The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [436]
After the stock market crash of 1987 and then again after the collapse of Long-Term, the Federal Reserve had slashed interest rates three times within seven weeks, priming the market pump with easy money. Now, to prevent panic, the Fed took interest rates down to historically low levels once again. The Fed’s role was to maintain the banking system’s liquidity. This time, however, the Fed would keep interest rates artifically low for three years.17 Fueled by cheap money, one month after the attacks, stocks completed a full recovery, restoring $1.38 trillion in market value. But the upheaval was far from over, and the market remained in a nervous mood, partly due to uncertainty over the outcome of the United States and British invasion of Afghanistan a few weeks after 9/11. Then, in November, an energy trading company called Enron stuck a pin in the remains of the late 1990s stock-market bubble, which had shrunk but not burst. As the Justice Department moved in, Enron melted into bankruptcy in the heat of an accounting fraud.
Enron was an extreme but not isolated situation. The excesses of the stock-market bubble and the opportunity for executives to pillage their companies led to a whole series of accounting-fraud and securities-violation cases: WorldCom, Adelphia Communications, Tyco, ImClone. As 2002 began, New York Attorney General Eliot Spitzer mounted a blitzkrieg assault against the Wall Street banks for having inflated stock prices by touting new offerings during the Internet bubble using biased stock research.18 Valuations of stocks and bonds began to fall apart as investors lost confidence in the numbers reported to them by managements.
Berkshire’s best opportunities always came at times of uncertainty, when others lacked the insight, resources, and fortitude to make the right judgments and commit. “Cash combined with courage in a crisis is priceless,” said Buffett. Now his time had come round again. Anyone of normal energy might have been overwhelmed, but Buffett had been waiting for years for the kind of opportunities that sleeted down upon Kiewit Plaza. Every one of his faculties seemed engaged at once. He bought a group of junk bonds, which had become cigar butts, for Berkshire. He bought the underwear maker Fruit of the Loom, quipping, “We cover the asses of the masses.”19 He bought Larson-Juhl, which made picture frames. Berkshire’s MidAmerican Energy subsidiary invested in the troubled Williams Companies and bought its Kern River Pipeline.20 Berkshire bought Garan, the maker of Garanimals children’s clothing. It picked up the Northern Natural Gas pipeline from Dynegy, another troubled energy company.21 Within days, MidAmerican lent more money to Williams Companies.22 It bought The Pampered Chef, which sold cookware at parties through a sales-force of 70,000 independent “kitchen consultants.” It bought farm-equipment maker CTB Industries and teamed with investment bank Lehman Brothers to lend $1.3 billion to struggling Reliant Energy.
Ajit Jain quickly moved into the terrorism-insurance business, filling a sudden vacuum by insuring airlines, Rockefeller Center, the Chrysler Building, a South American oil refinery, a North Sea oil platform, and the Sears Tower in Chicago. Berkshire was paid to unburden the Olympics of the dubious risk that either the Games would be canceled or the U.S. would not show up at least twice before 2012. It insured the Winter Olympics in Salt Lake City against a terrorist attack. It insured the FIFA World Cup soccer championship against terrorism.23 Buffett was handicapping.
Some of Berkshire’s businesses struggled in a weak economy. Buffett had always said he’d rather have a lumpy fifteen percent return than a steady ten percent. It didn’t bother him. Most would naturally right themselves over time. NetJets, however, was struggling, not just because of the economy but because