strange moments, remembers also that George Washington cried as he signed the death warrant of Major Andre, a British spy. But like Corrigan, he signed.
TOUGH DECISIONS
For Buffett, the rest of Friday and all of Saturday were given over to crucial operating decisions. One obliged him to address the fate of John Meriwether, who had sped to tell his bosses about Mozer’s misdeeds when he learned of them but then had willingly or unwillingly got caught up in the web of nondisclosure. Marty Lipton, terribly visible in these crisis days, wanted Meriwether fired, and so did a good many members of the management committee, who were clawing for anything that might save the firm.
But Buffett, unclear that it was fair to fire Meriwether, kept searching for more understanding of what had truly happened after April. He gained some knowledge on Saturday, when two Wachtell Lipton lawyers spent more than an hour telling Buffett and the surviving members of Salomon‘s management committee what they had learned in their investigation, which had begun in early July. Then, late on Saturday, the Meriwether question became moot, because he himself decided it was best that he resign.
The still bigger decision facing Buffett was determining which member of Salomon Brothers’ executive group would become the new head of the securities operation, now losing its two bosses, Gutfreund and Strauss. So on Saturday, at Wachtell Lipton’s offices, Buffett talked serially to about ten members of Salomon‘s management committee, asking each man whom, among this group, he thought most qualified to run the business. The great majority said Deryck Maughan, then 43, who had recently returned from running Salomon‘s Tokyo office and been made co-head of investment banking. Maughan himself had a subtle answer: “I think that when you ask many of the others whom they want, you’ll find it’s me.” Buffett knew also that Gutfreund thought the choice should be Maughan. So Buffett identified his man that day. But he held off telling both Maughan and the world because the Salomon board—ready to meet in emergency session at 10 A.M. On Sunday, Aug. 18—needed to ratify the decision and indeed to elect Buffett himself.
A NEW CRISIS
Had the whole regulatory establishment slept through that weekend, the board meeting would still have been a landmark event. But as it was, on Saturday Salomon‘s regulators were putting the finishing touches on a guided missile. It hit Salomon‘s offices in downtown Manhattan just before 10 A.M. On Sunday, by way of a phone call from the Treasury saying that in a few minutes it would announce that Salomon was to be barred from bidding at Treasury auctions, both for its own account and for customers.
Buffett got the message in a small room where he was talking with a handful of people, including two, Gutfreund and Strauss, who were set to offer their resignations at the meeting. The three men immediately concluded that the news would put Salomon out of business—not because of the economic loss that would be sustained because of the Treasury’s lockout, but because the world would interpret the news as TREASURY TO SALOMON: DROP DEAD. Furthermore, this blow would fall on a company already staggered by credit problems and just barely hanging on.
Nor was there time to maneuver: Word had already gone out that Buffett would appear at a 2:30 P.M. Press conference, and a crowd of journalists was expected. Worse than that, the tyranny of a worldwide market was bearing down on the firm. The Japanese market would be opening in the late afternoon, and then London, and then New York. Bad news would cascade from one market to the other and center on just one thought: Salomon‘s credit is shot. In a firm dependent on credit, other thoughts didn’t matter anyway. This one alone would destroy the company.
In the small room where they got the news, Buffett and the others huddled to consider their options. They saw three possible courses of action. First, get the Treasury to rescind or at least modify the ban. Second, put on a brave face, spout confident statements, and hope that the world would buy the act—or, in other words, lie. Third, liquidate by declaring bankruptcy, hoping thereby to fail honorably, minimize the damage, and spread its effects equitably among Salomon‘s creditors.
The second strategy got ditched almost before it was articulated. The other two lived and were pursued simultaneously. That meant bankruptcy lawyers needed to be called in. A team was summoned from Wachtell Lipton and put to work investigating how a mammoth international securities firm goes bankrupt, on a Sunday, possibly needing some judge, yanked from watching baseball and eating popcorn, who might suspect that a careless typist had added an extra zero to that figure of $150 billion, and who would in any case probably never have heard of a derivative or repos or fails to deliver. In short, the bankruptcy filing, if things came to that end, was going to be a nightmare.
In a personal sense, it would have been that for Buffett also. His job description was on the verge of drastic changes that would leave him no reason for being there: He had come to save Salomon, not to escort it through the endless process of bankruptcy. All manner of people could do that job, he told himself.
So early on that Sunday, Buffett concluded that he would refuse election if bankruptcy ensued. He did not, however, kid himself about the furor that would follow, since he knew that his exit would be viewed as the abandonment of a sinking ship or, worse yet, as the very cause of its going down. Buffett had long told his three children that it takes a lifetime to build a reputation but only five minutes to tear it down. As he moved along through Sunday, he told himself he might be edging up on the five minutes.
But that did not short-circuit a ton of energy he was putting into Plan A: getting a reversal of the ban. Buffett assigned himself to calling the Treasury and also talked once that day to Fed Chairman Alan Greenspan. Gutfreund and Strauss were put on the job of finding Corrigan, who proved hard to reach. Meriwether, lending help, was told to track down Richard Breeden, chairman of the SEC. That thrust turned out to be a total nonwinner. Breeden, once Meriwether got him, said he had participated in the Treasury’s decision, pronounced Salomon “rotten to the core,” and said it would get no help from him.
On the Treasury front, logistics dealt an early blow. When Buffett tried almost immediately to call back the Treasury official who had delivered the awful message, the line was busy. The phone company agreed to interrupt the call, but there was confusion and error and delay. By the time Buffett actually got through to the Treasury spokesman, the announcement of the Treasury ban had hit the wires and gone flashing around the world.
THE MOST IMPORTANT DAY
The Treasury spokesman then got Secretary of the Treasury Nicholas Brady, at that moment visiting Saratoga Springs, N.Y., for the horseraces, to call Buffett. The two men had been friendly acquaintances over the years but could hardly have imagined they would be facing off on this Sunday morning. His voice cracking with emotion and strain, Buffett made his case, telling the Secretary that Salomon could not cope with the Treasury ban and that it was bringing in bankruptcy experts to prepare for a possible filing. Buffett stressed Salomon‘s gargantuan size and the worldwide nature of its business. He predicted that a Salomon bankruptcy would be calamitous, having domino effects that would reach worldwide and play havoc with a financial system that subsists on the idea of prompt payments.
Doomsday scenarios are not easy to get across. Responding, Brady was friendly and empathetic but inclined to think this talk of bankruptcy and financial meltdowns was far-fetched. He could not imagine Buffett refusing to take the job or failing in its execution. Brady was also highly aware of where things stood: The announcement had gone out, and reversing it would be an enormous problem.
But to Buffett‘s enormous relief, Brady did not cut off the dialogue. Instead, he went off to make some calls and then kept getting back to Buffett. In one of the stranger details of the day, Buffett talked on Salomon phones that had been programmed not to ring but instead flashed a tiny green light when someone was calling. For longer than he cares to remember, Buffett stared at the telephone, waiting for the Secretary of the Treasury to create light.
With each call, Buffett tried to make Brady realize the seriousness of the situation and his sense that they were rocketing along on a train that had to be stopped—but that could be, once everybody realized that this was an accident that mustn’t be allowed to happen. At one point in the Brady conversations, all of Buffett‘s anguish and sense of futility got jammed into a single sentence: “Nick, this is the most important day of my life.”
Brady said, “Don’t worry, Warren, we’ll get through this.” But that didn’t mean at all that he had changed his opinions.
It took Corrigan’s entrance into the telephone calls in the afternoon to make a difference. This was the man who told Buffett to prepare for “any eventuality” and defined his term by endorsing the ban. But Corrigan now listened hard and seemed to assign credence to Buffett‘s talk of bankruptcy and of his personal plans to leave were a filing to come. Said Corrigan to Brady and another regulator on the phone with them: “We better talk among ourselves.”
Buffett went back into the boardroom and waited with the other directors. Six floors below, over 100 reporters and photographers, this author among them, were gathering for the 2:30 press conference. Directly outside the boardroom, some of the managing directors that Buffett had interviewed on Saturday were milling around, summoned because one of their number was to be named operating head of Salomon.
And then, just at 2:30, Jerome Powell, an Assistant Secretary of the Treasury, called Buffett to read a statement the Treasury was ready to go with. It was effectively half a loaf, or maybe two-thirds, saying that the ban on Salomon‘s bidding for its own account was lifted while the ban on bidding for customers’ accounts remained. “Will that do?” Asked Powell. “I think it will,” answered Buffett. The board then raced through electing Buffett as interim chairman of Salomon Inc. And Deryck Maughan as a director and operating head of Salomon Brothers. Buffett found Maughan and said, “You’re tapped,” and the two went down to the press conference, entering at 2:45.
The start was abrupt: “I’m Warren Buffett, and I was this afternoon elected interim chairman of Salomon Inc.” A few minutes later he was into the just-released Treasury announcement, which he read aloud. When he finished, there were muffled cheers from the back of the auditorium and a scrambling of feet as employees ran with the lifesaving news. Buffett then moved into more than two hours of questions. “How will you handle needing to be both here and in Omaha?” He was asked, and the answer popped right back: “My mother has sewn my name in my underwear, so it’ll be okay.”
A FINAL PAYOFF
On Monday, the headlines didn’t say DROP DEAD; they took in the reversal as well as the ban. Salomon‘s stock opened on time and traded in orderly fashion, falling about a point and a half.
Pointing out a paradox, Buffett says today that the whole Treasury episode, excruciating though it was at the time, probably gave Salomon a boost that it could not have got any other way. The reversal, coming along at 2:30 P.M., sent a message to the market that this almighty regulator, the Treasury, thought Salomon was okay. Had not that endorsement materialized, Monday’s debt markets would have been forced to make their own determination about Salomon‘s creditworthiness, and who knows what kind of thoughts they would have pulled from the ether.
As it was, Salomon emerged from that weekend with just enough stamina to limp through some exceedingly tough months, in which the interim CEO reduced leverage by vastly shrinking the balance sheet, haggled with banks about money Salomon badly needed, and hoped above all else that Mozer’s wrongdoing (which cost him nearly four months in prison after he pleaded guilty to lying to the Fed) would not entrap Salomon itself in criminal charges. In the end, the company settled for $290 million, an outcome mainly reflecting the extraordinary cooperation Buffett decreed should be given both regulators and the law in getting things cleaned up.
A big broom in this cleanup was a California lawyer who had worked often for Berkshire, Robert Denham, and whom Buffett pulled into Salomon full-time. When May of 1992 rolled around, with many of Salomon‘s biggest problems under control, Buffett went back to Omaha, and Denham stepped into his place as chairman of Salomon Inc. And overseer of the shareholders’ interests. Having now overseen these folk into $9 billion of Travelers stock, Denham will be stepping on to something else.
And Berkshire’s part of the $9 billion? It’s about $1.7 billion, though some of the Travelers stock Berkshire will receive is committed to holders of a Berkshire convertible bond. About that complication you do not wish to know more, nor do you wish to deeply analyze other acrobatics that Buffett has carried out with Salomon stock. Just note this: a share of Salomon is right now worth about $81 in Travelers stock. Against that, Berkshire owns some Salomon stock that it bought in 1987 at an effective price of $38, and it owns other Salomon shares purchased later at an average price of about $48.
In short, Buffett said in 1987 that Salomon wouldn’t be “a triple,” and it hasn’t been. On the other hand, this record hardly equates to a strikeout. “I’d say we hit a scratch single,” says Buffett, “but not before the count got to 0 and 2.”
And then inching oh-so-slightly toward a philosophical summary of Salomon, he hauls out one of his favorite expressions: All’s well that ends.
This piece originally appeared in the October 27, 1997 issue of Coins2Day.
