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up his personal investment in the firm, leveraging the leverage with which Long-Term had already leveraged itself. He spent the day going over every position the firm owned and stressing the incredible opportunity he was offering to Buffett.23 “He wanted me to put in capital. He described the seven or eight big fundamental positions. I knew what was happening with relationships and on prices in these areas. I was getting more interested as time went along, because they were crazy relationships and spreads. But he was proposing a deal to me that didn’t make any sense. They thought they had time to play the hand out. But I said no, so that was that.” Buffett told him, “I am not an investor in other people’s funds.”24 He was only interested as an owner.

Long-Term didn’t want an owner, only an investor. It came close to finding somebody else, but then he backed out.25 By month-end, when it had to report to its investors, the fund had lost $1.9 billion—almost half of its capital—through a historically unusual combination of stock-market declines and almost hysterical aversion to risk in the bond markets.26 Since the model had contemplated losses of twenty percent as being a one-in-one-hundred-year event—like a moderate West Coast earthquake—this was somewhat like a Category 4 hurricane hitting New York City. Meriwether wrote his investors a letter saying losses of half the fund’s money were a “shock,” but “the opportunity set in these trades at this time is believed to be among the best that LTCM has ever seen…. The Fund is offering you the opportunity to invest in the Fund on special terms related to LTCM fees.”27 Long-Term was behaving as though it could raise capital to wait out the crisis and profit from its turnaround. But with the kind of leverage it had taken on, it didn’t have that option. This was the fallacy of defining risk as anything other than losing money. Long-Term had not prepared for that. The firm’s insular culture and years of getting its way had blinded the partners to the reality that no investor would put in money to save it without also taking control.

The day he read this, Buffett wrote a letter to a colleague and forwarded Meriwether’s entreaty, saying:

Attached is an extraordinary example of what happens when you get 1) a dozen people with an average IQ of 160; 2) working in a field in which they collectively have 250 years of experience; 3) operating with a huge percentage of their net worth in the business; 4) employing a ton of leverage.28

Anything times zero is zero, Buffett said. A total loss is a “zero.” No matter how small the likelihood of a total loss on any given day, if you kept betting and betting, the risk kept stacking up and multiplying. If you kept betting long enough, sooner or later, as long as a zero was not impossible, someday a zero was one hundred percent certain to show up.29 Long-Term, however, had not even tried to estimate the risk of a loss greater than twenty percent—much less a zero.

In September the earthquake kept rumbling. Long-Term searched desperately for money, having now lost sixty percent of its capital. Other traders had started putting the squeeze on the fund, shorting positions they knew Long-Term owned because they knew Long-Term needed to sell, which would force prices lower. Investors were fleeing anything risky in favor of anything safe, to a point that Long-Term’s models had never considered possible because it made no economic sense to them. Long-Term hired Goldman Sachs, which came in as a partner to buy half the firm. It needed $4 billion, an almost unimaginable sum for a hedge fund in distress to raise.

Goldman Sachs got in touch with Buffett to see if he was interested in a bailout. He wasn’t. However, he would consider teaming with Goldman to buy the entire portfolio of assets and debt. Together they would be strong enough to wait the crisis out and trade the positions deftly for a profit. But Buffett had a condition: no Meriwether.

Long-Term owed money to a subsidiary of Berkshire. It owed money to people who owed money to Berkshire. It