The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [258]
Buffett waited at Graham’s Georgetown house after a Post board dinner for Byrne to arrive. “This is risky,” he told Don Graham. “It could go completely out of business. But in insurance it’s very hard to get an edge, and they have an edge. If they got the right person in to run it, I think he could turn it around.”47
In came Byrne, red-faced, effervescent, forty-three years old, like a firecracker exploding. The two men sat down by the fireplace in Graham’s high-ceilinged library. Buffett questioned Byrne for a couple of hours. Of all the Irish-Americans who would ever swing through Buffett’s orbit, Byrne had the greatest gift of blarney, and “by a wide margin,” Buffett says. “I was excited and babbling on and on and on,” says Byrne. “Warren asked a lot of questions about how I thought we were going to stay out of insolvency and what my plans would be after that.”
For Buffett, “the question was whether Byrne really was cool, unflappable, and professional, or whether he just didn’t know what was going on.”48 He decided that Byrne “understood insurance very well and had the analytical abilities. And he was a leader and a promoter. GEICO needed an analytical leader to figure out how to solve its problem and it needed a promoter to make that sale to all the constituencies that were involved.”49
The next morning, Buffett met up with George Gillespie, the lawyer who had sold him the Post stock, because the two men were on the board of Pinkerton’s, the detective company, and there was a board meeting that day.50 “George,” he said, “it’s pretty uncharacteristic of me, but today I bought some stock that really might be worthless tomorrow.” He had just called Bill Scott back in the office and placed an order for half a million shares of GEICO for Berkshire, leaving another order to buy millions more as stock became available. Scott put together a huge block trade, buying $4 million worth of GEICO for him.51
Buffett had waited years for the chance to buy GEICO at the right price. The tow truck had arrived, but GEICO still did not have reinsurance, it needed capital, and both depended on the goodwill of Max Wallach, the regulator.52 But now a new phenomenon took hold. Buffett’s margin of safety was his mere presence as an investor. Having Buffett as a backer—a now-legendary investor whose company already owned a successful insurer—gave Byrne a powerful card to play with the regulators.53 In addition, “General McDermott, the head of USAA, wrote a letter” to other insurers, says Byrne. The United States Automobile Association sold insurance only to military officers and behaved accordingly. Within the insurance industry, it was fabled, General Robert McDermott almost revered. He supposedly wrote that “in the military we never leave people behind; we have a fallen eagle here.”54
Buffett went to see Wallach to do what he could to convince the crusty old public servant to ease up on the June deadline. But assembling the reinsurance deal was like convincing two dozen shivering children to hold hands and jump into a lake.55 To pull it off, the story Byrne was selling was that the worthless former management, befoulers of GEICO, had been tossed out; that what was left of the termite-riddled house was now clean; that the seasoned Jack Byrne, rescuer of Travelers, had helicoptered in to restore the damage; and so confident was the infallible Warren Buffett in Jack Byrne that he had plunked down a whopping $4 million on the stock.
Nonetheless, when Byrne started hitting the banks on Wall Street, “people were walking out in the middle of lunch,” he says. “I got kicked out of everywhere.” Then Sam Butler took him down to Salomon Inc. An old, respected specialist bond house, Salomon had never done an equity deal but craved to enter the lucrative business of underwriting stocks. John Gutfreund, an influential Salomon executive, sent a junior research analyst, Michael Frinquelli, and his sidekick, Joe Barone, to Washington to check GEICO out. “I kept them waiting for an hour and a half, so they were furious,” says Byrne. “But