The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [399]
Gradually, as Long-Term’s coffers swelled and imitators followed for the next several years, through early summer of 1998, lenders collectively began to realize that, as periodically happens, they had gotten too euphoric about the prospects that all these people to whom they had lent money would pay them back. Long-Term’s competitors started dumping their dodgier positions as interest rates rose. That pushed down prices and set off a cycle of selling. But Long-Term had bet the opposite way, selling the safest assets and buying the riskiest, which were relatively cheaper. Its intricate models basically said that over time the financial markets were becoming more efficient, so the prices of risky assets would converge toward the prices of safer assets. Its biggest trades were a formulaic guess that the market would become less volatile, meaning that as the market bounced around, it would oscillate in smaller arcs. And historically that had been so. But as history had also shown, generally did not mean always. Long-Term knew that. It had made investors lock in their capital long enough to be safe—or so it thought.
On August 17, 1998, Russia suddenly defaulted on its ruble debt, meaning it would not pay its bills. When a major government stiffs its lenders, worldwide financial markets shudder. Investors began dumping everything in sight. A money manager had warned Long-Term, early on, that its strategy of eking out teensy profits on a zillion trades was like “picking up nickels in front of a bulldozer.”21 Now—surprise—the bulldozer turned out to have a Ferrari engine, and it was racing toward them at eighty miles an hour.
On Sunday, August 23, “I was playing bridge on the computer. I picked up the phone, and it was Eric Rosenfeld at Long-Term.” The boyish Rosenfeld, forty-five years old and one of Meriwether’s key lieutenants, was the person who had had the brain-numbing job of going through thousands of Mozer’s trades at Salomon and reconstructing what went wrong. Buffett liked Rosenfeld. Now he had been deputized by Meriwether to cut back the portfolio’s size by selling the firm’s merger arbitrage positions. “I hadn’t heard from him for years. With fear in his voice, Eric started to talk about me taking out their whole big stock arbitrage position, six billion dollars’ worth. They thought stock arbitrage was mathematical.”22 Responding reflexively, Warren Buffetted Rosenfeld. “I just said to Eric, I would take certain ones but not all of them.”
By a few days later, the market’s gyrations had cost Long-Term half its capital. The partners had spent a week talking to everybody in their well-connected database, trying to raise money before they had to report this dire news to their investors on August 31. No dice. Now they agreed that Larry Hilibrand—the superrationalist whose sobriquet on Wall Street was still “the $23 million man,” for the outsize bonus that had set Mozer off on his tear—would make a pilgrimage to Omaha and reveal what Long-Term owned.
The next day the Dow dropped four percent in what the Wall Street Journal referred to as a “global margin call,” with investors panicking and selling. Buffett picked up Hilibrand at the airport and drove him back to Kiewit Plaza. The modesty of Buffett’s smaller office, staffed by a handful of people and piled with Coca-Cola memorabilia, contrasted markedly with Long-Term’s enormous digs in Greenwich, which featured two pool tables and a three-thousand-square-foot gym staffed by a full-time trainer.
Hilibrand had gone deep into debt to pump