history doesn't always repeat, but it rhymes...buffet had some interesting times when he did the salomon deal, as there were some regulatory issues with the treasury that would have tanked salomon's stock...i doubt buffet would make the same mistake again..it took him years to get his money back on that deal....at any rate the story here isn't what buffet did or how smart it was, the story is that goldman is desperate and got guido terms from buffet
some reading here on the buffet/salomon deal years ago if you're interested:
chinese-school.netfirms.com
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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. |
