The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [256]
“Well, he’s a friend of mine,” Graham said. “He’s just bought a piece of the Washington Post.” Neither knowing nor caring, Byrne turned down the meeting. Then Buffett’s old friend Lorimer “Davy” Davidson, who had retired from GEICO in 1970, called Byrne. “God, what kind of ninny are you to pass up a meeting with Warren Buffett?” he asked.34
Byrne had been hired in 1976 to try to pull GEICO—on the brink of bankruptcy—out of the ditch. Once an insurer only of government employees, GEICO had taken on John Q. Public. “Millions more qualified” was the tagline. “Growth, growth, growth, the emphasis was all growth,” says a longtime executive.35 Fueled by growth, growth, growth, GEICO stock had traded as high as $61—far too rich for Buffett, but he had kept an eye on it anyway. In fact, he had never stopped following it for the past twenty years.
In 1975, “I looked again at GEICO and was startled by what I saw after a few rule-of-thumb calculations about loss reserves.” As an auto-insurance company grows, grows, grows, so does the number of accidents its customers have. If a company underestimates the payments for those claims, it has overstated profits by the same amount. “It was clear in a sixty-second examination that the company was far underreserved and the situation was getting worse. I went in to see [the CEO] Norm Gidden on one of my Washington Post trips. I had known and liked Norm for twenty years on a casual basis. He was friendly, but he had no interest at all in listening to my comments. They were in deep denial. He really sort of hustled me out of the office and would not respond on the subject.”36
That Buffett, who did not own the stock, was trying to help GEICO’s management says something about how attached he still was to the company from which Lorimer Davidson had recently retired, the stock that had been his first really big idea, the investment that had made so much money for his friends and family.
In early 1976, GEICO announced its worst year in history, a $190 million loss from underwriting operations during 1975.37 The company stopped paying dividends, a move that conveys to shareholders that the till is empty. Gidden cast about frantically to bolster the mere $25 million in capital that GEICO had in its coffers.38 That April, at Washington’s Statler Hilton, four hundred angry stockholders stormed the shareholder meeting, armed with questions and accusations. Shortly afterward, the insurance commissioners arrived in a squadron at GEICO’s offices. The board realized, a bit belatedly, that it had to fire the management.39 The board itself was in disarray, several of its members having lost their personal fortunes in the debacle. Without a capable CEO to steer the company, Sam Butler, a steady-handed lawyer from Cravath, Swaine & Moore, took charge as the lead board member—in effect, a temporary CEO.
Butler knew that Byrne had quit Travelers on impulse, bitter at having just been passed over for the job of CEO. A former actuary who became a millionaire at age twenty-nine through a start-up insurance company, Byrne had been instrumental in turning around the Travelers’ flailing home-and auto-insurance lines two years earlier. Butler called him in Hartford and played on his ego, explaining that if he took the job at GEICO it would prevent a national emergency that would throw the whole United States economy into jeopardy. The unemployed Byrne was easily recruited to audition for CEO.40 He came down to Washington in early May and pogo-sticked back and forth before the board, tearing through white flip-chart pages, covering them with marker pen while talking nonstop. “I came in and gave a sort of off-the-cuff five-hour blah, blah, blah, here’s five points, here’s what we have to do, boom boom boom speech,