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Despite his passivity and limited influence as a board member, Buffett certainly understood arbitrage. But the board’s knowledge of Salomon’s business details went only so far, and Buffett did not understand computers, which were becoming important to every business and intrinsic to the new Wall Street. He did know, however, that he was now a director of a corporation that was utterly dependent on computers, and he had certainly figured out that computers increased risk. He once visited Mark Byrne, the son of Jack Byrne, who traded foreign exchange options for Salomon.

“Mark was bright and young, and he had a computer in his home so he could trade all the time. He had it rigged so that if the Japanese yen moved more than a certain amount, it rang a bell or something and woke him up in the middle of the night.

“I said to Mark, ‘Now let me get this straight. You’ve got this computer here, and at three in the morning, after you’ve been doing who knows what—we won’t even ask—until one or two in the morning, you’re asleep, and this bell rings. And you get up and stagger over to the computer, and you see that the yen-dollar relationship is such-and-such.

“‘Tell me, is there any limit to what you can punch in to the computer in terms of the size of the trade that you’d do? Does the computer rebel if you make a mistake?’

“And he said, ‘No, I can type whatever I want.’

“‘So,’ I said. ‘Well. If you’ve had a little too much to drink, and you punch three extra zeroes in there by mistake, is the firm committed? Does it have to follow through with the trade?’

“And he said, ‘Yeah.’

“So I had these nightmares of this guy, at three in the morning, maybe with a girl still in the bed or something, going over there in a daze and sort of punching something into the computer in the middle of the night and then staggering back to bed. And finding out the next morning that instead of a trillion yen, he’d put in a quadrillion yen.”

To Buffett, it was obvious that the combination of fallible human beings and judgment-free computers in a completely unmonitored, unsupervised environment, meant an almost unlimited potential for things to go wildly out of control. But as a board member, he lacked authority to make changes and could only try persuasion. By now he and Munger had wrangled repeatedly—and unsuccessfully—with Salomon’s management. Munger had taken over the audit committee—which had not formerly been a bastion of zealous oversight—and put it through six-and seven-hour dissections of the firm and its accountants. Munger discovered that Salomon’s derivatives business had grown immensely, using trades for which no ready market existed. The trades would not settle for long periods, sometimes years. With minimal cash changing hands, the derivatives were valued on Salomon’s books using a model.38 Since the model was created by those whose bonuses it would determine, not surprisingly the models usually showed the trades were quite profitable. As much as $20 million of profits had been overstated through such accounting mismarks.39 The audit committee, however, addressed only trades and deals already approved, and usually completed. The real oversight took place before the fact.

There, in the one area in which Buffett and Munger unequivocally had more skill than anyone else—making investments—they weighed in loudest of all—and were ignored. Their protestations only alienated them from the employees. In one example, Salomon’s Phibro unit had formed a joint venture with a seven-year-old Houston company, Anglo-Suisse, to build oil fields in West Siberia, south of the Arctic Circle, that would supposedly revolutionize oil production in Russia. The White Nights venture brought peace offerings to Russia, among them a recreation center, food, and clothing, all flown over from the United States.

“Anglo-Suisse,” Munger said when the idea was floated. “This is an idiotic idea. There are no Anglos and no Swiss involved in this company.