The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [365]
He wanted to run things by what he called the “front-page test.” Don’t just obey the rules, he said.
I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter.25
Employees at the time were frantically trying to keep from losing the firm. They called customers and begged them not to desert Salomon and ditched assets as fast as they could sell them because the debt that financed them was disappearing. John Macfarlane and the repo desk, which sold and bought batches of bonds, managed an intricate runoff of assets while negotiating tensely with numerous lenders, some of whom were refusing to advance money to the firm.26
The balance sheet dwindled at the rate of about a billion dollars a day. Macfarlane and the traders met with lenders several times to make sure they were informed, and concentrated on stabilizing Salomon’s balance sheet and customer relationships, gradually raising the firm’s interest allocation charge and letting economics do the rest.27 They paid off all the firm’s commercial paper and restructured the debt toward medium-term notes and longer-term capital. Using futures markets and swaps (derivative trades), the firm’s traders tiptoed through the market to disguise the giant fire sale they were putting on. If other brokers recognized the pattern of their sales, it could set off a raid.28
Under threat of indictment, it was far from certain that Salomon would survive. The employees understood the message of Buffett’s letter. Absolutely nothing else could go wrong in this atmosphere, with regulators and Congress in full cry. “I want every employee to be his or her own compliance officer,” Buffett said. This meant that to save the firm, they had to spy on each other. Meanwhile, everyone knew that MTO was crawling through the government desk like a minesweeper, looking for anything that could be wrong. As the customers fled, the trades shrank, and the fear spread, the firm’s long-standing culture of swashbuckling risk-taking began to fade.
Within days, Buffett was called back, this time to testify before the Senate. Corrigan, Breeden, and the federal prosecutors remained disgusted with Salomon. As he waited to be called, seated a couple of rows behind Corrigan in the Senate chamber, Buffett heard Senator Chris Dodd question Corrigan about whether the Federal Reserve had been asleep at the switch.29 Corrigan said no, and that the Sternlight letter delivered on August 13 had been designed to produce a change in management but had been ignored—which, Buffett saw, he interpreted as Salomon spitting in his face.
Buffett sat figuratively scratching his head. He knew there was some kind of major problem here, but he didn’t know what Corrigan was talking about.30
When it came time for him to testify, he said, “The nation has a right to expect its rules and laws to be obeyed, and Salomon did not live up to this obligation.” Congressmen complained about Salomon’s excessive pay. How could one bond-arbitrage trader make $23 million? they asked. “That disturbed me plenty,” Buffett replied. They wanted to know what bond arbitrage was, and whether it benefited the economy. Buffett explained, then said, “If you asked me whether that compares to a good teacher in a public school, I would not want you to press me on it.”
Why hadn’t a board filled with smart people been more aware and alert? a Congressman demanded. Without betraying the fact that he was steaming inside about the Sternlight letter—whatever that might be—Buffett said that management had withheld information.31 He acknowledged that Munger had been the only one smart enough to ask the right questions when the first phone call came.
He was not about to defend Salomon as what it was: a great company with a wonderful culture that had a single employee who did a