The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [403]
The next day, as they boarded the bus to visit Old Faithful geyser, Buffett was still turning over in his mind whether there was some way to undo it. Gates had a treat in store. When they arrived in Livingston, Montana, in early afternoon to board a nine-car private train fitted out with burnished wood and polished leather that Gates had rented, Sharon Osberg was waiting along with Fred Gitelman, a low-key computer programmer and bridge player. Gates had flown them in. While everyone else was admiring the cliffs and waterfalls of the Wind River Canyon, the foursome retired to an upstairs lounge with a transparent dome for a twelve-hour bridge marathon. Periodically, Buffett’s phone rang and he talked with someone in New York about Long-Term as the spectacular scenery rolled past. It still might not be too late to unwind the impending bailout and resurrect a private deal. But it wasn’t working out.36 At least the bridge distracted him.
The next morning, after a final round of bridge, the train rolled to a halt and dropped Osberg and Gitelman off in Denver, then continued through Devil’s Hole Canyon and Dead Man’s Gulch. Over the next few days, as the others went white-water rafting and mountain biking and the train wound its leisurely way to the Napa Valley via the Grand Canyon, Buffett read about the rescue in the newspapers and gradually lost hope of participating.
Only seven years after the regulators had contemplated letting Salomon fail—with all the consequences that that potentially entailed—the Federal Reserve had now engineered the bailout of a private investment firm, an unprecedented intervention in the market to avoid a similar event. Afterward, the Fed slashed interest rates three times in seven weeks to help keep the financial stumble from paralyzing the economy. It was by no means certain that any such paralysis would occur, but the stock market took off like a screaming banshee.37 Long-Term’s partners and most of the staff worked for a year for $250,000—pauper’s wages for people used to making millions a year—to unwind the fund’s positions and pay back most of the emergency creditors.38 Hilibrand, in debt for $24 million, signed the employment contract with tears streaming down his cheeks.39 Still, nobody starved, even though Eric Rosenfeld had to auction off Long-Term’s wine collection. Most of them got good jobs afterward. Meriwether made a comeback to start a smaller, less leveraged fund, taking some of his team. People thought the partners had gotten off light, considering that they had nearly sent the whole financial world into a seizure. And Buffett considered it one of the great missed opportunities of his life.
Eric Rosenfeld had an insight. Maybe models didn’t work when the world went mad. For that you needed a lot of capital, the kind that Berkshire Hathaway offered. After all, if you were going to bet by a hundred billion or more in favor of risk, you needed a partner, even a parent, one with so much capital that it essentially undid the leverage, somebody to provide a big umbrella in a storm.40 By implication, maybe they would have been better off being owned by somebody like Berkshire Hathaway. But that would have meant giving up their ownership…. You couldn’t have it both ways. If you wanted Berkshire to take the risk and put up the money, to it went the gains.
To think otherwise was unrealistic—that somehow risk could be laid off to someone else without also giving up the rewards. But that point of view was growing and beginning to dominate the financial markets of the late 1990s. It would have profound consequences over time.
It is hard to overstate the significance of a central-bank-led rescue of a private money manager. If a hedge fund, however large, was too big to fail, then what large financial institution would ever be allowed to collapse? The government risked becoming