Charlie Munger was telling him not to do it under any circumstances. "Forget it," he said. "Some sort of surprise could happen the first day and you won't be able to extricate yourself and will spend the next twenty years of your life in court."

Corrigan took Buffett's threat to leave more seriously than the other regulators had, however. "I'll call you back," he said.

Buffett sat and waited, envisioning his next move. He pictured himself getting on an elevator, riding down six floors, walking onto the stage at the press conference all alone, and opening with the words "We've just declared bankruptcy."

Downstairs, in the August heat, more than a hundred reporters and photographers who had been pulled away unexpectedly from their baseball games and swimming pools and family picnics swarmed into Salomon's auditorium for the press conference. The only thing they had to fill their interrupted Sunday afternoon was the sight of Salomon's blood-drenched gladiators, gutted before their eyes on the sand of the Colosseum.

"This crowd was sitting there expecting big news. And I was thinking about the old story about the reporter sent to file a story on a wedding, and he went back and told the editor, 'Well, there wasn't any story, because the groom didn't show up.' That was the mood those reporters were in."

As the minutes passed, a white and shaken Meriwether arrived. He had gone, as instructed, to see Dick Breeden, chairman of the SEC, asking for help. Meriwether reported that Breeden had turned them down flat. Twice in the conversation, Breeden had said Salomon was "rotten to the core."

"Rotten to the core," Meriwether repeated in shock, "rotten to the core." All of them suddenly realized that the Treasury's move had been a joint decision among the Federal Reserve, the Treasury, and the SEC, their condemnation a sudden reversal of the world's opinion of Salomon, a dramatic payback for years of pride and arrogance.

The hour of the press conference came and went, while the reporters fidgeted and grew more irritable downstairs. Brady did not call. The phone sat unblinking.

Finally, Jerome Powell, assistant secretary of the Treasury, called. The Treasury would not fully reverse itself, he said. Salomon could not bid in Treasury auctions for customers. Yet it would compromise on Salomon's most important point: The firm could bid for its own accounts.

"Will that do?" Powell asked.

"I think it will," Buffett said.

He loped back into the boardroom and told them. The room erupted with relief and joy. As rapidly as he could talk, Buffett oversaw the election of himself as interim chairman and Deryck Maughan as director and operating head of Salomon Brothers. At about a quarter to three, he walked outside and had somebody call downstairs to the trading floor.

Maughan was sitting with the traders, watching the clock. At a nearby desk, John Macfarlane's team was working on a contingency plan to dump the firm's assets in Japan as fast as they could work the phones. Somebody called from upstairs and told Maughan to meet Buffett at the elevator bank for a talk. Maughan was uncertain whether he was about to be made the boss-or told he had a new one. He walked over to the elevator. The door opened, and he saw Buffett standing inside. "You've been tagged," Buffett said, and motioned for Maughan to get in. Instead of riding back up to the boardroom, they descended two more floors into the jaws of the waiting press.93 "The press was unruly. They were like animals. Every question was a trick question. It was a big story, and they wouldn't have minded if it had gotten bigger. It was their chance to shine. The TV people were particularly obnoxious. They wanted us to hurry up for the five o'clock news, or the six o' clock news, and I wouldn't cooperate with them. And I could just feel it. I could just tell it. I had to fall on my face. I had to be found a phony. They wanted it to develop that way. There were all kinds of book contracts floating around that room, but only if somehow Salomon failed."

Sitting on the dais, Buffett crossed his arms; he looked weary. Maughan, his light brown hair brushed into a neat pouf, stared wide-eyed at the crowd like the proverbial deer caught in the headlights. Both were clad in navy suits, white shirts, and funereal ties. "I had no preparation, zero," Maughan says. "'You're tagged' was my complete set of instructions." He did not know a single detail that had transpired upstairs. They began.

What happened? the reporters wanted to know.

Buffett, suit jacket bunched up around his ears, explained: "The failure to report is, in my view, inexplicable and inexcusable. I have seen similar dumb things happen in other operations that I am more intimately involved in but not with such consequences."

Had the culture contributed to the scandal? "I don't think the same thing would have happened in a monastery," Buffett said.

Somebody asked him what he would get paid. "I'm going to do this for a dollar," he said. The board, sitting in the audience, was dumbfounded. This was the first they had heard of it.

The reporters declined to be soothed. Were records altered? Who altered them? Was there a cover-up? Who participated in the cover-up?

Yes, some records had been altered. There had been something resembling a cover-up. At that, the pack grew excited, throwing questions hard and fast. Here, perhaps, was the stumbling prey they were hunting, close to capture, ready to be torn apart by their sharp teeth. Alas, the trail grew cold when the cover-up included no one significant beyond those who had already been sacked.

Someone came out to the stage and told Buffett he had a phone call from the Treasury. He hurried from the dais, leaving Maughan, astonished, twisting in the wind alone. Nevertheless, Maughan managed to answer some questions in the perfectly articulated monotones of a BBC announcer narrating a documentary about the mating habits of the wildebeest.

Buffett returned with a press release from the Treasury Department, announcing that Salomon had part of its credibility back. The journalists were not mollified. They pressed on.

Did the ex-executives really resign or had they left through arm-twisting? Buffett assured them repeatedly that Gutfreund, Strauss, and Meriwether had resigned voluntarily. Were the ex-executives getting special compensation? Was Salomon paying their legal fees? How much money did illegal actions earn the firm?

After well over an hour, one of the directors who was sitting next to Munger nudged him and said, "Isn't Warren ever going to end this thing?"

"Maybe he doesn't really want to," Munger said. "Warren knows what he's doing."94 How much did the phony trades cost the government? How many customers had told Salomon they wouldn't do business with the firm? What severance would be paid to the ex-executives? Why didn't Wachtell, Lipton take the situation more seriously? What were the details of the strange fraudulent trade the investigators had discovered, the one referred to in the press release as the "billion-dollar practical joke"?

"It is not a joke. I suppose if you had to characterize it in some way-" began Buffett.

"Those were your words in the release," retorted the reporter, sharply.

"Those were not my words. It was in the release. My name is not on the bottom of the release. You can characterize it as a bizarre incident. My definition of a practical joke is one you can laugh at after hearing it. I don't see it as the least bit funny."

The reporters, most of whom had read Liar's Poker, waited for an explanation. Salomon, they knew, was famous for its "goofs." Traders were constantly stealing the clothes out of each other's suitcases and replacing them with wet paper towels or lacy pink panties. The most famous goof at Salomon concerned the game of liar's poker itself, which Gutfreund once allegedly offered to play Meriwether for a million dollars on a single bet, no tears. Meriwether supposedly countered with ten million, causing Gutfreund to stand down. While even this story was thought to be a sort of goof, containing apocryphal elements, until now ten million dollars was the outside limit that anyone had ever imagined for a Salomon goof.

But for a billion dollars, you could fill New York Harbor with rubber chickens as high as the Statue of Liberty's thighs. What, then, could have been the "billion-dollar practical joke"?

"Apparently a woman was leaving the department after many, many years-retiring, I guess," Buffett said. "An order was worked out with somebody, to give her a very large order. A billion dollars. A billion-dollar order on a new offering of thirty-year Treasury bonds. Then-and this gets vague-I guess the plan was to maybe convince her somehow that the order was not submitted and have the client question the fact that it was not submitted. It was to try to scare the hell out of her or something. I don't know.

"The bid actually did get submitted."

A hundred fifty reporters sat in silence. Salomon had bought a billion dollars' worth of bonds in a practical joke gone wrong. Buffett was not kidding that the culture of Salomon was going to have to change.

"It should have been crossed out. My guess is that whoever did it did intend to cross it out. It has to be the dumbest joke ever attempted to be perpetrated."

No one said a word.

Maughan: "Any more questions?"

The hot air had been let out of the room. After this bit of truth-telling, what could anyone ask? Only a few more mild questions followed.

The press conference ended. Buffett looked at his watch as they walked off the stage. "I've got to get back to Omaha," he said.

"Warren, what's happening here?" asked Maughan. He had never spoken to any of the angry government officials, had never attended a Salomon board meeting, and the ship was sinking. "Do you have any views on who should form the management? Is there any direction you want to give me as a strategy?"

"If you have to ask me questions like that, I picked the wrong guy," Buffett said. He walked away without another word, leaving his $700 million and his reputation in the hands of a man he had met thirty hours before.95 "And then, when it was over, they were swinging cameras in our faces and banging us. It was a mob scene. I went out and got in a cab. And one or two reporters noticed that, which they felt was the new Salomon. Instead of a string of black cars waiting for us out there."

On Monday morning, Maughan went out to The Room to shore up the staff's devastated morale. He took off his jacket and rolled up his sleeves. The firm, he said, had faced three tests. The first was character. By firing Mozer and his number two, Thomas Murphy, and accepting the others' resignations, the firm had passed that test.

The second was confidence. By regaining at least partially the Treasury Department's good graces, Salomon had passed that test.

The third was will. "This is not the same firm," said Maughan, "but we must keep aspects of the old culture while we bring in a new one."96 Some of the traders stirred uneasily. What did that mean, a new culture?

But at least Salomon had gotten one lucky break. Overnight, news had flashed over the wire that Soviet Premier Mikhail Gorbachev had been ousted in a coup. The stock market immediately dropped 107 points. Business coverage, which had been drilling on Salomon all day Friday, suddenly shifted focus as the world turned its attention toward Gorbachev, held under house arrest by eight of his own military and state officials. With tanks rolling into Moscow and Russians demonstrating in Parliament and protesting in Leningrad, customers got on the phones, and the bond desk did a brisk business that morning.

"There are lots of ways of getting off the front page," said a salesman, "but sending in the Red Army has got to be the most creative."97

49.

The Angry Gods New York City * 19911994 The regulators' confidence that Salomon could survive on Buffett's reputation alone was almost certainly misplaced. Salomon barely survived even after the Treasury partially reversed itself. Some of its biggest customers simply felt revulsion toward the firm. First the huge and influential California Public Employees' Retirement System, then the World Bank washed their hands of Salomon. Buffett fell asleep each night with visions of the hundreds of billions of dollars of Salomon debt that would fall due over the next few weeks staggering through his dreams like sickly sheep. He had a sense that, for once, matters were simply not under his control. "Events could do me in, and I couldn't get off the train. I didn't know where the train was going to go.

"I couldn't do anything about what the troops were going to do every day. I couldn't do anything about discovering things that I didn't know existed when I went in. I couldn't do anything about what Jerry Corrigan felt about everything that had taken place, or what the U.S. Attorney for the Southern District of New York or the Antitrust Division of the Justice Department would do. I knew it was terribly important that it get worked out right, and I knew that was something that-no matter how hard I worked-I had no control over. I could stay up all night and think about things, but that wasn't necessarily going to guarantee a good outcome. And it made a lot of difference to a lot of people. It would change my whole future life."

Buffett had to return to New York the following week. Senator Daniel Patrick Moynihan wanted to see him about Salomon, and there were many other matters that required his presence. He and Munger took Moynihan up to a private dining room on Salomon's forty-seventh floor, where the chef prepared a proper Wall Street meal for Moynihan, including the correct wines. Moynihan looked at Buffett and Munger, who had ordered sandwiches, in disgust. The aftermath of Hurricane Bob was still pounding the East Coast. Suddenly, cascades of rain began pouring in through a leak in the windows. "The gods are angry with Salomon," Buffett remarked.1 Later that week, he and Munger went down to Washington to see Bill McLucas and Dick Breeden at the SEC. They came into the office looking like "two guys you would see at the Greyhound bus station," according to McLucas. Then they started talking and laying out their plan to save Salomon; McLucas then understood, he says, why one person he was talking to was considered a legend and the other could finish the legend's sentences.2 Afterward, Buffett visited the Treasury Department himself to see Nick Brady, who told him that he had thought Buffett was bluffing. "Warren," he said, "I knew you were going to take the job no matter what we did."3 It was only the sincerity of Buffett's plea that had touched him. Wind up the job as fast as you can, Brady said, and get out of there.

Buffett was determined that whatever was wrong at Salomon be found, confessed, and fixed right away. "Get it right, get it fast, get it out," he said. When he said fast, he meant fast; he talked to his new secretary, who had worked for Gutfreund and knew everybody well. Paula, he suggested, why don't you start talking to the board members and ask them questions about what they knew and when.4 Bob Denham, the cautious, thorough Munger, Tolles lawyer who had been airlifted in from Los Angeles to head the investigation, got wind of this plan and put a stop to it. The investigating would be done by lawyers.

The first thing Denham did was interview Don Feuerstein. Afterward, Feuerstein was fired summarily. He asked to talk to Buffett, who told him only "You could have done more." Since Buffett had known that from the beginning, Feuerstein couldn't understand the about-face.5 Buffett, however, had gradually settled on the conclusion that in his loyalty to Gutfreund, Feuerstein had put his boss's interests ahead of Salomon's. Now Denham got the job of general counsel. As Buffett began to assume control, he discovered how much the board had been subjected to what he called adroit "information rationing" by Salomon's management. He and Munger now learned that when Mozer had first admitted in April to submitting an unauthorized bid, the firm had also discovered that he had tried to cover it up, and had misled the customer whose name he had used by claiming their falsely submitted order for Treasury bonds was a clerical error.

"It was as if Mozer had lit a match. And Mr. Gutfreund could, on April twenty-ninth, have blown out that match that Mozer lit, and instead he did nothing about it.

"And it turned out that Mozer had certain characteristics of a pyromaniac and tended to light matches more often than we thought. Mr. Gutfreund's responsibility was to do something about that when he saw it. He at first did nothing and then later started, perhaps in panic, pouring gasoline on it.

"The end result was that the shareholders of Salomon would be cost hundreds of millions of dollars, and eight thousand employees and their families would fear for their jobs.

"I think it was the simplest thing in the world to do. Here you have a fellow, Paul Mozer, who admits submitting false bids to the most important client and regulator in the world, the U.S. government. And then you know he's tried to cover it up by dragging in a customer and trying to get that customer to cooperate with a cover-up so that the government won't find out.

"None of that was Mr. Gutfreund's fault at all.

"But when you hear about an action like that, it is very obvious in ten seconds that you pick up the phone and say, Mozer, you're fired. Then you go right over to Jerry Corrigan and say, Jerry, you know, this is the problem of running a place with eight thousand employees. This guy went off the reservation, and I fired him as soon as I heard about it. What do you want me to do next?"6 Of course, it wouldn't be obvious in ten seconds to many people. They would be thinking about all sorts of other things. Mozer was so valuable to the firm; he had turned around the foreign-exchange department; firing him would be unpleasant; might it be possible to rehabilitate him; it was going to be painful to confess to the regulators; their reaction might be scorching; and no less than a major law firm had said that reporting it wasn't technically required. Buffett skipped all that. He thought in probabilities; he extrapolated right away to whether a catastrophic outcome was possible-then worked out very fast what it would take to get to the lowest probability of catastrophe. Here, it was firing Mozer and confessing right away. Buffett also thought in black-and-white terms about honesty; he had no tolerance for liars and cheaters. So that was that.

Now he found that the situation unfortunately involved more lying and cheating than he had previously been told. The investigators reported to him that Feuerstein had said at the time that Mozer's actions were "criminal in nature"-a startling contrast to the firm's agreeable response to later legal advice that no disclosure was required. And nobody had ever told the firm's compliance department-which was charged with overseeing regulatory conduct-of Mozer's behavior. True, Salomon had an attitude toward compliance that was best described as loose. There would later even be an argument over who should be considered a member of the compliance committee.7 Nevertheless, the head of compliance had been disturbed when he found out that he was out of the loop and was angry that such procedures as did exist had been ignored.

Buffett and Munger also learned about the time in early June when Gutfreund had met with Treasury Undersecretary Bob Glauber to defend the firm against accusations that it had engineered the May squeeze. They found out that Salomon's management had considered whether to disclose the February false bid to Glauber immediately after that meeting, and had decided that the time was not right. Glauber later said he felt that he was played for a sucker because Gutfreund had not told him. Nothing had inflamed relations with the government and compromised Salomon's credibility more than this meeting with Glauber. It smacked of an outright cover-up.

The second press release that the board had approved, saying that the delay occurred thanks to "a lack of sufficient attention to the matter," had made the board look like part of the cover-up, given that Gutfreund met with Glauber and clearly had the opportunity to tell him. But of course the board itself had been ignorant of the Glauber meeting.

Buffett was angry that he had known nothing of these matters during the entire weekend of the crisis when he had been negotiating with the government. Everybody whose number one job was to protect the firm's franchise had failed to do so and in fact had acted in a way that actually jeopardized it. Yet even with all of this to outrage him, Buffett still did not know about one last thing: the "cocked gun" Sternlight letter that had been sent and ignored.

A few days later, the board met, and Buffett explained his thinking based on what he had learned. The board canceled the former executives' magazine subscriptions. It took away their secretaries and got rid of chauffeurs and limousines. It cut off their long-distance phone service and messenger services. They were barred from entering Salomon's offices. It tried to cancel their health insurance. Wachtell, Lipton offered to step aside as counsel. Initially, Buffett demurred, but then he agreed. The universal opinion was that Marty Lipton's legal advice had not protected Salomon's reputation.8 Denham was now helping to oversee Salomon day to day. To augment the legal team for outside matters, Buffett brought in Ron Olson, the most recent name partner of Munger, Tolles & Olson, who had worked on the Buffalo Evening News case and now represented Berkshire Hathaway.9 MTO had finely tuned radar for how to get the best results for the client from the legal system-and a long-standing knowledge of how Buffett thought.

Buffett told Olson that he wanted to pursue a novel strategy.10 Already staggering under the near-mortal blow to its reputation, Salomon could not, in his view, survive a criminal indictment.11 It was like a late-stage cancer patient. To save it, Buffett felt, radical techniques must be applied, even if it left the patient in a weakened state. The therapy he thought was Salomon's best hope of avoiding a criminal indictment was to show extreme contrition. He would surgically dig out every last cell of the cancer and, with scorching radiation, cleanse the firm and burn out any trace of a recurrence.

On Olson's first day on the job, he was sent to see Otto Obermaier, the U.S. Attorney for the Southern District of New York, who would make the decision whether to criminally indict Salomon.

"The argument we made to Otto Obermaier was that we would set an example. This was going to be an example of the most extraordinary cooperation that a target has ever given, and the outcome would have an effect on the behavior of future defendants and how the justice system worked."

Olson had to make an extraordinary pledge. On the spot, he waived Salomon's attorney-client privilege, which shielded communications between the firm and its lawyers from prosecutors. He said that whatever MTO found in its investigation, Obermaier would know it as soon as MTO knew it.12 In plain English, this meant that MTO, on behalf of Salomon, had volunteered to act as an arm of the government.

Obermaier was "incredulous," Olson says. "He thought we were some Midwest aw-shucks group, come to sell him a bill of goods."13 He could not believe that any company would make an offer voluntarily that was so against its own best interest. After all, Salomon was in no imminent danger of indictment. It would have months to prove its case. Clearly, this was more than a lip-service promise to "reform."

Then Olson flew to Washington and told Breeden at the SEC-who was "equally skeptical"-the same thing.14 Initially, it was not clear what waiving the privilege meant. Frank Barron, an attorney from Cravath, Swaine & Moore, one of Salomon's other law firms, was put in charge of negotiating what this extraordinary gift would mean to the Justice Department. Negotiating terms was difficult, since the commitment had already been made. Salomon had little leverage. The Justice Department pressed hard for a broad interpretation of the commitment and largely got its way.15 The agreement put the firm in a peculiar and paradoxical situation of prosecuting its own employees. The more evidence that MTO found that employees were guilty, the more proof it could show that Salomon had cooperated and cleansed itself. The employees, meanwhile, must cooperate or be fired, their statements to investigators unprotected by the normal attorney-client privilege.16 Asked to help Buffett prepare for upcoming congressional testimony, Gutfreund and his lawyer met with Olson a few days later. Gutfreund had volunteered to cooperate, but when his lawyers tried to lay down ground rules for the conversation, Olson refused to accept them. In the end, Gutfreund and his lawyers walked out.17 Olson reported back to Buffett that he had been "stonewalled."18 Everything at Salomon was turned topsy-turvy as the new culture of openness went into effect. A couple of days after meeting with Obermaier, Olson and Buffett walked into a room at 7 World Trade Center for a meeting. Someone, acting on autopilot, had hired a new public-relations firm. Around a large square table, two dozen people sat waiting for them. Some worked for Salomon, but most were public-relations people and lobbyists who were billing by the hour. Buffett listened for fifteen minutes as they described how they wanted to manage the crisis. Then he stood up. "I'm sorry, but I've got to excuse myself," he said. He leaned over, whispered in Olson's ear, "Tell them they won't be needed," and walked out of the room.19 "It isn't that we're misunderstood, for Christ's sake," said Buffett afterward. "We don't have a public-relations problem. We have a problem with what we did."

On his birthday, August 30, Buffett went down to Washington. He had decided to prepare for upcoming congressional testimony and had arranged with Steve Bell, who ran Salomon's Washington office, to gather a group to try to anticipate what questions the Congressmen might ask him.

He checked in to the Embassy Suites hotel next to GEICO's offices. As the emergency continued, he holed up in his room for two days. He encountered a telephone operator at the hotel, Carolyn Smith, who became his de facto secretary and Daisy Mae, manning the phones and sending cookies upstairs for him to eat for dinner. They never met in person, but when Nick Brady from the Treasury Department called, she got word to Buffett even when he was tied up on the single line in his room.20 After a couple of days, Buffett found time to go over to Salomon's fancy offices, where Bell had gathered people to brainstorm. Bell had called New York in advance, asking what to feed Buffett. "Something simple," he was told. "Feed him hamburgers." Bell was one of many people over the decades who thought this advice surely could not be literal. When lunchtime arrived, the chef sent out a plainly prepared fish course. Buffett didn't touch it. Then came a pretty salad with a nice imported cheese. Buffett ignored it. Veal or something similar arrived as the third course. Buffett took a bite or two and pushed the food around on his plate. "Mr. Buffett," Bell said, looking worried, "I've noticed you haven't been eating your food. What's wrong? Is there something else we can get for you?"

"I follow a very simple rule when it comes to food," said Buffett. "If a three-year-old doesn't eat it, I don't eat it."21 The following day, Buffett, Deryck Maughan, and Bob Denham went to the Rayburn House Office Building to testify before Congress. Katharine Graham showed up to lend moral support, sitting with Maughan and Denham in the first row. Buffett made a striking impression, seated alone at the subcommittee table and pledging extraordinary cooperation with Congress and the regulators.22 "I want to find out exactly what happened in the past so that this stain is borne by the guilty few," he said, "and removed from the innocent."

The Congressmen excoriated Salomon, postured as saviors of investors, and demanded a total break with the past. Nonetheless, they appeared slightly awed by Buffett. When he spoke, "The Red Sea parted, and the Oracle appeared," says Maughan.23 Buffett laid the problems on Wall Street. "Huge markets attract people who measure themselves by money," he said. "If someone goes through life and measures themselves solely by how much they have, or how much money they earned last year, sooner or later they're going to end up in trouble." Salomon, he said, was going to have different priorities from now on.

"Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless."

Those words have since been parsed and dissected in classrooms and case studies as the model of corporate nobility. Buffett's unflinching display of principle summed up much about the man. In this statement, many of his personal proclivities-rectitude, the urge to preach, his love of crisp, simple rules of behavior-had merged. Openness, integrity, extreme honesty, all the things that he meant to stand for: Buffett meant for Salomon to stand for them too. If Berkshire Hathaway was his editorial page, Salomon would be the church of finance.

Buffett headed back to 7 World Trade Center and put out a one-page letter to employees, insisting they report all legal violations and moral failures to him. He exempted petty moral failures like minor expense-account abuses, but, "when in doubt, call me," he told them. He put his home phone number on the letter. We are going to do "first-class business in a first-class way," he wrote.24 He wanted to run things by what he called the "front-page test." Don't just obey the rules, he said.

I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter.25 Employees at the time were frantically trying to keep from losing the firm. They called customers and begged them not to desert Salomon and ditched assets as fast as they could sell them because the debt that financed them was disappearing. John Macfarlane and the repo desk, which sold and bought batches of bonds, managed an intricate runoff of assets while negotiating tensely with numerous lenders, some of whom were refusing to advance money to the firm.26 The balance sheet dwindled at the rate of about a billion dollars a day. Macfarlane and the traders met with lenders several times to make sure they were informed, and concentrated on stabilizing Salomon's balance sheet and customer relationships, gradually raising the firm's interest allocation charge and letting economics do the rest.27 They paid off all the firm's commercial paper and restructured the debt toward medium-term notes and longer-term capital. Using futures markets and swaps (derivative trades), the firm's traders tiptoed through the market to disguise the giant fire sale they were putting on. If other brokers recognized the pattern of their sales, it could set off a raid.28 Under threat of indictment, it was far from certain that Salomon would survive. The employees understood the message of Buffett's letter. Absolutely nothing else could go wrong in this atmosphere, with regulators and Congress in full cry. "I want every employee to be his or her own compliance officer," Buffett said. This meant that to save the firm, they had to spy on each other. Meanwhile, everyone knew that MTO was crawling through the government desk like a minesweeper, looking for anything that could be wrong. As the customers fled, the trades shrank, and the fear spread, the firm's long-standing culture of swashbuckling risk-taking began to fade.

Within days, Buffett was called back, this time to testify before the Senate. Corrigan, Breeden, and the federal prosecutors remained disgusted with Salomon. As he waited to be called, seated a couple of rows behind Corrigan in the Senate chamber, Buffett heard Senator Chris Dodd question Corrigan about whether the Federal Reserve had been asleep at the switch.29 Corrigan said no, and that the Sternlight letter delivered on August 13 had been designed to produce a change in management but had been ignored-which, Buffett saw, he interpreted as Salomon spitting in his face.

Buffett sat figuratively scratching his head. He knew there was some kind of major problem here, but he didn't know what Corrigan was talking about.30 When it came time for him to testify, he said, "The nation has a right to expect its rules and laws to be obeyed, and Salomon did not live up to this obligation." Congressmen complained about Salomon's excessive pay. How could one bond-arbitrage trader make $23 million? they asked. "That disturbed me plenty," Buffett replied. They wanted to know what bond arbitrage was, and whether it benefited the economy. Buffett explained, then said, "If you asked me whether that compares to a good teacher in a public school, I would not want you to press me on it."

Why hadn't a board filled with smart people been more aware and alert? a Congressman demanded. Without betraying the fact that he was steaming inside about the Sternlight letter-whatever that might be-Buffett said that management had withheld information.31 He acknowledged that Munger had been the only one smart enough to ask the right questions when the first phone call came.

He was not about to defend Salomon as what it was: a great company with a wonderful culture that had a single employee who did a terrible thing, overseen by a management who mishandled the situation disastrously. Defending the firm of Liar's Poker was not likely to win friends. No, Salomon was a financial Gomorrah that must be investigated and purged of its ticket-forging, bonus-pimping, pizza-tossing ways.

This bold, arresting stance stopped a brewing witch hunt in its tracks. The pitchforks went back into the barns. The employees went along accordingly. "It was a brilliant strategy," said Eric Rosenfeld. "That was our marching order, and we marched."

When Buffett got back to Salomon, he went after the details of the Sternlight letter; "he was livid," according to board member Gedale Horowitz. "It compounded the felony. He was so angry because he hadn't been told and the letter hadn't been responded to." Other than the Glauber meeting, the Sternlight letter was the most serious act of "information rationing." Withholding it from the board had put them in the position of making a number of decisions in a state of ignorance about Corrigan's expectations. Buffett's and Munger's attitudes toward prior management hardened. Now the real import of Munger's term "thumb-sucking" became absolutely clear. "Thumb-sucking" meant ignoring the obvious until your diaper was full. Over a couple of weeks, said Munger, "We paid attention to our sovereign"-meaning the Treasury and the Federal Reserve-"and our views changed as our cognition improved." As far as Gutfreund was concerned, "we had no option of forgiveness,"32 Buffett said.

Through these revelations, Buffett led Salomon with apparent equanimity and poise, while Maughan and a few employees dressed in hazmat suits made up the cleanup crew. But beneath his eggshell-smooth demeanor, he was roiling in turmoil. To keep himself from thinking about Salomon, he played an electronic game called Monty for hours at a time. He hated being away from Omaha. Gladys Kaiser noticed the lift in his step when he returned and the drag in his feet when he had to leave. She wanted to retire but stayed on temporarily because her boss was having such a terrible year.33 New York did not suit him any more than it had when he was young and working at Graham-Newman. He remained aloof, never appeared on the trading floor, and, as one senior manager noted, even a glimpse of him in the hallways at Salomon was "a rare sighting." Susie came out to visit from San Francisco. Kay Graham arrived to play bridge and keep him company. Before long, he had set up a regular game with Carol Loomis, George Gillespie, and Ace Greenberg, the CEO of Bear Stearns. Bridge helped him relax because, when he played bridge, he couldn't think about anything else. A couple of miles uptown, in his enormous Park Avenue apartment filled with a painstakingly assembled collection of art, his old friend Dan Cowin lay dying of cancer.

Buffett wasn't sleeping. When in New York, he would call home at twelve-thirty a.m., since he had the special deal to get the Wall Street Journal early in Omaha, and have tomorrow's news read to him over the phone.34 He listened on tenterhooks, fearing that something horrible would be published about Salomon. Often there was, but at least he knew it before the rest of the employees, some of whom were seeing even less of their own homes than he was of Omaha. They were working fourteen or more hours a day to hold the firm together in the face of repeated obstacles and humiliations. Salomon's stock and bond salesmen called clients knowing their main task was to convince them that the firm was not going under. Investment-banking clients were canceling previously committed deals as fast as they could run out the door. British Telecom threw Salomon out of the landmark deal that Gutfreund had gone to London to save, a trip that had caused him to miss the phone call with Buffett in Reno that revealed the emerging scandal. Bankers trying to sell other business faced an almost impossible task, as competitors used the firm's precarious status against it when Salomon vied against them in banking "bake-offs."35 Other employees got field promotions of daunting magnitude. Maughan elevated one of the arbs, Eric Rosenfeld, to head trader, alongside Bill McIntosh, the head of sales. Rosenfeld, a former college professor who had never worked with a team of more than five people, suddenly found himself managing six hundred. Then the investigators threatened to fire some of his traders. And along with managing the six hundred, Rosenfeld personally reviewed thousands of trades for the lawyers to reconstruct what had happened.36 He did not want this promotion; he and the other arbs wanted J.M. back. Meriwether's office remained exactly as he had left it. The golf clubs, his ceremonial instruments of power, leaned in the corner. The cleaning crew kept the shrine well-dusted. The arbs gathered to consult the oracles of trading. They prayed for J.M.'s return. Salomon's stock continued to slump toward the low $20s.

As the investigation ticked along and the employees rowed like galley slaves, Buffett's mind could not help but wander toward his main preoccupations: Berkshire Hathaway and investing. He had just bought a shoe company, H.H. Brown Shoes, and turned to his secretary at Salomon, Paula Orlowski, sending her to the library to delve into computer files in search of SEC documents on Morse Shoe, another footwear maker that had recently filed for bankruptcy.37 Nevertheless, Salomon demanded most of his attention. Piled on top of other, earlier scandals-Ivan Boesky, Michael Milken at Drexel Burnham Lambert-the Salomon affair had fueled the perception that Wall Street was utterly corrupt. In the wake of Buffett's performance before Congress, a raft of other brokerage firms rushed to the confessional and followed suit.38 By now, Salomon's investigators had discovered that Mozer had bid more than thirty-five percent on eight separate occasions, submitting false customer bids or jacking up customer bids and taking the extra bonds into Salomon's own account without informing the clients whose names had been used. On four occasions he had managed to acquire more than three-quarters of all the debt issued.39 As the witch-hunt atmosphere heightened, Buffett upped the ante. At the next board meeting, he led a discussion. Why should Salomon be paying the attorneys of John Gutfreund to stonewall us? was the thrust of his questioning.40 The directors voted, almost unanimously, to make two surprising moves. No severance pay, they said. And the firm cut off payment of legal fees for the former executives.41 The drama now revolved around two things: the Federal Reserve's deliberations over whether to keep Salomon as a primary dealer, and the criminal case. The Federal Reserve lacked the expedient option of temporarily suspending the firm: "It's like executing somebody technically and then resuscitating them," said Federal Reserve Chairman Alan Greenspan. In October, the Fed was seriously considering letting Salomon fail. Keeping it around was a decision that might be "jumped on by politicians right and left."42 The U.S. Attorney's prosecutors thought they had enough evidence to indict. The criminal law makes it very difficult to defend corporations against the acts of their employees. Gary Naftalis, Salomon's criminal lawyer, advised the firm that "Salomon plainly could be convicted" if it was indicted. For obvious reasons, everyone at the firm was desperate to get the criminal matter resolved. As long as it was hanging over the firm's head, Salomon operated under a death threat, and customers knew as much. But Naftalis was in no hurry. He reasoned that a quick decision would probably mean indictment, whereas more time would let him lobby and persuade that Salomon did not deserve indictment; more time would let Salomon demonstrate its extraordinary willingness to cooperate; more time made it less likely that the prosecutors would indict.43 After some three months of work dedicated to reforming the firm, Denham led Buffett, Olson, Naftalis, and Frank Barron to a secret location, chosen at U.S. Attorney Otto Obermaier's insistence, half a mile from the prosecutor's office at St. Andrew's Plaza near City Hall. It was a last-ditch attempt to persuade Obermaier and his lawyers not to indict.44 A Teutonic old-school prosecutor with a love of the law and a deep respect for the history and traditions of the U.S. Attorney's office, Obermaier had been trying to figure out what to do with the fiasco that had landed in his lap. He recognized its unique nature. "This is no assault case on the New York subways," he said. Indeed, he had been calling Jerry Corrigan "alarmingly often" to learn the ins and outs of the Treasury bond market: the difference between two-year notes and thirty-year bonds, the frequency of auctions, and how they were conducted.45 Sitting in a little conference room facing Obermaier, Buffett did most of the talking. He worked very hard to convey what he had said so many times, that if the firm were indicted, it could not survive. Obermaier made comparisons, however, to a case involving Chrysler, which had survived prosecution.46 The difference between a firm that sold hard assets and a firm that bought and sold nothing more than promises on pieces of paper was initially not clear. Buffett tried to get past the image of onion-burger-tossing slobs inspired by Liar's Poker and invoked the innocent rank-and-file who would lose their jobs if Salomon went down. He promised that he would not sell his Salomon stock anytime soon and that his people would continue to run the place. He conveyed the sweeping nature of the cultural changes taking place inside the firm. This made an impression on Obermaier, but he kept a poker face. He had many other factors to consider.47 The Salomon team went back across town with no idea whether they had succeeded or failed.

By midwinter, Salomon's status as a primary dealer remained unresolved. The firm still lacked the right to trade for clients, and the Treasury Department could undo the whole deal at any moment. Under threat of corporate criminal indictment, Buffett and Maughan labored to prove the firm worthy of saving. Buffett had run a full-page ad in the Wall Street Journal explaining the firm's new standards.48 "I said that we would have people to match our principles, rather than the reverse. But I found out that wasn't so easy."

Day after day, Buffett bore down, shocked by the lavish lifestyle that was taken for granted on Wall Street. The executive dining room's kitchen, as large as that of any restaurant in New York, was run by a head chef trained at the Culinary Institute of America and staffed by a pastry chef, a sous-chef, and a number of under-chefs. Employees could order "anything on earth they wanted" for lunch.49 In his first days in New York, Buffett received a letter from the head of another bank, inviting him to lunch so their chefs could do battle. Buffett's idea of testing his chef's skills was ordering a hamburger for lunch every single day.

The frustrated chef created batch after batch of handmade potato chips. He peeled the potatoes into cylinders sized to the millimeter, sliced them gossamer-thin, and whisked them into fresh sizzling oil until crisped just so. The perfect potato chips lay heaped in a pyramid alongside the daily hamburger on Buffett's plate. He ate them absentmindedly, daydreaming of McDonald's french fries.

For Buffett, the dining room symbolized the culture of Wall Street, which he found abhorrent. He had been born in an age where money was scarce and life was lived at a walking pace, and he'd arranged his own life to keep things that way. On Wall Street, money was plentiful and life was lived at whatever speed bandwidth could currently supply. People left their homes at five a.m. daily and returned at nine or ten at night. Their employers showered them with money for doing that but in return wanted every waking second of their time and supplied certain services to keep them working at a treadmill pace. Buffett as a child had been impressed by the Stock Exchange employee who rolled custom-made cigars, but now found this astonishing.

"They had a barbershop downstairs, and they didn't even tell me about it. They were afraid of what would happen when I found out. And they had a guy who came around and shined your shoes, and you didn't pay him."

The executives of Salomon had previously felt, as one underling put it, that "God forbid they should ever lift anything but a fork." Behavior by their new billionaire chairman that would seem normal on Main Street shocked Salomon's employees. On the way to play bridge one night, Buffett asked his Salomon driver to stop the car. He climbed out and walked into a nearby store, then returned a few minutes later as the driver watched, mouth agape. The chairman was carrying huge bags full of ham sandwiches and Coca-Cola.50 This was the new Salomon.

But it was the battle over pay that became the watershed. Early in the fall, Buffett had told the staff that he would be slashing $110 million from the year-end bonus pool. "Employees producing mediocre returns for their owners should expect their pay to reflect this shortfall," he wrote.51 That seemed simple and obvious to him. Businesses and people that were producing should be paid. Those that weren't should not. Maughan agreed with Buffett that the culture of entitlement had to go. People were not entitled to millions just because they owned three houses and were supporting two ex-wives.52 But for once Buffett had miscalculated the limits of human nature. The formerly enriched employees, used to being showered with money on bonus day, now knew that they were about to be gouged.

Buffett's reasoning that employees should not take home all the spoils and the shareholders none was lost on them. Indeed, they believed the opposite, since they had been taking home the spoils for years. A decrease from last year was outrageous. They felt that Buffett was trying to transfer some of the guilt from Mozer's misdeeds to them by making an issue out of the bonuses. They had not caused Salomon's woes. Rather, they had stayed out of loyalty and were enduring humiliation and misery in its aftermath. They were sweeping up behind the elephant. They felt that they deserved combat pay. It wasn't their fault that their businesses weren't performing. How could they sell an investment-banking deal while the firm was under threat of indictment? Didn't Buffett understand that? They were up against the fact that everybody on Wall Street knew that Buffett thought investment bankers were nothing but useless stuffed shirts with fancy cuff links. Meanwhile, despite its problems, Salomon was actually having a decent year financially. They resented being called greedy once again by an avaricious billionaire.

The deprived traders, sales force, and bankers had to hang around until year-end, the traditional time for quitting, after individual bonuses were paid and the smaller but nevertheless multimillion-dollar deferred bonus pool was scheduled to cash out.

When the bonus pool was divvied up around the holidays, the battle over pay reached epic scale. The top thirteen executives saw their bonuses slashed by half. As soon as the numbers were announced, Salomon's hallways and trading floor erupted in open revolt. With budgets and bonuses gutted, traders and bankers fled. Half the equity department-home of the investment bankers-ran out the door. The rest of the trading floor went on a temporary strike.

One day, Buffett walked a couple of blocks over to American Express to have lunch with its CEO, Jim Robinson. "Jim," he said, "I didn't think it was possible, but I just paid out nine hundred million dollars in bonuses." Yet he felt that everybody, other than Maughan and one or two people he had brought in to fix the place, was mad at him.53 "They took the money and ran. Everybody just peeled off.

"It was just so apparent that the whole thing was being run for the employees.54 The investment bankers didn't make any money, but they felt they were the aristocracy. And they hated the traders, partly because the traders made the money and therefore had more muscle."