Ralph Schey, the head of Scott Fetzer, an Ohio conglomerate, got his company into a jam by trying to take it private in a leveraged buyout. With its stable of profitable businesses, from Kirby vacuums to the World Book encyclopedia, Scott Fetzer made appealing prey, and corporate raider Ivan Boesky quickly intervened to make a bid of his own.

Buffett sent Schey a simple letter saying, "We don't do unfriendly deals. If you want to pursue a merger, call me." Schey leaped at the proffer, and $410 million later, Berkshire Hathaway owned Scott Fetzer.52 Two and a half years after buying the Nebraska Furniture Mart, Buffett had bought a company eight times its size. For the first time, the CEO of a public-rather than private-company had approached Buffett because he would rather work for Buffett than work for (or be fired by) someone else.

The next to recognize the power of Buffett's reputation was Jamie Dimon, who worked for Sanford Weill, the CEO of the brokerage firm Shearson Lehman, an American Express subsidiary.53 American Express wanted to sell its insurance arm, Fireman's Fund, to Weill in a management buyout. Weill had already recruited Jack Byrne to leave GEICO and run Fireman's Fund. Dimon approached Buffett to invest his money-and his reputation-in the deal.

Despite their friendship, Buffett was not sorry to lose Byrne. After repairing GEICO's woes, the perpetually itchy Byrne had embarked on a series of acquisitions and entered into new business lines. Buffett wanted GEICO to concentrate on a sure thing, its core business. Furthermore, he had hired a new chief investment officer for GEICO, Lou Simpson, a retiring Chicagoan who had a distaste for rapid trading and expensive growth stocks. Buffett had added Simpson to the Buffett Group right away, and by now Simpson had become the only person besides himself whom Buffett trusted to invest in other stocks-he allowed Simpson to manage all of GEICO's investments. But Simpson and Byrne acted like brothers who fought and made up. Periodically, Simpson tried to bolt; Buffett lured him back. Without Byrne, keeping Simpson would be easier.

Nonetheless, Buffett knew that Byrne was a powerful moneymaker for any business he touched. "Never let go of a meal ticket" was Buffett's verdict when asked to invest in the Fireman's Fund deal. American Express decided to cut Weill out of the deal, however, and unload Fireman's Fund in a public offering, with Byrne as CEO. To keep Buffett on the menu to attract investors, it offered Berkshire a sweetheart reinsurance deal. Buffett took the deal, and became an informal adviser to Byrne and his board. Weill, feeling double-crossed, blamed Buffett. He went on to buy Travelers Insurance and build it into a small empire, but by some accounts carried a grudge against Buffett from then on.

From American Express to Sandy Weill, however, the financial world now understood the power of Buffett's name. At this point, Buffett was tending to so many major investments and advising so many managements that he was either an actual or de facto board member of Cap Cities, Fireman's Fund, the Washington Post Company, GEICO, and Omaha National Corp. And now he reached a turning point, the moment when he had to consider whether to cross the Rubicon.

Buffett had for some time played a dual role. He ran Berkshire Hathaway as if he still managed money for his "partners"-albeit without collecting any fee. He wrote them letters explaining that he made decisions based on personal criteria; he set up the shareholder contribution program, a personal solution to the problem of corporate giving; he refused to split the stock, had never listed it on the New York Stock Exchange, and considered the shareholders tantamount to members of a club. "Although our form is corporate, our attitude is partnership," he had written-and meant it.

At the same time, he enjoyed living the life of a major-company CEO. He served on board after board; he bumped with the biggest elephants. He took pride in the way politicians, journalists, and other CEOs sought out his knowledge and advice. More recently, his clout on Wall Street had become so great that entire deals-important deals-turned on whether he would participate. Above all, he was now so attached to Berkshire that it had become a virtual extension of himself.

The loosely defined dual role he was playing had so far suited him and his shareholders. Now, however, a decision faced him that required him to choose-he could either run a de facto partnership or continue his role as a major-company CEO. But he could no longer do both.

The reason was taxes. Berkshire was already burdened with corporate income taxes, a cost the partnership had not faced. On the other hand, Buffett charged his Berkshire partners no "fee" to manage their money. That was a good deal (for everyone but Buffett) or at least the shareholders' loyalty suggests they saw it that way. Now, however, in 1986, Congress passed a major tax-reform act that, among other things, repealed what was called the General Utilities Doctrine. Formerly, a corporation could sell its assets without paying any taxes as long as it was liquidating and distributing the assets to the shareholders. The shareholders would be taxed on their gain, but the gain would not be taxed twice.

Once the General Utilities Doctrine was repealed, any liquidation of a corporation and distribution of its assets would result in a tax on the corporation's profits and another tax on the shareholders upon distribution. Since the double tax added up to a staggering amount of money, closely held and family corporations all over the country rushed to liquidate themselves before the act went into effect. Buffett, who regularly said in his shareholder letters that Berkshire had gotten so large that its money was a barrier to investing success, could have distributed its assets, then raised a more manageable sum-still in the billions-set up a new partnership, and started over investing within weeks (collecting his fee again, to boot). With $1.2 billion of unrealized profits on Berkshire's balance sheet, had Buffett liquidated Berkshire, he could have given his shareholders a total tax avoidance of more than $400 million and the chance to start over in a partnership free of the corporate double tax.54 But he didn't.

Buffett wrote a lengthy dissertation on taxes in his annual letter, in which he addressed this topic and dismissed the idea of liquidating out of hand: "If Berkshire, for example, were to be liquidated-which it most certainly won't be-shareholders would, under the new law, receive far less from the sales of our properties than they would have if the properties had been sold in the past."55 The Warren Buffett of old would not have sneered at an extra $185 million in his own bank account and the chance to start over earning fees without the corporate income tax-which is what his decision not to liquidate Berkshire Hathaway in 1986 cost him personally. But ordinary greed no longer drove his decisions-for this cost him far more than any other shareholder. His long-standing attachment to Berkshire held him so firmly in its grip that he gave up the option of keeping Berkshire as a virtual partnership. Otherwise, he would have liquidated without a second's hesitation.

Instead he had crossed the Rubicon and chosen the role of being the CEO of a major corporation, like Procter & Gamble or Colgate-Palmolive, one that would continue to exist after he was gone.

This company, Berkshire, with its disparate parts, was hard to value. Munger liked to joke that Berkshire was the "Frozen Corporation," since it would grow endlessly but never pay a penny in dividends to its owners. If the owners couldn't extract any money from their money-making machine, how much was that company really worth?

But Buffett was growing Berkshire's book value far faster than his shareholders could have accumulated such wealth themselves, and he had the scorecard to prove it. Moreover, it was a long-term scorecard, far more comfortable for him than the year-to-year pressure of beating the market's bogey. By shutting down the partnership, he had freed himself from that tyranny; in fact he no longer presented numbers in a fashion that allowed someone to calculate his investing performance from inception.56 Besides, being CEO of the Frozen Corporation was fun. He got to own a newspaper in Buffalo; he got to use his shareholder letters as the editorial column in a newspaper. Yet even though he had now officially joined the CEO club, he had no desire to acquire most of their habits-visiting five-star resorts, collecting wine or art, buying a yacht, or acquiring a trophy wife. "I've never seen a trophy wife yet that looks like a trophy," he would later say. "To me they always look like a booby prize."

One day in 1986, however, he called his friend Walter Scott Jr., a down-to-earth hometown boy who had worked for Peter Kiewit Sons', Inc, all his life, just like his father before him. Scott was businesslike yet refreshingly open and relaxed. He had succeeded Peter Kiewit, then made his reputation during a federal highway bid-rigging scandal that threatened Kiewit's existence by disqualifying it from bidding on any contracts that got government funds. By forthrightness, "groveling," and thorough reforms, Scott led the company through a long restoration-a model for dealing with the government in a corporate life-or-death situation.57 He was such a trusted friend of Buffett that Katharine Graham stayed in the Scotts' apartment on the few occasions that she visited Omaha.

"Walter," Buffett asked, "how do you justify buying a private airplane?" Buffett knew that Kiewit had a fleet of private jets because it was always having to ferry its employees to remote construction sites.

"Warren," said Scott, "you don't justify it. You rationalize it."

Two days later, Buffett called back. "Walter, I've rationalized it," he said. "Now, how do you hire a pilot and maintain a plane?"

Scott offered to let Buffett piggyback the maintenance of his proposed new jet on Kiewit's fleet, and Buffett went off and sheepishly bought a used Falcon 20-the same type of plane that Kiewit employees flew-as Berkshire's corporate jet.58 It gave him an extraordinary degree of privacy, as well as control over his travel schedule-privacy and control over his time ranking in the top handful of things that Buffett cared most about on earth.

Of course, buying a private jet conflicted with another of the things he cared most about: not wasting money. Buffett had never lived down an incident in an airport in which Kay Graham had asked him for a dime to make a phone call. He pulled out the only coin he had, a quarter, started to bolt off to get change, but Graham had stopped him by teasing him into letting her waste fifteen cents. So, for Buffett, it was like leaping in one bound over Mount Kilimanjaro to go from justifying twenty-five cents for a phone call to rationalizing two pilots and an entire airplane to carry him around like a pharaoh on a litter. But he was doing a fair amount of rationalizing this year, having just rationalized giving up $185 million in tax avoidance as well.

Still, it bothered him-the jet so plainly contradicted his upbringing and self-image. His tortured rationale to his former roommate from Penn, Clyde Reighard, explained with great earnestness and obvious embarrassment, was that the plane was going to save him money by getting him around faster.59 Next he started to make fun of himself to the shareholders, saying, "I work cheap and travel expensive."

The plane ushered in a new phase of his life. Buffett clung tenaciously to his corn belt-even while wearing black tie-yet fraternized ever more often with hoity-toity sosoity, as CEO of the Frozen Corporation. In 1987, Ambassador Walter Annenberg and his wife, Leonore, invited Warren and Susie out to Palm Springs for a weekend with their friends Ronald and Nancy Reagan. Buffett had dined at the White House and already knew both the Reagans from visiting Kay Graham's house on Martha's Vineyard, but he had never spent a whole weekend with a sitting president.

"It was kind of like an elaborate minuet or something. Sunnylands was designed to be sort of a court for Walter. You had two people living there and fifty-something servants. You had a billion dollars' worth of art on the walls, and I'm the only guy that was ever there that didn't ooh and aah over the art. I'd just as soon have a bunch of old Playboy covers on the walls." (Susie, however, might not have enjoyed herself quite as much.) "They put us in the Blue Room. The bedspreads, the covers on the books were all blue. Everything was blue. The jelly beans were blue. Every guest room had two maids, so they could serve us breakfast in bed at the same time, and the trays would be placed down at the exact same time and they would lift the covers at the exact same time.

"When we would walk out in the evening dressed for dinner, there would be one maid on each side of the door. And Susie's maid would say, 'Madame looks beautiful tonight.' And then my maid would look at me and just sort of gurgle. She'd had a week to prepare for me and think of what to say, and she can't come up with anything.

"Walter had his own private nine-hole golf course at Sunnylands. He had his own driving range with ten tees lined up and all these golf balls piled in perfect little neat pyramids. And there wasn't anybody there. The course was immaculate. If he had four foursomes, Walter would say, 'That's too much play for my course,' and send one of them off to play at Thunderbird Country Club. I'd go out there and hit four golf balls, and somebody'd run out and replace the pyramids. And that was the day at Sunnylands. It was as fancy as living gets."

Buffett, of course, had his own views about pyramids and pharaohs, but he liked Annenberg and was happy to play golf with him. Though he would never spend his money that way, Buffett believed that people had the right to spend their own money any way they chose. Besides, he would never dream of criticizing the ambassador. Annenberg paired Buffett that weekend with Reagan as a golf partner, so Secret Service agents trailed them-but refused to fetch golf balls out of water traps as Buffett had hoped.

Buffett had a mixed view of Reagan as President. He admired Reagan's handling of geopolitics. However, under Reagan the United States went from being the world's largest lender to its largest borrower. Just as junk bonds and leverage were ballooning on Wall Street, the government had been running up mountains of debt-which Buffett considered the Wimpy style of economics: I will gladly pay you Tuesday for a hamburger today.60 Buffett's style was to own the cattle ranch-and he had the balance sheet to prove it.

Armored by Berkshire Hathaway's balance sheet-and a golf scorecard signed by the President of the United States-Buffett was now a fortress of power, a fount of widely acclaimed wisdom. After his role rescuing Scott Fetzer, people thought of him as a high-profile protector. Every financial statistic pertaining to him and his company rang with exclamation points. Berkshire Hathaway's book value per share had grown by more than twenty-three percent a year for twenty-three years! Buffett's first group of partners had reaped $1.1 million for each $1,000 put into the partnership! Berkshire was trading at the dizzying price of $2,950 per share! Buffett himself had a net worth of $2.1 billion! A Wall Street money manager-an investor-was the ninth-richest man in the U.S.! Never in history had anyone climbed from the ranks of those who managed other people's wealth to join the celebrated few on top of the feeding chain of riches. For the first time, the money from a partnership of investors had been used to grow an enormous business enterprise through a chess-game series of decisions to buy whole businesses as well as stocks. Inevitably, more people were going to call him for help.

The next person to pick up the phone was John Gutfreund, the man who ran Salomon Brothers and had endeared himself to Buffett by helping to save GEICO in 1976.

That he had done so showed both the strength and weakness of Salomon. The GEICO stock underwriting had been based on the opinion of one equity research analyst. If the firm had any stature in the marketplace of selling stocks, it would have passed on the deal as far too small to be worth the legal liability if it failed-as all the other firms had done. But Salomon, bold and decisive rather than bureaucratic, dared the risk because it needed the business. Buffett had always taken a liking to people who extended themselves and helped him make money. And Gutfreund's reserved, intellectual prep-school personality, coupled with a domineering brutality, seems to have added to Buffett's trust in him as overseer of an unruly-by-nature investment bank.

Gutfreund had grown up the son of a well-to-do meat-truck company owner in Scarsdale, New York, a golf-course-ringed suburb of commuters close to New York City. He'd majored in literature at Oberlin College and considered teaching English, but was drawn to the trading floor by a golfing friend of his father's, Billy Salomon, a descendant of one of the firm's three founding brothers.

Salomon Brothers was born in 1910 when Arthur, Herbert, and Percy Salomon, carrying $5,000 of capital, knocked on Wall Street's doors to broker short-term loans. Less than a decade later, the U.S. government became the tiny firm's client by adding Salomon to its list of registered dealers of government securities. With this endorsement, Salomon, a game little terrier, scrapped its way to respectable size over the next three decades by sticking to its core business of trading bonds using its wits, nerve, and fidelity to clients.61 Meanwhile, dozens of other small brokers closed shop or were swallowed up by larger ones.

Billy Salomon had installed Gutfreund as a trading assistant. Joining a roomful of men who spent their days buying and selling bonds for clients on the phone, Gutfreund, like the rest, carved off a little slice of everything for Salomon in return for his labors. He proved a deft trader and made partner in 1963 at the age of thirty-four. Partners at Salomon were bound by the edict of Billy Salomon, all of their interests welded together by the capital he forced them to leave at risk in the firm-instead of taking it out year by year as bonuses and profits.

In 1978 Billy Salomon promoted Gutfreund to head of the firm, then retired. Three years later, Gutfreund showed up on his friend and mentor's beachfront porch in East Hampton to say that he was selling Salomon to Phibro, a giant commodities dealer, to create Phibro-Salomon Inc. Gutfreund and his partners walked away with an average of nearly $8 million apiece in profit from the sale, while those who had built the firm and were now retired-like Billy Salomon-got zero, zilch.62 One former partner thought it a Greek tragedy: the story of Oedipus, who had killed his own father.

Gutfreund became co-CEO with Phibro's David Tendler. Running a firm with a co-CEO is like trying to balance two ends of a seesaw in the air. When Phibro's business slumped after the sale just as Salomon's was soaring, Gutfreund wasted no time. He slammed his end of the seesaw to the ground and sent Tendler flying.

After Gutfreund took control, he added a foreign-currency business, broadened into equity trading and underwriting, and expanded the bond business into Japan, Switzerland, and Germany. For the next few years, the witch doctors from academia with their computers and formulas filtered onto Wall Street, and Phibro-Salomon's floor became populated with PhDs who unlocked the mathematical secrets of stripping, slicing, packaging, and trading mortgages and other bonds. By inventing a whole new segment of the bond market, Salomon (for the Phibro-Salomon name never quite replaced "Solly" in people's minds and was dumped in 1986) grew in a few short years from a second-tier firm to the top of the Street, with a swagger to match, as its traders stayed many steps ahead of other banks.

They ruled from "The Room," Solly's trading floor, a smoky palace about a third the size of an airplane hangar, filled with long double rows of desks where the traders, salespeople, and assistants crouched in front of banks of screens with a slice of pizza in one hand and a telephone receiver in the other. The daily battle took place as a symphony of groans and curses and farts and screams punctuating the background babble, yelps, and mutterings of trader talk. Eccentrics were welcome, as long as they produced. Gutfreund shot down the aisles every morning from his desk on the floor as if fired from a cannon. He glared through horn-rimmed spectacles, chomping his stogie, and shredded screwups into piles of mulch on the trading floor.

The characters on the trading floor bartered with a camaraderie born of competition and a united obsession with killing the other team. They so dominated the bond-underwriting market that BusinessWeek crowned Salomon "The King of Wall Street."63 The story also said it was the kind of place where the "long knives" could come out if things went south-in other words, that Gutfreund would purge anyone suspected of dissent in order to still a revolt.64 Salomon's profits peaked in 1985, when the firm made $557 million after tax. But the new businesses-principally equities-didn't earn their keep; thus, internal competition started to get out of hand. The traders who had built Salomon's unique and profitable business started to leave, enticed by million-dollar offers from other firms. Soon they populated Salomon's competitors. Gutfreund ratcheted the pay upward to stem the tide. But he did not crack down on departments like equity trading and investment banking when they failed to produce, then came in with new five-year plans to fix their failures. His intimidating personality covered a soft underbelly: He shrank from hard decisions and substantive confrontations. As time passed, he spent less time in The Room and presided with a somewhat distracted air over a kingdom in which the threat of poison hung in the air. "My problem is that I am too deliberate on people issues,"65 he would later say. Somewhat unfairly, observers blamed not him but his wife, Susan.

Tied to her husband by a long, long leash, all through the 1980s Susan Gutfreund had raced headlong up Fifth Avenue, dragging the once-retiring, silver-haired CEO of Salomon behind her into international society. Gutfreund came to tolerate and even enjoy it because, he said, she expanded his horizons. With Susan blowing with the force of a nor'easter, he turned his rudder and ran into the wind. Modesty and thrift were the first to go overboard.

"It's so expensive to be rich," the former flight attendant complained-perhaps facetiously but nonetheless famously-to Malcolm Forbes.66 Susan's party guests received chauffeur-delivered invitations tied with yellow roses for events that featured four types of caviar. She chilled her perfume in a refrigerator next to her bathtub. She yanked up her Chicago roots to become such a Francophile that her butler answered the phone in French. She greeted First Lady Nancy Reagan, at their first meeting, "Bonsoir, Madame." At the couple's River House living room in New York City, millions of dollars' worth of French antiques sat atop a million-dollar rug. She redid Salomon's executive meeting room, drenching it with so much passementerie and ormolu that it "looked like a French bordello."67 She wore the collection of designer Hubert de Givenchy, who lived across the courtyard from the Gutfreunds' eighteenth-century Paris pied--terre. In New York, their righteously indignant neighbors sued them when an allegedly unauthorized crane appeared on their penthouse terrace to hoist a twenty-two-foot, five-hundred-pound Christmas tree into the Gutfreunds' living room.68 Thus did Susan Gutfreund become 1980s Nouvelle Society's most beloved object of parody. The Gutfreunds graced magazine covers and Susan earned a role in Tom Wolfe's roman clef, The Bonfire of the Vanities.69 Susan's friends defended her, but however overdone the satire might be, nobody, not even her husband, questioned that this outpouring of opulence had diverted his attention, at least a little bit.70 A corporate history published around this time included a telling remark. Instead of making a decision and expecting others to follow, it said Gutfreund "liked to involve the people who would be affected" and "would bend over backward to make them comfortable with what was to be done." Nevertheless, wrote the author, protesting a bit too heartily, Gutfreund "is in ultimate control" and "his decisions after consultations are final."71 In fact, some of Gutfreund's former partners, now retitled "managing directors," were mounting a major challenge to his authority. Having kept their commitment to grow, they now blamed him for the bloated costs and vied with one another for territory.

By the end of 1986, when earnings had begun to sink from the burden of the newly swollen payroll-Salomon had increased its staff by forty percent that year-the managing directors nearly dethroned Gutfreund in a coup. The firm's largest shareholder, the South African company Minorco, grew impatient and told Gutfreund it wanted to sell its block of stock. But when "nothing happened," according to several of the managing directors, and Salomon's stock languished as the Dow rose forty-four percent, Minorco found its own buyer: Ron Perelman, the feared corporate raider who had taken over Revlon.

The executive team did not want to work for Perelman and whomever he brought in at the top.72 Gutfreund pushed the panic button and called Buffett, asking him to invest in Salomon as "white knight" to save Salomon from Perelman-much as Buffett had saved Ralph Schey at Scott Fetzer from Boesky.73 Owning a company that sold vacuum cleaners was one thing. Even though Salomon was dominated by trading, which Buffett liked, the firm was muscling its way into investment banking and had recently caved to market pressure and set up a merchant banking business to finance takeovers using junk bonds, a technique he despised. The firm was late to the highly competitive merger business, still a novice.74 In trying to launch Salomon in these rough waters, Gutfreund seemed uncomfortable; he had aged visibly in just one year.75 Yet Salomon's expertise in reshaping the bond market appealed to Buffett at a time when good stock ideas had become scarce.76 While he denigrated junk bonds, he didn't shun the takeovers that were done using them. In fact, he opportunistically arbitraged those deals-shorting the stock of the acquirer and buying the stock of the acquiree. Since Salomon's bond arbitrage unit made most of the firm's profits, the firm in fact was an arbitrage machine, and he had a deep affinity and respect for this corner of Wall Street.

Moreover, Buffett's nostrils had caught the rich warm scent of money, for Gutfreund had the air of desperation. So he said that Berkshire would buy $700 million of Salomon preferred stock, as long as it made fifteen percent.77 Gutfreund ordered his horrified employees to design a security that would deliver to Buffett the kind of returns normally earned only on a junk bond. Over the weekend of Rosh Hashanah, the Jewish New Year, when Gutfreund knew the observant Perelman would be neutralized, Buffett flew to New York, and he and Gutfreund met at Salomon's lawyers' offices. Buffett walked in by himself, without a briefcase or even a pad of paper in his hand. Over a handshake, he agreed to buy a preferred stock with a nine percent coupon that would convert to common stock at the price of $38.78 The nine percent yield gave Buffett a premium return until the stock went to $38, when he had the right to convert to equity. So the upside was unlimited. But if the stock went down, he had the right to "put" the security back to Salomon and get his money back.79 The deal worked out to an expected fifteen percent profit, on an investment that carried very little risk.80 The annual dividends on this preferred stock-$63 million-were more than Blue Chip and Berkshire had spent on the Buffalo Evening News and See's Candies together. Inside Salomon, people were outraged.81 They felt that Gutfreund had dithered on the Minorco request, then called Buffett in desperation, and had to overprice the convertible as a result. And thus, for his huge fifteen percent return, Buffett was, as writer Michael Lewis would later explain, making "only the safe bet that Salomon would not go bankrupt."82 What the firm had bought with all this money was Buffett's reputation, which came partly at the expense of Gutfreund's power. Along with the deal, Buffett and Munger each got board seats. Before signing the papers, Buffett climbed aboard his new jet and flew to New York. He met Munger at One New York Plaza to inspect Salomon.

Standing outside Gutfreund's office next to the trading floor, he beheld The Room for the first time. Hundreds of disheveled people sweated in front of tiny green screens. Most had phones glued to each ear as they jostled, spat, puffed, and spun their way through multimillion-dollar deals. Curses and screams cut through the low roar that filled the air. Above the scene hung a hazy fog. So many traders calmed their nerves with tobacco, why bother to abstain? Everyone's lungs were always filled with nicotine anyway.

Munger crossed his arms and turned to Buffett. "So, Warren," he said. "You really want to invest in this, huh?"

Buffett stood, gazing out through the haze over the pandemonium that he was about to buy. "Mmmm-hmmmm," he said, after a long pause.83

47.

White Nights New York City * 19871991 Observers stood slack-jawed that the Midas from Omaha had gilded the mighty Salomon Brothers with his touch. Buffett-the burger-chomping billionaire next door, who drove an eight-year-old Cadillac, lived in his original $31,500 house, and possessed few of the tokens of the rich and famous-owned a major investment in a Wall Street bank.

He routinely railed against the Wall Street of which he was now very much a part. He wrote the Berkshire shareholders excoriating the junk bonds used to finance takeovers-including Salomon's-which, he said, were "sold by those who didn't care to those who didn't think."1 "I never talk to brokers or analysts," he said. "You have to think about things yourself.... Wall Street is the only place people ride to in a Rolls-Royce to get advice from people who take the subway."2 On the pages of the Washington Post, he had decried the "casino society" that was making the corporate raiders rich. Why not tax one hundred percent of the speculators' profits?3 There was certainly a lot to tax. From 1982 to 1987, the Dow Jones Industrial Average had streaked from 777 to 2,722. If you want to make money, he told business-school students, "hold your nose and go to Wall Street." But he was already there.

The image of Wall Street seducing a Midwestern populist into bed was too good to leave alone. Asked by a reporter why he owned the largest single chunk of Salomon when Wall Street was such a sinkhole, Buffett did not hesitate. He had placed his faith in one man. John Gutfreund, he said, "is an outstanding, honorable man of integrity."4 Buffett always did fall in love with people, and observers said he was noticeably in love with Gutfreund-at first. Yet the man who once quit his job as a "prescriptionist" to escape the inherent conflict of interest with his customers couldn't shield himself with John Gutfreund from the basic fact that he owned part of an investment bank, which was riddled with conflicts of interests with its customers. How had he gotten himself into the-at best awkward-position of sitting on the board of such a company?5 It was as if, during a dry spell, Buffett's urge to make money had once again overwhelmed his high hopes, high aspirations, and high principles. And as had been true throughout his life, whenever his avarice got the upper hand, trouble followed.

At the time that Buffett invested in Salomon, the market was near a breaking point. In his shareholder letter the previous March, he had said that money managers were so hyperkinetic they made "whirling dervishes appear sedated." He didn't have a partnership to dissolve, but over the next few months he started dumping stocks. He knew that as the market continued upward, part of what was driving it was a new invention, the "S&P 500 future." Salomon, like all major banks, now traded derivative contracts that were a way of betting how high or low the index of S&P 500 stocks would be on a certain date.6 Derivative contracts work like this: In the Rockwood Chocolate deal, the value of the futures contract was "derived from" the price of cocoa beans on a certain date. If the beans turned out to be worth less than the price agreed to by the contract, the person who had bought the futures contract as insurance "won." Her losses were covered. If the beans were worth more, the person who had sold the futures contract as insurance "won." The contract entitled him to buy the beans below the then-current market price.

Suppose that in the weight deal Buffett had made with Howie for the rent on his farm, he didn't want to risk Howie's actually losing weight, which would drop the rent. Since this was under Howie's control, Warren might want to buy insurance from someone else. He could say to Susie, "Lookit, I'll pay you a hundred bucks today. If Howie loses twenty pounds and keeps it off for the next six months, you'll pay me the two thousand dollars of rent that I'll lose. If he doesn't keep it off for the whole six months, you don't have to pay me the rent and you get to keep the hundred bucks." The index that determined the gain or loss was "derived" from Howie's weight, and whether or not Buffett would make such a deal was based on a handicap of the odds that Howie would be able to lose the weight and keep it off.

Another example: Suppose that Warren made a deal with Astrid to give up eating potato chips for a year. If he ate a potato chip he had to pay her a thousand bucks. This would not be a derivative contract. Warren and Astrid were simply making a deal. Whether Warren ate a potato chip was not "derived from" anything. It was under his own control.

However, if Astrid and Warren made that agreement and then Astrid paid Warren's sister Bertie a hundred bucks as insurance, in exchange for a thousand dollars if Astrid lost the bet, the deal with Bertie would be a derivative contract. It would be "derived from" whether Warren ate the potato chips, which was not under either Bertie's or Astrid's control. Astrid stood to lose the hundred bucks to Bertie if Warren didn't eat the chips, and Bertie would lose a thousand bucks if he did. "Derivatives," therefore, are either a type of insurance (for Astrid) or an outright gamble (for Bertie).7 Most people buying and selling derivative contracts do so based on an impersonal index, setting the contract without ever meeting their counterparty. The S&P "equity index futures" that money managers were buying as insurance in 1987 paid them back if the stock market fell below a certain level. People who assumed the market would keep going up were often "gambling" by "selling" the insurance. They wanted income from the premiums.

Buffett had written to Congress citing the risk inherent in these deals and urging regulation of this market as long ago as 1982, but nothing changed.8 Since then, equity index futures had swarmed like gnats in July. If stocks started to fall, all the bills would be presented to the sellers of insurance at once. They would have to dump stocks to meet their claims. The buyers of the index futures, meanwhile, were often using them to insure "program trades" that would sell automatically as the market fell, triggering a cascade of sales.

By the early fall the market got nervous, and began to stutter and stall. On Black Monday, October 19, 1987, stocks plunged a record-breaking 508 points as everybody tried to squeeze through the keyhole at once. The market came close to a trading halt, as it did in 1929, and suffered its largest one-day percentage drop in history.9 The Buffett Group happened to be meeting on the third day of the avalanche, this time in Colonial Williamsburg. Kay Graham had been put in charge of the arrangements, and she used Williamsburg's atmospheric celebration of America at its purest, most patriotic moment to elevate the meeting from its formerly "slapdash, amateur effort by whoever," as Buffett put it, to a whole new standard. The group was chauffeured everywhere, and members who were used to bran flakes at breakfast woke to find "enough food for a thousand people," as one member described it, with chicken, steak, ham, and chicken livers served alongside their eggs. Graham hired Carter's Grove Plantation, a historic eighteenth-century mansion fronting the James River, for a formal dinner one night and rented out a theater to screen a movie produced by Rick Guerin, some of whose money had been funneled directly into Hollywood. As the events crescendoed, each more elaborate than the last, the group was awestruck by the contrast with prior years, as well as by the expense. "How wonderful of Kay to have us as her guests," Chuck Rickershauser said, as everybody in earshot nodded. On the final evening, Graham hired costumed chamber musicians to play Haydn during a private dinner at the DeWitt Wallace museum.10 The topic planned for discussion as stocks were peaking had been "Is the Group finished with the market?" Instead, with the market crashing around their ears, for three days Buffett, Tisch, Gottesman, Ruane, Munger, Weinberg, and the others glowed like fireflies as they flickered in and out of the room, checking stock prices and phoning their traders with controlled excitement. Unlike the many people devastated by losses, they were buying stocks.11 When the avalanche survivors were dug out of the snow, however, Warren's sister Doris-now living in Fredericksburg, Virginia, the town she had fallen in love with when the family followed Howard to Congress-turned out to be one of the many people who had been "selling" the insurance. She had sold what were called "naked puts," a type of derivative peddled by a Falls Church, Virginia, broker. Naked puts were promises to cover somebody else's losses if the market fell-"naked" because they were unclothed by collateral and thus unprotected against loss.12 The broker had emphasized that the naked puts would provide Doris with a steady stream of income, which she needed. It is hard to imagine that the broker gave her any kind of realistic description of the risk she was taking, especially using a scary term like "naked put." Doris was unsophisticated about investing but highly intelligent, with a hard-nosed common sense. She had not talked to Warren about the investment, however. He was famous for recommending only extremely safe, low-return investments, like Treasury or municipal bonds, especially when counseling divorced women. These were investments that he would never make himself. Doris had trusted him enough to become one of his first partners; she trusted him implicitly when it came to investing for Berkshire. But that long-ago childhood episode when Cities Service Preferred went down after he bought it for himself and Doris might have loomed large in both their minds, had she asked him for advice. She didn't ask.

Now, acting on her own, Doris had incurred losses so large that they wiped out her Berkshire stock and threatened her with bankruptcy. Compounding her desperation, she had recommended the broker to some of her friends and felt responsible for the money they had lost as well.

Doris romanticized her brother, viewed him as a protective figure, and kept a little shrine to him, featuring miniature golf clubs, Pepsi bottles, and other symbolic accoutrements of his life. But when she had a problem, instead of going to Warren, she called Susie as a go-between, as everyone in the family did. By this time Doris had been married and divorced three times. She felt she had rushed into her first marriage out of insecurity; her second had failed in part because she had felt coerced into it and thus hadn't fought hard enough to save it. Her third marriage, to a college professor in Denver, had been a terrible misjudgment. By now, Doris had experienced a great deal of mistreatment in her life, but rather than letting it cow her, she fought back. This time, however, she didn't know what to do.

"You don't ever need to worry," Susie had told her about her brother after her third divorce. "He'll always take care of you."

After she confessed to Susie what she had done and asked for help, Warren called her early on a Saturday morning. He said that if he gave her the money to pay her creditors, it would only help the businesses to whom she owed money-the counterparties whom she had insured. His logic was that they were speculators; therefore he would not bail them out. As she realized that this meant he was not going to help her, she broke out in a cold sweat and her legs started shaking. She was sure this meant that her brother despised her. He felt, however, that his decision was simply rational.

"I could have given a couple million dollars to her creditors if I'd wanted. But, you know, the hell with them. I mean, this broker woman who sold this stuff to Doris-she'd busted everybody in that particular branch."

Doris hoped that Susie would save her. Susie had so much money of her own, and Warren gave her so much money, most of which she gave away. However, just as Susie had not given money to Billy Rogers for a down payment on a house, she did nothing now to help Doris financially.

The story hit the Washington Post that the sister of "a highly successful investor" had done something extremely dumb. Damaging Warren's reputation was a serious transgression in the Buffett family, and Doris's timing was terrible. The Buffetts were still trying to recover from Billy Rogers's fatal overdose just seven months before, another event that had publicly bared the problems beneath the family's wholesome surface. Warren may have known-on some level-that he was rationalizing. Certainly he feared Doris's ire; when she felt threatened-like Kay Graham-Doris defended herself as if cornered. Warren, of all people, genuinely understood his sister-but he could not tolerate shrill behavior from anyone, not even her. So he retreated. He stopped calling, and nobody else in the family contacted Doris. She felt as though the family had cut her off. Frightened at being abandoned and deeply wounded, Doris browbeat her mother for money and loans to prevent her from losing her home.13 Ironically, the Federal Reserve had lowered interest rates, companies were buying their own stocks, and the market was recovering quickly from the debacle, leaving only victims like Doris behind in its wake. In a sort of panic, she married Al Bryant, the lawyer who was helping her with her legal difficulties.

But behind the scenes, Warren was arranging to advance his sister $10,000 a month from the trust left by Howard's will. "That was more money than I have ever spent in my whole life," she says. The tension deescalated; they were able to speak. She was almost prostrate with gratitude-until she realized that this was her own money, which she was simply being paid early. At the time, her share of the trust, having grown from a little over 2,000 shares of Berkshire that were worth $30,000 in 1964, was valued at about $10 million. The trust was not structured to pay out until Leila died, when Doris and Bertie would receive the money in four installments. As a further olive branch, however, her brother set up the Sherwood Foundation, which paid out $500,000 a year in charitable gifts. Doris, Warren's children, and Astrid could each allocate $100,000 to any causes they chose. The annual income produced was as if her brother had put around $7 million into a trust for the five of them. Doris's share, therefore, was almost as much as if Warren had given her the money after all, but in a different form.

Of course, it was not in a form she could use to pay her debts or save her house-Warren never gave money outright, only in an earmarked manner that he controlled. Still, as the storm subsided, Doris regained perspective. She was grateful that he had gotten over his embarrassment and had helped her, in his own way. She was acutely aware that without him she would have had nothing in the first place. As she scraped together the money to pay her debts, their relationship gradually returned to normal, and the shrine stayed in place on her wall.

The other victim of the crash that Buffett had to deal with was Salomon. Only three months after Berkshire's investment, he and Munger attended their first board meeting. The topic of the day was the slump in trading and merger business at Salomon and the $75 million that Black Monday had cost the firm.14 Salomon faced the cleanup from Black Monday weakened by the fact that, only days before the crash, Gutfreund, his moon-shaped face impassive, had head-chopped even highly valued longtime employees, laid off eight hundred people, and discontinued marginally profitable businesses such as commercial paper trading (a backwater of the bond business) so abruptly that the disruption hurt relationships with some important clients almost beyond repair.15 These and the losses from Black Monday were going to gouge a deep hole in the shareholders' pockets that year. And with that, Salomon's stock fell into the tank.

The shareholders were suffering, yet the compensation committee-which Buffett had joined at the request of its chairman, Bob Zeller-began to discuss lowering the price at which the employees' stock options could be exercised.

These options were rights to buy stock at a specified price in the future. If Salomon had been See's Candies, it would be as if Buffett paid the line workers partly in pieces of paper that gave them the right to buy candy at a set price. If the price of candy kept going up every year, those pieces of paper kept increasing in value as time went along.

However, right now the candy factory was having a bad year. See's was going to lose money and its employees would suffer a cut in wages. The compensation committee was talking about lowering the price the workers would have to pay for candy to make up the difference. Buffett argued against this. The candy factory belonged to the owners-the shareholders-not the employees.16 He wanted the employees' share of candy trimmed by exactly the amount that earnings had declined.17 The other members of the committee, however, felt the workers had been promised candy worth a certain amount when Gutfreund announced their packages a couple of months before, and when the candy went on sale, they were obligated to make up the difference. Perhaps they were trying to forestall the traditional Wall Street bonus-day stampede that occurs whenever people are unhappy: Take the money and run.

Buffett felt this was morally wrong. Since the shareholders weren't getting their earnings, why should the employees get their candy? The others outvoted him two to one. He was outraged.18 But his role on the Salomon board was mostly titular. His advice was rarely sought and less often taken. Even though Salomon stock by then was starting to recover, the repricing of the stock options, he says, "almost immediately" made his investment in Salomon "way less attractive financially than it had been.

"I could have fought harder and been more vocal. I might have felt better about myself if I did. But it wouldn't have changed the course of history. Unless you sort of enjoy combat, it doesn't make sense." Buffett's willingness to do combat-even in a roundabout way-had diminished markedly since the days of Sanborn Map, Dempster, and the Buffetting of Seabury Stanton.

"I don't enjoy battles. I won't run from them if I need to do it, but I don't enjoy them at all. When it came to the board, Charlie and I didn't even vote against it. We voted yes. We didn't even abstain, because abstaining is the same thing as throwing down the gauntlet. And there were other things at Salomon. One thing after another would come up that I thought was nutty, but they didn't want me to say anything. And then the question is, do you say anything? I don't get in fights just to get in fights."

Buffett had been originally attracted to Gutfreund, the reserved, thoughtful man in love with his work, who arrived every day at seven a.m., lit up the first of his huge Temple Hall Jamaican cigars, and wandered among the shirtsleeved traders to tell them, "You've got to be ready to bite the ass off a bear every morning."19 Indeed, it appeared to employees who made presentations in board meetings that Buffett was a "relatively passive" board member.20 He seemed to understand little of the details of how the business was run, and adjusting to a business that wasn't literally made of bricks-and-mortar or run like an assembly line was not easy for him. 21 Since he had made the investment in Salomon purely because of Gutfreund and now didn't like the way it was working out, he always had another choice, which was to sell his investment and resign from the board.22 Wall Street boiled with rumors that Buffett and Gutfreund had had a falling out; that Buffett was either going to sell or to fire Gutfreund and bring in someone else to run the firm.23 But it hadn't come to that. Someone as prominent as Buffett selling and resigning from the board as a major investor would be a shocking gesture that would drive down Salomon's stock price and cost his own shareholders, as well as make him look capricious or vindictive or unreliable. By now his reputation had become part of Berkshire's value. Moreover, he hadn't given up on Gutfreund. His whole reason for investing was Gutfreund, and when Buffett threw his arms around someone, it took an ax to split them apart. Thus, as the holidays approached, he and Gutfreund struggled uneasily to work out their differences.

Meanwhile, the high cost of 1987 was not quite over. A belated note from Katharine Graham to members of the Buffett Group arrived two weeks before the end of the year. Some of them went into shock. She had sent them a bill. As it turned out, they had not been her guests. Instead, they themselves had been paying for the extravaganza in Williamsburg that Kay had put on! The total was "somewhat breathtaking," she acknowledged, adding, "I'm really sorry it's so late and so much. I hope Xmas is still merry and I'm still your friend."24 Buffett did have a merry Christmas, but for another reason: His present to himself was Coca-Cola. It would make up for a great deal of the unhappiness from Salomon. At a White House dinner some time earlier, he had reconnected with his old friend Don Keough, who was now president and chief operating officer of the company; Keough had convinced him to switch from his own concoction of Pepsi dosed with cherry syrup to the newly introduced Cherry Coke. Buffett tried it and liked it. His family and friends were gobsmacked when the man so famously loyal, especially to Pepsi, performed this turnaround. For years, however, KO stock had been too expensive for Buffett to consider. Now, however, the company had gotten into trouble, its bottlers locked in a fierce price war with Pepsi that had taken the price of Coke down to around $38 a share. Rumor said that it had become a takeover target of the dreaded Perelman, and the company was buying back its own stock. Although still expensive, it had the same quality of a great brand under duress as American Express had had earlier.

The way Warren looked at it, Coca-Cola was no cigar butt, yet it was pouring forth a waterfall of cash, and spending only a small portion of that to operate. Its cash flow each year had value; that was something he could quantify in his head. Since he had studied the company for years, he knew how much money it had made in the past and he could make a sensible judgment of how much Coca-Cola's businesses were going to grow for many years in the future.25 Adding up those estimates of cash flow year after year gave him an ultimate value.

Predicting the company's prospects many years from now wasn't a precise science, however. Buffett applied a margin of safety to his estimates. He did this simply by taking a whack at the number, rather than using some complicated model or formula. He used no computers or spreadsheets in doing any of these calculations; if the answer didn't hit him over the head like a caveman's club, in his view, the investment wasn't worth making.

After the estimate came the decision. He had to compare what Coca-Cola would ultimately be worth as a business-the bird in the bush-to the bird in the hand, which was Berkshire's cash. Simply by investing the cash in government bonds that had no risk of losing money, Berkshire could earn a certain amount over that same period. He compared the two. By that yardstick, Coca-Cola was a beauty, and in fact, there wasn't any other stock he knew of that stacked up better. Buffett started buying it.

When Coca-Cola products turned up at Buffett's shareholder meeting in 1988, Berkshire shareholders began swigging Coke in imitation of him. They had no idea that, through Berkshire, they also owned the stock. The meeting took on a whole new tenor that year when a thousand people showed up at the Joslyn Art Museum auditorium. This was the year that the Frozen Corporation, no longer a quasi-partnership, officially joined big-time corporate America and listed itself on the New York Stock Exchange. The Berkshire meeting had to be delayed because so many people showed up that shareholders were having trouble finding parking spots. Buffett had an inspiration. He rented two school buses and persuaded a few hundred shareholders to follow him after the meeting, like the Pied Piper of commerce, to the Nebraska Furniture Mart. Part of the appeal was the chance to meet the indomitable Mrs. B, about whom Buffett had been writing and talking for five years. The shareholders were so charmed by the tiny tank of a woman perched on her electric cart in the carpet department-and by her prices-that they spent $57,000.26 By year's end, the shareholders still did not know that Berkshire had purchased more than fourteen million shares of KO at a cost of almost $600 million.27 Because his every action now moved markets, Buffett had gotten special dispensation from the SEC not to disclose his trades for a year. He was buying so much KO stock and the company itself was repurchasing so much that, rather than compete against each other and bid up the price, "they would buy half and Buffett would buy half" of the daily trading volume, according to Walter Schloss.28 Berkshire soon owned more than six percent of the company, worth $1.2 billion.29 In March 1989, when his position was revealed, the resulting hullaballoo caused so much demand that the New York Stock Exchange had to stop trading the stock to keep the price from skyrocketing out of control.

Coca-Cola's CEO, Roberto Goizueta, had glowed with delight at the famous investor's endorsement. He asked Buffett to join his board, possibly the most prestigious in North America. Buffett had accepted with alacrity, steeped himself in all things Coca-Cola, and met a number of new people who were fellow board members, including Herbert Allen, the blunt-spoken, straight-shooting chairman of Allen & Co. The two became allies. Allen invited the Buffetts to his Sun Valley conference, which was emerging as the quintessential elephant-bump for corporate CEOs. At Sun Valley, investors, Hollywood, and media moguls met to mingle and play every July.

Buffett knew this meant adding a new annual event to his calendar, but Sun Valley was important and he wanted to attend. Moreover, he now had the means to arrive in style. In keeping with his rising stature as a member of the CEO Club, he had just swapped the used Falcon for a fancy new Challenger jet that cost nearly $7 million. He revealed the airplane-which he had dubbed the Indefensible- in his shareholder letter, making sport of himself with St. Augustine's prayer: "Help me, oh Lord, to become chaste-but not yet." He would soon write his shareholders that he wanted to be buried in the jet.

On his way to the airport to fly to Sun Valley, Buffett visited his sister-in-law Dottie in the hospital. Frail, twig-thin, a longtime alcoholic, Susie's sister had contracted a severe case of Guillain-Barre syndrome, an autoimmune disorder of unknown origin and sudden onset that can cause almost total paralysis of the nervous system, including the respiratory system and other organs. Dottie was in a coma. She was so debilitated that her doctors recommended discontinuing treatment and letting nature take its course.

Susie, distraught, refused to allow this. She remained in Omaha throughout the summer and fall to nurse Dottie, who underwent a slow and arduous process of extensive care and physical therapy. Since Susie was in Omaha for an extended stay, she had taken an apartment in Dottie's building, across the hall from her sister. While there, she helped Howie campaign for Douglas County commissioner, an office that governed Omaha and its environs. He was running as a pro-choice Republican, in a race where being Republican helped and being pro-choice didn't hurt. Buffett had chosen not to back his son financially, once again confounding the perception that a rich man's son had plenty of cash, so Howie had to raise his own funds. But Susie stuffed envelopes and attended fund-raisers, covering herself with campaign buttons and showing her break-front smile everywhere, in order to put the family imprimatur behind her son. Her presence made everything easier.30 When Howie won the race, Buffett was exceptionally pleased. Farming had never resonated with him; politics made his heart race. He felt that Howie was starting to mature and detected the stirrings of ambition in his son. The Buffetts began to talk of Howie's running for Howard's old seat in the second Congressional district.

While Peter remained in San Francisco, two of Buffett's three children were now nearby-the two who had always wanted his attention the most. Susie Jr. had recently moved back to Omaha following the birth of her second child, Michael, after mentioning to her father-without telling her husband-that Allen wanted to run the Buffett Foundation, which needed professional management after undergoing a strategic reorganization under the direction of family friend and activist Shirley Smith. Warren seized this chance by the throat. It not only brought his daughter home but also looped Big Susie closer to him.

Having his daughter around pleased Warren in another way. Susie Jr. shared her mother's caretaking quality, although packaged in a more businesslike style. He would now have two women in Omaha to look after him. More women to look after him was something that he had always rationalized. "Women don't mind taking care of themselves," he said. "Men mind taking care of themselves. I think women understand men better than men understand women. I'll eat asparagus before I give up women." His desire to be taken care of by women was so overwhelming that he mostly left it up to the women to settle any differences in their hell-bent desire to do what, in each of their opinions, was in his best interest. Susie Jr. and Astrid began to work out their respective roles.

The network of connections he had forged now brought Buffett a business that would certainly put him in favor with all his women-Borsheim's, an Omaha jewelry store. Louis Friedman, the brother-in-law of Mrs. B, had founded this company, which carried high-and mid-range merchandise at discount prices. Buffett had learned how strongly women preferred jewelry to clothes, no matter how well clothing "held its value." The person most likely to be pleased by this purchase was Big Susie, who had been assembling an impressive collection of jewelry given by her contrite husband. Susie Jr. also appreciated jewelry, as did Warren's sisters and Kay Graham. The only one not that interested in jewelry was Astrid, who was uncomfortable with expensive things, though if he gave her jewelry, she certainly wouldn't turn it down.

So Warren's Christmas shopping for the women in his life was simplified in 1989. He worked out a system: earrings, pearls, watches, everybody would get a variation on some theme each year. But he himself got nothing to equal the hefty chunk of Coca-Cola that he'd bought so happily the year before. Worse still, he got a lump of coal in his stocking in the form of a new book, Liar's Poker, written by former Salomon bond salesman Michael Lewis. Named after a bluffing game that traders played using the serial numbers on dollar bills, the book captured Salomon's swaggering, innovative, energetic culture and how it had begun to break down in 1986 and 1987. Liar's Poker turned into a whopping bestseller; it depicted the firm's eccentricities so memorably that Salomon would never again live down its reputation as a sort of zoo for the most aggressive and uncouth people on Wall Street.31 The end of the 1980s takeover boom was another problem for Buffett, for while he was still arbitraging announced deals, his usual feeding territory was empty. With no great businesses to buy, Buffett once again lowered his standards as he had when buying Hochschild-Kohn.

The lure this time was other CEOs, who, fearing for their jobs or their autonomy, began to offer him more special deals to invest. For Berkshire, he bought three apparently lucrative "convertible preferred" stocks, all structured along the lines of the Salomon deal, paying him on average nine percent, which gave him a floor on his return while also giving him the right to convert in case the companies did well. Each of these companies was quite different. Champion, a poorly managed paper business, was thought to be "in play" among takeover artists.32 Gillette, a business with a huge "moat" around its brand-like See's Candies, invulnerable to competition-was being temporarily shunned by investors. And Pittsburgh-based US Air, formerly called Allegheny Airlines, a weak regional player in a newly deregulated industry, was also "in play."

Like the Salomon preferred stock, the terms of these special deals meant that critics suddenly viewed Buffett as protecting the interests of entrenched CEOs. It was of course in the interest of his own shareholders to maximize their returns while protecting them from risk, but Buffett now looked like one of those boardroom insiders who depended on special deals to get ahead.

In the age of the buyout funds and corporate raiders, this level of greed was chump change. Buffett could have easily been a buyout king himself. But what his determination to stay friendly and on the side of management did make clear was that he was now one of the guys at the country club. Ben Graham had always felt that if someone traded in stocks, this necessarily made him an outsider-because he had to be willing to displease a company's management. Buffett, who wanted to be liked by everyone, had been trying to bridge that gap since his earliest investing days when he became friends with Lorimer Davidson at GEICO. Now, "Many Wall Street investors say Mr. Buffett's special deals amount to a kind of gentlemanly protection game," said one news story.33 In the end, what looked like sweetheart deals turned out to be no more than finely handicapped bets. Only Gillette turned into a winner, ultimately earning Berkshire $5.5 billion. US Air was the worst. Buffett had made a number of remarks over the years about the stupidity of investing in things with wings. Then the company suspended its dividend and, like Cleveland's Worst Mill, the stock plunged. "That was the dumbest fucking thing, going into that deal!" one friend exploded. "What the hell are you guys doing? You violated every one of your principles!"34 Buffett would later agree, saying, "As soon as the check cleared, the company went into the red and never came out. I have an 800 number I call and say, 'My name is Warren Buffett and I'm an Air-aholic."35 Charlie Munger's dry comment was, "Warren didn't call me on that one."

Salomon, the model for these deals, was also not doing well. After the crash and the near-escape from Perelman, the merger business had been slow to get back on its feet, and talented bankers left for elsewhere. Gutfreund had restructured the firm once again in another round of layoffs. But the managing directors no longer feared him. "People kept threatening John and he would try to buy them," said one vice chairman. At first the firm had three, then seven vice chairmen. "Honk if you're a vice chairman" became a joke around The Room.

Already fragmented into disparate power bases, Salomon now evolved into a system of warlords: a corporate-bond warlord, a government-bond warlord, a mortgage-bond warlord, an equities warlord.36 One ruled above them all: the warlord of bond arbitrage, a soft-spoken, brilliant mathematician, the forty-year-old John Meriwether. The shy, self-effacing "J.M.," a former PhD candidate, expressed his outsize ambitions through a team of professors he had lured with Wall Street salaries from schools like Harvard and MIT. These "arb boys" hunched protectively over their computers, fiddling with mathematical models portraying the bond universe, an oasis of intellect amid the belching, sweating traders, who more often swung from their gut. Like handicappers assembling the financial version of the Daily Racing Form, the arbs were launching a revolution in the bond business, and the edge their computer tip sheet gave them against the rest of the suckers produced most of Salomon's profits. They lived inside Meriwether's little bubble on the trading floor and felt they had earned their arrogance. J.M. was enormously forgiving of mistakes but relentless toward anyone he considered stupid, and the arbs were his personally chosen elite. He had a deeply complex personal relationship with his team, and spent nearly all his time with them, engaging in one of his three obsessions: work, gambling, and golf. Many an evening after the markets closed the arbs sat together, playing liar's poker to hone their handicapping skills.37 The boyish-looking, blank-faced Meriwether usually won.

Despite his passivity and limited influence as a board member, Buffett certainly understood arbitrage. But the board's knowledge of Salomon's business details went only so far, and Buffett did not understand computers, which were becoming important to every business and intrinsic to the new Wall Street. He did know, however, that he was now a director of a corporation that was utterly dependent on computers, and he had certainly figured out that computers increased risk. He once visited Mark Byrne, the son of Jack Byrne, who traded foreign exchange options for Salomon.

"Mark was bright and young, and he had a computer in his home so he could trade all the time. He had it rigged so that if the Japanese yen moved more than a certain amount, it rang a bell or something and woke him up in the middle of the night.

"I said to Mark, 'Now let me get this straight. You've got this computer here, and at three in the morning, after you've been doing who knows what-we won't even ask-until one or two in the morning, you're asleep, and this bell rings. And you get up and stagger over to the computer, and you see that the yen-dollar relationship is such-and-such.

"'Tell me, is there any limit to what you can punch in to the computer in terms of the size of the trade that you'd do? Does the computer rebel if you make a mistake?'

"And he said, 'No, I can type whatever I want.'