The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [396]
No CEO had ever done such a thing before. A small forest of trees was felled in media coverage of Buffett’s honesty. Yet investors gobbled up the B shares anyway. Buffett thought them foolish and said so privately and often. Yet there was no denying it was enormously flattering that they did, for they were clearly buying only because of him. He would have been secretly disappointed had the B share offering been a flop. The B shares were a Buffett no-risk deal: His shareholders won, and Buffett won, no matter how the offering turned out.
The Baby Bs forever changed the character of Buffett’s “club.” After May 1996, forty thousand new owners could call themselves shareholders. The next year he moved the meeting to the grimy old Ak-Sar-Ben Coliseum, and 7,500 people showed up. They spent $5 million at the Nebraska Furniture Mart. The meeting turned into Woodstock for Capitalists, or BRKfest. At the 1998 shareholder meeting, ten thousand people came. Yet as the money and the people and the fame came rolling in, an underlying shift took place in the world in which Buffett worked that would have profound effects on him and everybody else.
There really was no such thing as “Wall Street” anymore. Now financial markets were a string of blinking terminals connected by computers hooked up to the Internet that reached every corner of the world. A guy named Mike Bloomberg, whom Salomon had been dumb enough to fire back in the eighties, had created a special computer that captured every piece of financial information that anyone could possibly want. It made graphs, it made tables, it did calculations, it gave news, it gave quotes; it could do historic comparisons and set up competitions between companies and bonds and currencies and commodities and industries for whoever was lucky enough to have a Bloomberg terminal on his or her desk.
By the early 1990s, the Bloomberg terminal was becoming ubiquitous. The Bloomberg saleswoman had called Berkshire Hathaway for three years in a row. “Nope” was the answer every time. Buffett felt that following the market minute to minute and manipulating computers was not the way to invest. Finally it became obvious even to computer-averse Buffett that to trade bonds you had to have a Bloomberg terminal. But the Bloomberg sat some distance from Buffett’s office and he never looked at it; that was the job of Mark Millard, the bond trader.10
The advent of the Bloomberg terminal, symbol of the new computerized trading, mirrored the ongoing struggle over Salomon’s identity, which continued within the firm. Its laggard businesses had never gotten back on their feet. In 1994, Maughan had tried to realign pay at Salomon on the theory that employees should shoulder the same risk as shareholders. When times were good, they would get bonuses, but when times were bad, they would suffer as well. There were people inside the firm who agreed with him.11 But that was not the standard anywhere else on Wall Street, so thirty-five senior people walked out the door. Buffett was disgusted with the employees’ unwillingness to share the risk.
Deprived of Meriwether to bonus-pimp for them, the arbs fought for their share. Buffett was willing to pay them for results—the firm still made most of its money from arbitrage—but increasing competition made it harder for them to produce.
Arbitrageurs make a bet that a temporary gap of prices between similar or related assets will eventually tighten. For example, the bet may be whether two nearly identical bonds will trade at a closer price.12 With so much new competition, the easy trades had become scarcer. The arbs took larger positions with more risk. When they were losing, they doubled down and increased the size of their trades. In both cases, they did so because margins on trades were falling, and doing bigger trades, often using debt, helped offset that.
The rules of the racetrack said not to do so, because you don’t have