The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [333]
Like the Salomon preferred stock, the terms of these special deals meant that critics suddenly viewed Buffett as protecting the interests of entrenched CEOs. It was of course in the interest of his own shareholders to maximize their returns while protecting them from risk, but Buffett now looked like one of those boardroom insiders who depended on special deals to get ahead.
In the age of the buyout funds and corporate raiders, this level of greed was chump change. Buffett could have easily been a buyout king himself. But what his determination to stay friendly and on the side of management did make clear was that he was now one of the guys at the country club. Ben Graham had always felt that if someone traded in stocks, this necessarily made him an outsider—because he had to be willing to displease a company’s management. Buffett, who wanted to be liked by everyone, had been trying to bridge that gap since his earliest investing days when he became friends with Lorimer Davidson at GEICO. Now, “Many Wall Street investors say Mr. Buffett’s special deals amount to a kind of gentlemanly protection game,” said one news story.33
In the end, what looked like sweetheart deals turned out to be no more than finely handicapped bets. Only Gillette turned into a winner, ultimately earning Berkshire $5.5 billion. US Air was the worst. Buffett had made a number of remarks over the years about the stupidity of investing in things with wings. Then the company suspended its dividend and, like Cleveland’s Worst Mill, the stock plunged. “That was the dumbest fucking thing, going into that deal!” one friend exploded. “What the hell are you guys doing? You violated every one of your principles!”34 Buffett would later agree, saying, “As soon as the check cleared, the company went into the red and never came out. I have an 800 number I call and say, ‘My name is Warren Buffett and I’m an Air-aholic.”35 Charlie Munger’s dry comment was, “Warren didn’t call me on that one.”
Salomon, the model for these deals, was also not doing well. After the crash and the near-escape from Perelman, the merger business had been slow to get back on its feet, and talented bankers left for elsewhere. Gutfreund had restructured the firm once again in another round of layoffs. But the managing directors no longer feared him. “People kept threatening John and he would try to buy them,” said one vice chairman. At first the firm had three, then seven vice chairmen. “Honk if you’re a vice chairman” became a joke around The Room.
Already fragmented into disparate power bases, Salomon now evolved into a system of warlords: a corporate-bond warlord, a government-bond warlord, a mortgage-bond warlord, an equities warlord.36
One ruled above them all: the warlord of bond arbitrage, a soft-spoken, brilliant mathematician, the forty-year-old John Meriwether. The shy, self-effacing “J.M.,” a former PhD candidate, expressed his outsize ambitions through a team of professors he had lured with Wall Street salaries from schools like Harvard and MIT. These “arb boys” hunched protectively over their computers, fiddling with mathematical models portraying the bond universe, an oasis of intellect amid the belching, sweating traders, who more often swung from their gut. Like handicappers assembling the financial version of the Daily Racing Form, the arbs were launching a revolution in the bond business, and the edge their computer tip sheet gave them against the rest of the suckers produced most of Salomon’s profits. They lived inside Meriwether’s little bubble on the trading floor and felt they had earned their arrogance. J.M. was enormously forgiving of mistakes but relentless toward anyone he considered stupid, and the arbs were his personally chosen elite. He had a deeply complex personal relationship with his team, and spent nearly all his time with them, engaging in one of his three obsessions: work, gambling, and golf. Many an evening after the markets closed the arbs sat together,