The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [259]
“The insurance industry can’t afford to let these guys go down,” Frinquelli told Gutfreund. “It would be a terrible black eye on the industry, and these assholes will not tolerate that.”57 But when Byrne and Butler arrived at Salomon’s offices for his last-ditch attempt to raise the money, Gutfreund opened with a bruising remark: “I don’t know who’d ever buy that fucking reinsurance treaty you’re trying to sell.”
“You don’t know any fucking thing you’re talking about,” said Byrne right back.58
Displays of testosterone out of the way, Byrne made a passionate speech, citing “God and the national interest” among reasons why Salomon should raise the money, and referring to Buffett’s investment. As Byrne waxed about GEICO’s prospects and approached liftoff, Gutfreund fiddled with a long, expensive cigar. Finally, wrung out and crestfallen, Byrne ground to a halt. Then Butler said his piece. Byrne thought, from Gutfreund’s demeanor, that they had failed. Then Gutfreund pointed at Byrne and said to Butler, “I will do this underwriting. I feel you’ve got the right guy, but you’ve got to keep him quiet.”59
Salomon agreed to underwrite a $76 million convertible stock offering by itself. No other investment bank would participate and share the risk. GEICO had to consent to an SEC decree in which it neither admitted nor denied the SEC’s conclusion that it had failed to disclose its losses to the shareholders—the mere description of which in a public offering prospectus would tend to poison the deal.60 To get the financing done, Salomon had to convince investors that GEICO would survive, yet the financing was what would enable GEICO to survive. The deal reeked of desperation, and investors could smell it. GEICO was getting such bad press, Byrne said, that if he had walked across the Potomac River, the headlines would have screamed, “Byrne Can’t Swim.”61
Buffett, the ace in the hole, was unperturbed by these events. When the offering looked as if it was not going to go off, he simply went to New York and met with Gutfreund, saying he stood ready to buy the whole deal—at a price. Having a backup buyer strengthened Salomon’s hand, but Gutfreund also got the impression that Buffett wouldn’t mind if the deal failed and he ended up buying all the stock.62 For Buffett, this was the ultimate no-risk deal. Naturally, the backup price he insisted on was low. Salomon told Byrne unequivocally that, given Buffett’s ceiling, the convertible offering would sell no higher than $9.20 per share, not $10.50 as Byrne wanted.
Buffett wanted as much of the stock as could be had. He asked Salomon to buy all that was available for him once the stock started trading. Buffett’s willingness to buy after the offering bolstered Salomon’s ability to market the deal. Otherwise, Salomon would have had to jam the stock down its customers’ throats.
Indeed, once the self-fulfilling prophecy of the sage of Omaha took hold, there was more demand for the stock than shares to be had.63 Buffett got only a quarter of the deal. Within a few weeks, after a total of twenty-seven reinsurers came forward to provide the required reinsurance, the common stock had quadrupled and was trading around $8 a share. And GEICO’s savior, John Gutfreund, became one of a tiny handful of modern Wall Street figures whom Buffett genuinely admired.
But GEICO was still not fixed. Byrne needed a thirty-five percent rate increase in New York—and speedily got it.64 In New Jersey, Byrne went to the decaying old capitol of Trenton to plead with Commissioner James Sheeran, a handsome ex-Marine who prided himself on being tough. Byrne marched into the commissioner’s office with a copy of the company’s license in his pocket and told Sheeran that GEICO must have a rate increase.
“He had a sour-ass, little wizened actuary at his side who had been fired by some insurance company and had a bone to pick,” says