The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [580]
5. Molly Baker, Joan Rigdon, “Netscape’s IPO Gets an Explosive Welcome,” Wall Street Journal, August 9, 1995.
6. Interview with Sharon Osberg.
7. The Buffetts made other philanthropic gifts using Susie’s stock, as well as funding the Buffett Foundation.
8. Carol Loomis, “The Inside Story of Warren Buffett,” Fortune, April 11, 1988.
9. Berkshire Hathaway press release, February 13, 1996.
10. Interviews with Dana Neuman, Mark Millard.
11. The employees’ pay could not really be fully aligned with shareholders. Unlike at the Buffalo News, for example, the employees’ base pay at a bank is too low to compensate for the labor value of their time that is owed by the shareholders. In effect, much of the bonus is really salary. The reason that a plan that requires employees to work almost for free in a bad year to compensate for “excessive” bonuses in other years cannot succeed is that it transfers some of the risk assumed by capital onto the backs of labor. The bonus structure of Wall Street—without the glue of partnership—is inherently problematic.
12. To be considered an arbitrage, two trades must take place simultaneously to eliminate market risk. Buying a stock and selling it later is not an arbitrage. Buying cocoa beans in Ecuador and selling them in San Diego is not an arbitrage.
13. Interview with Deryck Maughan.
14. Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management. New York: Random House, 2000.
15. In July 1998, Weill shut down Salomon’s bond arbitrage unit. One could argue that it was Travelers’ subsequent merger with Citicorp—which provided cheap capital—that made the firm a serious competitor in those businesses. Looked at another way, Travelers paid a high price to enter a business with high barriers to entry, and subsequently exploited its capital and scale advantage. Citigroup dropped the Salomon name in 2001.
16. Carol Loomis, “A House Built on Sand,” Fortune, October 26, 1998.
17. Interview with Charlie Munger.
18. Lowenstein, in When Genius Failed, estimated that these returns were achieved through leverage; Long-Term’s cash-on-cash return was only about 1%. This low return, multiplied fifty to a hundred times through borrowing, appeared extraordinarily profitable.
19. In When Genius Failed, Lowenstein drew this conclusion after extensive interviews with Meriwether’s former team.
20. Roger Lowenstein, When Genius Failed. Shorting it as a collection of stocks would not work because of a basis mismatch between Berkshire and the offsetting hedgeable positions. Berkshire was a collection of wholly owned businesses fueled by an insurance company that also owned some stocks, not a quasi-mutual fund.
21. Roger Lowenstein, When Genius Failed.
22. Stock or merger arbitrage is a bet on whether a merger will close. Merger-arb specialists talk to lawyers and investment bankers and specialize in scuttlebutt. Their bets are based partly on knowledge about a deal, not just statistics about how typical deals have done.
23. Interview with Eric Rosenfeld; Lowenstein, When Genius Failed.
24. Michael Siconolfi, Anita Raghavan, and Mitchell Pacelle, “All Bets Are Off: How Salesmanship and Brainpower Failed at Long-Term Capital,” Wall Street Journal, November 16, 1998.
25. Interview with Eric Rosenfeld.
26. The Standard & Poor’s index was down 19% since July and the NASDAQ down by more than 25%.
27. John Meriwether letter to investors, September 2, 1998.
28. Warren Buffett letter to Ron Ferguson, September 2, 1998.
29. Hence, don’t try to make it back the way you lost it.
30. Interview with Joe Brandon.
31. Craig Torres and Katherine Burton, “Fed Battled ‘Financial Maelstrom,’ 1998 Records Show,” Bloomberg News, April 22, 2004.
32. Roger Lowenstein, in When Genius Failed, includes, as do other accounts, an interesting sidebar about the role of Goldman Sachs, which, as capital-raiser for the firm, also sent in a mysterious “trader” who spent days downloading Long-Term