The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [318]
Despite their friendship, Buffett was not sorry to lose Byrne. After repairing GEICO’s woes, the perpetually itchy Byrne had embarked on a series of acquisitions and entered into new business lines. Buffett wanted GEICO to concentrate on a sure thing, its core business. Furthermore, he had hired a new chief investment officer for GEICO, Lou Simpson, a retiring Chicagoan who had a distaste for rapid trading and expensive growth stocks. Buffett had added Simpson to the Buffett Group right away, and by now Simpson had become the only person besides himself whom Buffett trusted to invest in other stocks—he allowed Simpson to manage all of GEICO’s investments. But Simpson and Byrne acted like brothers who fought and made up. Periodically, Simpson tried to bolt; Buffett lured him back. Without Byrne, keeping Simpson would be easier.
Nonetheless, Buffett knew that Byrne was a powerful moneymaker for any business he touched. “Never let go of a meal ticket” was Buffett’s verdict when asked to invest in the Fireman’s Fund deal. American Express decided to cut Weill out of the deal, however, and unload Fireman’s Fund in a public offering, with Byrne as CEO. To keep Buffett on the menu to attract investors, it offered Berkshire a sweetheart reinsurance deal. Buffett took the deal, and became an informal adviser to Byrne and his board. Weill, feeling double-crossed, blamed Buffett. He went on to buy Travelers Insurance and build it into a small empire, but by some accounts carried a grudge against Buffett from then on.
From American Express to Sandy Weill, however, the financial world now understood the power of Buffett’s name. At this point, Buffett was tending to so many major investments and advising so many managements that he was either an actual or de facto board member of Cap Cities, Fireman’s Fund, the Washington Post Company, GEICO, and Omaha National Corp. And now he reached a turning point, the moment when he had to consider whether to cross the Rubicon.
Buffett had for some time played a dual role. He ran Berkshire Hathaway as if he still managed money for his “partners”—albeit without collecting any fee. He wrote them letters explaining that he made decisions based on personal criteria; he set up the shareholder contribution program, a personal solution to the problem of corporate giving; he refused to split the stock, had never listed it on the New York Stock Exchange, and considered the shareholders tantamount to members of a club. “Although our form is corporate, our attitude is partnership,” he had written—and meant it.
At the same time, he enjoyed living the life of a major-company CEO. He served on board after board; he bumped with the biggest elephants. He took pride in the way politicians, journalists, and other CEOs sought out his knowledge and advice. More recently, his clout on Wall Street had become so great that entire deals—important deals—turned on whether he would participate. Above all, he was now so attached to Berkshire that it had become a virtual extension of himself.
The loosely defined dual role he was playing had so far suited him and his shareholders. Now, however, a decision faced him that required him to choose—he could either run a de facto partnership or continue his role as a major-company CEO. But he could no longer do both.
The reason was taxes. Berkshire was already burdened with corporate income taxes, a cost the partnership had not faced. On the other hand, Buffett charged his Berkshire partners no “fee” to manage their money. That was a good deal (for everyone but Buffett) or at least the shareholders’ loyalty suggests they saw it that way. Now, however, in 1986, Congress passed a major tax-reform act that, among other things, repealed what was called the General Utilities Doctrine. Formerly, a corporation could sell its assets without paying any taxes as long as it was liquidating and distributing the assets to the shareholders. The shareholders would be taxed on their gain, but the gain would not be taxed twice.
Once the General Utilities