Goldman Sachs got in touch with Buffett to see if he was interested in a bailout. He wasn't. However, he would consider teaming with Goldman to buy the entire portfolio of assets and debt. Together they would be strong enough to wait the crisis out and trade the positions deftly for a profit. But Buffett had a condition: no Meriwether.

Long-Term owed money to a subsidiary of Berkshire. It owed money to people who owed money to Berkshire. It owed money to people who owed money to people who owed money to Berkshire. "Derivatives are like sex," Buffett said. "It's not who we're sleeping with, it's who they're sleeping with that's the problem." As Buffett headed to Seattle that Friday to meet the Gateses and embark on a thirteen-day "Gold Rush" trip from Alaska to California, he called a manager and told him, "Accept no excuses from anyone who doesn't post collateral or make a margin call. Accept no excuses."30 He meant that if the Howie-equivalents out there paid the rent one day late, then seize their farms.

The next morning he, Susie, the Gateses, and three other couples flew to Juneau to helicopter over the ice fields. They cruised up the fjords to view huge blue icebergs and waterfalls cascading over three-thousand-foot cliffs. But as Buffett sat politely through a slide presentation on glaciology on board the ship that evening, his mind wandered to whether Goldman Sachs would be able to put together a bid for Long-Term. Predatory sellers had pushed prices so far down that Long-Term was a cigar butt. An opportunity to buy such a large bundle of distressed assets had never arisen so quickly in his career.

The next day, the Gates party went ashore at low tide to view the hundreds of brown grizzly bears that frequented Pack Creek. Jon Corzine, the head of Goldman Sachs, called Buffett on his satellite phone but kept being cut off. "The phone didn't work because of these half-mile-high rock walls on either side of the boat. The captain would point out, Look, there's a bear. I was saying, To hell with the bear. Let's get back where I can hear the satellite phone."

Two or three hours went by with Buffett held incommunicado as the party spent the afternoon crossing Frederick Sound so they could view the humpback whales. Corzine stewed in New York before he regained brief-and final-contact with Buffett. By the time Buffett resignedly trudged off to view a slide show on Alaskan marine wildlife that evening, Corzine had gathered that he could make a bid, as long as the investment had nothing to do with, and was not managed by, John Meriwether.

On Monday, Buffett remained out of touch and Corzine grew pessimistic about working out a bid. He had begun to talk with Peter Fisher, who ran trading activities at the Federal Reserve, and was drawing together Long-Term's creditors to negotiate a joint bailout. The Federal Reserve had held a conference call at which its chairman, Alan Greenspan, spoke of an "international financial maelstrom" that must be causing "considerable breakage to crockery somewhere."31 Hope began to stir that the Fed would cut interest rates.

Meanwhile, Long-Term lost another half billion dollars; the banks picking over its books were using what they learned against it.32 The fund now had less than a billion dollars of capital left. The irony was the $2.3 billion it had paid out to its own investors a year before in order to increase the share of the fund owned by its partners. If it had that money now, Long-Term might have been in a position to survive on its own. Instead, it had a hundred dollars of debt for every dollar of capital-a ratio no sane lender would ever entertain.

Buffett was en route to Bozeman, Montana, with the Gates party, but Corzine had reached him earlier that morning and gained permission to enlist a large insurer, AIG, which owned a derivatives business, to join the bid. Its chairman, Hank Greenberg, was on friendly terms with Buffett. AIG had the experience and the team to replace Meriwether as manager, and Greenberg's powerful presence would balance out Buffett's-and it might make Buffett's bid more palatable to Meriwether.

The next morning, forty-five bankers arrived at the Fed, as summoned, to discuss a bailout of the customer that had bullied them so relentlessly for the past four years. Long-Term had them over a figurative barrel once again, for if it went down, other hedge funds would go down with it. As one domino fell after another, a global financial meltdown was a real possibility-a repeat of Salomon. This was the warning that Buffett and Munger had been repeating at their shareholder meetings since 1993. Some of the banks now feared for their survival unless they helped save the fund. They were reluctantly contemplating putting more money into Long-Term-money that would only go to pay Long-Term's debts-on top of money they had already invested in the fund and lost. When Corzine told them Buffett was also bidding, the idea that he was going to come in and buy it to make a killing went down poorly, even though he would be bailing everybody out. Somehow, Buffett always won. People found it irksome. New York Federal Reserve Bank President William McDonough called Buffett to find out if he was serious. About to board a bus for Yellowstone National Park, Buffett told McDonough that, yes, indeed, he was ready to make a bid and could do so on short notice. He couldn't see why the Federal Reserve would be orchestrating a bailout when Berkshire, AIG, and Goldman Sachs, a group of private buyers, stood ready to solve the whole problem without government assistance. He called Long-Term around eleven o'clock New York time on a crackly satellite phone and said, "I want you to know, I'm going to bid for the entire portfolio. You'll hear from my representatives, but I want you to know it's coming from me, and I hope you'll take it seriously."

"I didn't want to hold the bus up, so I went along. It was killing me. And Charlie was in Hawaii. I still knew the basic positions that were involved, and I knew these spreads were really getting more and more extreme. On that Wednesday morning, it was changing by the hour."

An hour later, Goldman faxed a single page to Meriwether offering to buy the fund for $250 million. As part of the deal, Meriwether and his partners would be fired. If Meriwether accepted, AIG, Berkshire, and Goldman would put another $3.75 billion into Long-Term, with Berkshire funding most of that. To minimize the chance of Long-Term shopping the bid to gin up a higher offer, Buffett had given them only an hour to decide.

By then, Long-Term had just over $500 million left, and Buffett was bidding just under half that. After paying off debt and losses, Meriwether and his partners would be wiped out, their nearly $2 billion of capital gone. But the document had been drafted by Goldman with a mistake in it. It offered to buy LTCM, the management company, instead of its assets, which Meriwether knew was what Buffett wanted. Meriwether's lawyer said he needed his partners' consent to sell the entire portfolio rather than the management company.33 Long-Term asked for a temporary emergency investment pending receipt of the approvals. But they couldn't reach Buffett on his phone. If they'd reached him, he said later, he would have taken that deal. While everybody else on the Gold Rush trip was looking at hot springs, Buffett was dialing and redialing the satellite phone in Yellowstone, trying to call Corzine at Goldman and Hank Greenberg at AIG. The phone didn't work. He had no idea what was going on back in New York.

The people at Long-Term did not know what was going on in the room with the bankers, where McDonough was in a quandary. He had an offer from the Berkshire-Goldman-AIG consortium but no deal. It was hard to justify government involvement in orchestrating a bailout when there was a viable private bid on the table. Finally, he told the assembled bankers that the other bid had failed for "structural reasons." Buffett was not there to make a counterargument. The Federal Reserve brokered a deal in which fourteen banks put up a total of $3.6 billion. Only one bank, Bear Stearns, refused to participate, earning the long-lasting enmity of the rest. Meriwether's crew negotiated an arrangement for themselves that they considered slightly better than "indentured servitude."34 That night at the Lake Hotel, Buffett found out what had happened. He felt that Meriwether didn't want to sell to him. If he had wanted to, he would have found a way. Perhaps it had weighed on Meriwether's mind that, as one of the fund's partners said, "Buffett cares about one thing. His reputation. Because of the Salomon scandal he couldn't be seen to be in business with J.M."35 Meriwether had certainly gotten a better deal from the bailout than he would have with Buffett.

The next day, as they boarded the bus to visit Old Faithful geyser, Buffett was still turning over in his mind whether there was some way to undo it. Gates had a treat in store. When they arrived in Livingston, Montana, in early afternoon to board a nine-car private train fitted out with burnished wood and polished leather that Gates had rented, Sharon Osberg was waiting along with Fred Gitelman, a low-key computer programmer and bridge player. Gates had flown them in. While everyone else was admiring the cliffs and waterfalls of the Wind River Canyon, the foursome retired to an upstairs lounge with a transparent dome for a twelve-hour bridge marathon. Periodically, Buffett's phone rang and he talked with someone in New York about Long-Term as the spectacular scenery rolled past. It still might not be too late to unwind the impending bailout and resurrect a private deal. But it wasn't working out.36 At least the bridge distracted him.

The next morning, after a final round of bridge, the train rolled to a halt and dropped Osberg and Gitelman off in Denver, then continued through Devil's Hole Canyon and Dead Man's Gulch. Over the next few days, as the others went white-water rafting and mountain biking and the train wound its leisurely way to the Napa Valley via the Grand Canyon, Buffett read about the rescue in the newspapers and gradually lost hope of participating.

Only seven years after the regulators had contemplated letting Salomon fail-with all the consequences that that potentially entailed-the Federal Reserve had now engineered the bailout of a private investment firm, an unprecedented intervention in the market to avoid a similar event. Afterward, the Fed slashed interest rates three times in seven weeks to help keep the financial stumble from paralyzing the economy. It was by no means certain that any such paralysis would occur, but the stock market took off like a screaming banshee.37 Long-Term's partners and most of the staff worked for a year for $250,000-pauper's wages for people used to making millions a year-to unwind the fund's positions and pay back most of the emergency creditors.38 Hilibrand, in debt for $24 million, signed the employment contract with tears streaming down his cheeks.39 Still, nobody starved, even though Eric Rosenfeld had to auction off Long-Term's wine collection. Most of them got good jobs afterward. Meriwether made a comeback to start a smaller, less leveraged fund, taking some of his team. People thought the partners had gotten off light, considering that they had nearly sent the whole financial world into a seizure. And Buffett considered it one of the great missed opportunities of his life.

Eric Rosenfeld had an insight. Maybe models didn't work when the world went mad. For that you needed a lot of capital, the kind that Berkshire Hathaway offered. After all, if you were going to bet by a hundred billion or more in favor of risk, you needed a partner, even a parent, one with so much capital that it essentially undid the leverage, somebody to provide a big umbrella in a storm.40 By implication, maybe they would have been better off being owned by somebody like Berkshire Hathaway. But that would have meant giving up their ownership.... You couldn't have it both ways. If you wanted Berkshire to take the risk and put up the money, to it went the gains.

To think otherwise was unrealistic-that somehow risk could be laid off to someone else without also giving up the rewards. But that point of view was growing and beginning to dominate the financial markets of the late 1990s. It would have profound consequences over time.

It is hard to overstate the significance of a central-bank-led rescue of a private money manager. If a hedge fund, however large, was too big to fail, then what large financial institution would ever be allowed to collapse? The government risked becoming the margin of safety.41 No serious consequences had come about in the end from the derivatives near-meltdown. The market afterward seemed to behave as if no serious consequences ever could. This threat, the so-called "moral hazard," was a chronic worry of regulators. But the world would always be full of people who loved risk. When it came to business, Buffett's veins were filled with ice, but plenty of other people's pulsed with adrenaline much of the time. Some of them had even been members of his own family.

52.

Chickenfeed Decatur, Illinois, and Atlanta * 19951999 Howie and Devon were on the lam. He had walked out of the office at ADM on a Friday knowing he would never return. A pack of reporters had been camped out in their driveway ever since. He and Devon started packing. They sneaked out of Decatur at dawn on Sunday on a rented prop plane to fly to Chicago, where they met family friend Don Keough, who was giving them a ride to Sun Valley on his private jet. Since reporters weren't allowed inside the Allen conference, Howie thought they would be safe.

He had been pacing the floor for ten days, ever since Mark Whitacre, an excitable manager he knew at ADM, suddenly confessed to him that he was acting as an FBI mole. Whitacre told him that the FBI was going to arrive at Howie's house at six o'clock on Tuesday night for an interview. Now Howie knew why Whitacre kept showing up at work for several days in a row in the same greenish polyester suit: He had been wearing a wire. Ever since Whitacre made his confession, he'd been calling every day, blathering his anxieties at Howie, who tried to disentangle himself. Howie hadn't busted Whitacre, but he could tell from the panic in Whitacre's voice that he must be cracking under the stress.

That Tuesday night, Devon tried to fix dinner with shaking hands. When the doorbell rang, Howie wanted to throw up. In came a guy in a suit-who told him he was not a target. Three hundred FBI agents were fanned out across the country, interviewing other people about price-fixing of an ADM product called lysine that was used in chicken feed.

Howie was terrified but had made up his mind to be completely forthcoming with the FBI. He said he didn't trust Dwayne Andreas, who had put him in charge of funneling requests for political contributions, a role, given Andreas's history, that might have made anybody's stomach churn.1 He told the agent that the previous fall Andreas had rebuked him when he raised ethical questions about providing entertainment to a Congressman. Howie didn't know anything about price-fixing, however.

The second the FBI agents left, Howie called his father, flailing, saying, I don't know what to do, I don't have the facts, how do I know if these allegations are true? My name is on every press release. How can I be the spokesman for the company worldwide? What should I do, should I resign?

Buffett refrained from the obvious response, which was that, of his three children, only Howie could have wound up with an FBI agent in his living room after taking his first job in the corporate world. He listened to the story nonjudgmentally and told Howie that it was his decision whether to stay at ADM. He gave only one piece of advice: Howie had to decide within the next twenty-four hours. If you stay in longer than that, he said, you'll become one of them. No matter what happens, it will be too late to get out.

That clarified things. Howie now realized that waiting was not a way to get more information to help him decide, it was making the decision to stay. He had to look at his options and understand as of right now what they meant.

If he resigned and they were innocent, he would lose friends and look like a jerk.

If he stayed and they were guilty, he would be viewed as consorting with a gang of criminals.

The next day Howie went in, resigned, and told the general counsel that he would take legal action against the company if they put his name on any more press releases. Resigning from the board was a major event. For a director to resign was like sending up a smoke signal that said the company was guilty, guilty, guilty. People at ADM did not make it easy for Howie. They pushed for reprieve, they asked how he could in effect convict them without a trial. Howie held firm, however, and got out.

Two days later, when the announcement of his resignation became public, the reporters camped out on his doorstep. The name Buffett attached to a scandal was like red meat to rottweilers. The wisdom of moving fast was even more apparent now that he and Devon had to manage a getaway from their own home.

But Howie soon found that despite the absence of reporters, who were excluded from the event, even Sun Valley was not safe. One of the first people he saw in the lobby of the Sun Valley Lodge was another ADM board member. This man, who would be around all weekend, poked him in the chest and said, "You've just made the biggest mistake of your life."2 He couldn't have been more wrong. Howie had just saved himself from being associated with a disaster in which three top executives, including the vice chairman Michael Andreas, would go to prison in the biggest price-fixing case in American history.3 ADM paid an enormous fine to settle with the government, and its reputation took a hit that would shadow it for years.

Now, however, the contretemps had left Howie out of a job. Big Susie, who was concerned about him and also about Susie Jr., who was getting divorced from Allen, swung into action and convinced Warren to begin a tradition of giving each of the kids a million dollars once every five years on their birthdays, starting then. Buffett not only went along but bragged on himself for beginning this tradition. He had begun to loosen up significantly when it came to money. Susie's allowance had expanded dramatically. At her behest, Buffett bought another house in Laguna next to the first, known as the "dormitory," to house all the children and grandchildren and visitors.4 Susie's Pacific Heights apartment, up a million stairs with no elevator but with an amazing view of the Golden Gate Bridge and Alcatraz, had been transformed to feature white lacquered walls and carpeting in her trademark sunny yellow. Almost every inch of space was covered with things she had purchased, collected from her travels, or been given by friends. There were paintings and masks created by artist friends, a Chinese altar cloth, a Balinese tapestry, Tiffany glass, souvenirs and tchotchkes of all kinds, some expensive, many cheap and offbeat. They filled her walls, cabinets, closets, and drawers to overflowing.

The effect struck observers, depending on their perspective, as colorful, beautiful, and a wonderful reflection of Susie's personality, or a chaotic magpie's nest of things. Susie was always lobbying for more space; along with the second apartment she had convinced Warren to buy her on the ground floor of her building, unknown to him, she had also begun to rent storage rooms around San Francisco to house her ever-expanding collections.

Susie's ministry to the sick and dying seemed to compound as rapidly as her collections. She had carried on her work with AIDS sufferers through the 1990s. Then her sister Dottie began a battle with terminal cancer. All through Dottie's earlier struggles-with alcoholism, with health and marital problems, with the death of her son Billy-Susie had been by her side. Susie stayed in Omaha to nurse her sister through her last months and days. When Dottie finally died, another person Susie had not, in the end, been able to save, it was the greatest loss she had suffered since her nephew's terrible death by overdose. And Susie was now the last person alive from her original family.

In summer 1996, she had to help Warren deal with the death of his ninety-two-year-old mother. Even in her later years, Leila had never stopped berating the family. She could still work Doris over on the phone or during a visit, barely stopping for breath for an hour or more, sending Doris into tears and ending with "I'm glad we had this little talk." Warren himself continued to avoid Leila, having relegated most of the caretaking to Susie Jr. He spoke much more often and more fondly of Rose Blumkin than he ever did of his mother. When Astrid and Sharon Osberg took him out to visit Leila, he was a "wreck," and the two women would talk to Warren's mother while he sat by anxiously, not participating in the conversation. As Leila's memory faded, her story mostly wound down to the 38 wonderful years with Howard and one other topic that seemed to have lodged itself in her mind during Warren's infancy: "Isn't it a shame about the little Lindbergh baby?" she would ask. "Isn't it a shame?"

After Leila died-on Warren's sixty-sixth birthday-the family assembled for a funeral, their grieving complicated by a cauldron of mixed emotions. She went to rest as the person she had been; any hopes of what she could have become had things been different went to the grave along with her.

"I cried a lot when my mother died. It wasn't because I was sad and missed her. It was because of the waste. She had her good parts, but the bad parts kept me from having a relationship with her. My dad and I never talked about it. But I really regret the waste of what could have been."

With both his parents gone, Warren was the senior member of his family, the watchkeeper at that thin boundary between life and death. It was his sisters, however, whose lives were most affected by Leila's death. They were surprised to find themselves inheriting a sizable amount of Berkshire stock from their mother, more than they had originally owned themselves, along with the first distribution from their father's trust set up by their brother years before. Bertie had kept all her Berkshire stock from the beginning, and had her own philanthropic interests. She had always tended to contribute her energy and effort quietly, behind the scenes and did not want to play a leading role. And Doris now had real money again, for the first time since the "naked puts" debacle had wiped her out in 1987. For Doris, her mother's death was a new beginning. She set up her own foundation, the Sunshine Lady Foundation, and started her giving with the Edith Stahl Kraft Outstanding Teacher Award, named after their aunt Edie-and modeled on the Omaha teacher awards named after their aunt Alice that her brother's foundation gave out.

Warren's sisters were now rich. Two of his children also had a little money, thanks to Susie's persuasiveness about the million-dollar birthday gifts. Buffett had never demanded an accounting of the huge amounts it took to fund Susie's largesse, although he scratched his head and wondered what on earth she did with all the money. The tax complication of the large gifts to their children, however, required that she give Warren a history of her gift-giving. He had always been proud of her generosity, although not always pleased about those who benefited from it. He was now particularly displeased by some of her larger gifts, which flew in the face of what he had understood about the nature of their marriage. His impression that she had ended her other relationship stood corrected. Despite the parallel between his own complicated personal life and Susie's, he was upset.

A discussion of Susie's will ensued. They had sharply differing opinions about who among her friends should receive bequests. In the end, his decision ruled. Afterward, the Buffett bathtub memory went to work. Anything negative that had transpired between them simply vanished, and Susie was restored as his ideal, because he needed her to be.

Warren had stood firm on the question of Susie's bequests to her friends. But she had gentled him enough on issues of money when it came to their children that he was not only comfortable giving them a million dollars every few years while he was alive, he was going to leave them a reasonable amount of money after his death.5 It would not fund a zoo full of bears like William Randolph Hearst's, but they would be more than comfortable.

Howie had used his first million-dollar birthday gift to buy a nine-hundred-acre farm in Decatur, Illinois, where he still lived. Now he had two farms, one of which he owned outright. After the ADM lawsuits settled down, Don Keough suggested that he become a professional director by going on the board of another high-profile business, Coca-Cola Enterprises (CCE). Even though he had gained some business experience, Howie really preferred to sit on his combine working the fields. And while CCE was far more respectable than ADM, the CCE directorship nevertheless was a bit of a hop from the fire into the frying pan.

A giant cola bottler, CCE had been smashed together out of smaller bottlers that were Coca-Cola's customers. They bought the syrup concentrate that Coke made, mixed it with fizzy water, and sold it, acting as middlemen, so their relationship with Coke was critical. Neither could live without the other.

Don Keough, Buffett's old Omaha friend, was now president of Coca-Cola. His boss, the CEO of Coca-Cola, the aristocratic Cuban-born Roberto Goizueta, was revered in the business world for creating the world's best-known brand through slogans like "Coke Is It" and "I'd like to buy the world a Coke." Buffett felt that Coca-Cola had by now become a self-sustaining enterprise-and he admired Goizueta for having gotten it to this stage.

In 1997, Gates joined Buffett and Goizueta on a panel discussion at Sun Valley that was moderated by Keough.

"I used to talk to Bill all the time, and I'd always use this expression that a ham sandwich could run Coca-Cola. And Bill wasn't quite housebroken then. So we were sitting on this panel, up in front of the audience, and Bill said something to the effect that it's pretty easy to run Coke."

"I was trying to make a point about how Coke is such a wonderful business," says Gates, "and I said something about how I'm going to step down from Microsoft before I'm sixty because it's a tough business and a young person may need to be in there to handle turns in the road. But it came across that I thought of Microsoft as exciting and I must have said something like, 'Unlike Coca-Cola...'

"Goizueta thought I was an uppity, arrogant kid who was painting some kind of picture that I was engaged in some masterful act on a daily basis whereas anybody could leave at noon and go golfing if they ran Coca-Cola."6 "And Roberto hated Bill from that point forward."

Buffett avoided technology stocks partly because these fast-moving businesses could never be run by a ham sandwich. He thought it no shame to have a business that could be run by a ham sandwich; he wanted to get Berkshire Hathaway to the point that it could be run by a ham sandwich too-though not until after he was gone.

But by 1997, Coca-Cola had started to set goals for itself that were so ambitious that it took-not a ham sandwich, not even Goizueta-but a lot of financial engineering to achieve them.

Coke owned forty percent of CCE and tended to act as though it owned a hundred percent. The creation of CCE by rolling up a group of bottlers had been part of a larger strategy of buying and selling bottlers in order to time the profits and boost Coca-Cola's earnings. This was neither illegal nor technically deceitful, but it was nonetheless an illusion, and Warren, who was on the board of Coke, was always aware of the potential for misrepresentation.

"Roberto did a lot of things operationally that were terrific, and I loved the guy. But Roberto got tangled up in promising numbers that eventually couldn't be delivered. He talked about high-teens growth, eighteen percent. Big companies are not going to increase their earnings in the high teens over long periods of time. For a while you can do it, but it just isn't in the cards to keep it up forever.

"I remember when he came in and talked to us about how he was going to add a third leg to earnings, which was profits made on buying and selling bottlers. He tried to sell the finance committee that this was the way of the future.

"The prices they paid for bottling companies were just nuts. I asked the chief financial officer all these questions. But Roberto started the board meetings at ten o'clock and finished at noon; the atmosphere was such that it didn't lend itself to questioning. You just had a feeling when it got to be noon that it would not be at all polite to keep raising subjects or talking about things that would cause the meeting to last until one o'clock. He was just not a guy you questioned. Some people have that bearing about them, and when the bearing is backed up by a very good record, the combination of the two is pretty overpowering." Buffett was more than simply nonconfrontational; he was of an age and from an era that viewed serving on boards as a quasisocial activity in which deference and politeness held sway. In 1998, that was the boardroom culture throughout America. This culture reflected the reality that the structure of corporate boards gave directors very little leeway with management.

"As a director, you can't remotely tell management what to do. All this stuff you read in the press about the board setting strategy is baloney. As a board member, you can do practically nothing. If a CEO thinks a director is smart and on his side, he'll listen to some degree, but ninety-eight percent of the time, he'll do what he wants to anyway. Listen, that's the way I run Berkshire. I think Roberto liked me, but he was not looking for a lot of ideas from me."

Buffett never knew of anything seriously enough awry at Coca-Cola to make him consider the drastic step of resigning from the board. Howie had a different problem: standing up to pressure from Coca-Cola.

"I was more independent than just about anybody else on that board, because I was on the Berkshire board, and no one at Coca-Cola could intimidate me," says Howie. "So I had no problem challenging Coca-Cola on behalf of CCE." But Howie eventually got off the CCE board. There was just too much potential for conflict between the two boards. In the sense that people learn more from heavy seas than smooth sailing, if Keough had meant to send Howie to another crash course in business school, the CCE role was a success. Howie's radar for danger signs in business had sharpened considerably. Even though he continued to serve on boards, the experience taught him that he wanted to fulfill his thirst for excitement outside the corporate world.

By the mid-1990s, Goizueta and his finance chief, Doug Ivester, were dosing Coke with even larger amounts of bottler profits to maintain the illusion of the company's rapid earnings flow. Then in 1997, Goizueta died unexpectedly, only a few months after announcing he had lung cancer. The board and the company and investors were shocked. He had been a statesmanlike CEO, credited with making Coca-Cola an international giant, his persona so titanic that it was hard to imagine who could fill his shoes. The board had deferred to Goizueta so absolutely that nobody ever seemed to have thought of any alternative to his handpicked successor, the burly, table-pounding Ivester.7 The finance chief had a big reputation: He had engineered much of the company's recent success, carving up the financial interests of Coca-Cola and its bottlers to squeeze out every last advantage in Coca-Cola's favor. Goizueta was the aristocratic leader, Ivester the hands-on "doer." He loved technology, and hummed along with the Silicon Valley gestalt of the times.

Buffett liked Ivester and wanted him to succeed. A textile-factory mechanic's son who had risen through sheer determination, Ivester was an analytical numbers guy.8 And, of course, under Goizueta he had enriched Buffett enormously. He had that underdog grit that Buffett liked. Moreover, Buffett laid responsibility for the accounting gimmickry at Goizueta's door, not Ivester's.

Juicing the earnings had certainly worked. Coca-Cola was trading at $70 per share. BRK itself was rocking with the market. Priced at $48,000 in June 1997, it flew to $67,000 over the next nine months. The higher the market went, the tougher it got for Buffett to invest, and yet the higher BRK rose. It made no sense, except that the stocks that Berkshire owned were rising with the market. As 1998 progressed, the Dow crossed 9,000 and was on its way to the magic 10,000. BRK blasted through $70,000 a share. At the shareholder meeting, Buffett told investors, "Our idea of tough times is periods like now."9 With too much cash, too few wonderful ideas, and without calling the Air-a-holic hotline, Buffett now bought a company for Berkshire called NetJets for $725 million.10 He sold the Indefensible and became one of NetJets' customers. This company sold time-shares in jets of various makes and sizes; its planes all had tail numbers that started with QS, or Quebec Sierra. Susie had gotten Warren to buy her a quarter share in a "fractional" jet from NetJets in 1995, worth two hundred hours a year of flight time, which she referred to as The Richly Deserved.11 She joked that QS stood for Queen Susie. Buffett took to NetJets so much that he had appeared in an ad and endorsed it even before he bought it. Still, on the surface, it was an atypical decision for a man who would, one year later, tell the moguls at Sun Valley that somebody should "have shot Orville down."

The reasoning behind the purchase seemed sound, though. NetJets was dominant in its market; it was too late for any serious competitor to catch up. Buffett figured that it was not unlike the newspaper business, where there were no red ribbons. Eventually, the competitors would fall away.12 And, indeed, NetJets was outgrowing the competition. Buffett was intrigued with its CEO, Richard Santulli, an entrepreneurial mathematician who had formerly spent his days at Goldman Sachs figuring out trading patterns using chaos-theory mathematics. Now he used those same skills to schedule plane flights on six hours' notice for a database full of celebrity clients whom he entertained at private events. Buffett met a whole new set of famous people, including Arnold Schwarzenegger and Tiger Woods.

Investors cheered Buffett's purchase of NetJets but were shocked when he almost simultaneously announced that Berkshire was buying General Re, a huge insurance wholesaler, or "reinsurer," which bought excess risk from other insurers. At $22 billion, this deal was almost thirty times larger than NetJets. It dwarfed by multiples his largest deal ever, GEICO.13 When he met with the Gen Re management team, Buffett told them, "I'm strictly hands-off. You guys run your own business. I won't interfere." Then he suddenly started spouting numbers from GEICO. "Well, you know, their hit ratio has dropped a bit.*32 Last week their numbers were..." Holy cow! thought Tad Montross, General Re's chief underwriter. This is hands-off? He knows more about GEICO than we know about General Re.14 Buffett did not know much about the inner workings of General Re. He had made the decision to buy based on studying the company's results, and he liked its reputation. General Re was sort of the Grace Kelly of the sometimes-shady insurance business. General Re wore white gloves and historically had acted more ladylike and respectable than the average company. Still...given the pattern of Buffett's purchases of insurers-in almost every case they plunged straight into the ditch shortly after he bought them-and given the size of this deal, the distant rumble of the tow truck's engine warming up could be heard, barely audible, over the next hill.

But it was the high price paid for General Re that attracted most of the attention, and the fact that Buffett had paid in stock, not cash-in effect, swapping twenty percent of Berkshire Hathaway for General Re in a deal announced on the day that Berkshire hit its then-all-time high of $80,900 per share. People wondered if Buffett's willingness to give away his stock when it was trading at such an unheard-of price meant that he, too, thought BRK was overvalued.15 Buffett had spent his career tightening his stranglehold on Berkshire. Giving stock to General Re's shareholders diluted his own personal voting interest in Berkshire from forty-three percent to less than thirty-eight percent. The last time he had paid stock for a major purchase, it was GEICO, and investors had believed then that Berkshire was overpriced. So they speculated about the message Buffett's new deal might be sending.

The price of BRK swung up and down based partly on the prices of the stocks that Berkshire owned. It was especially high at that moment because Berkshire owned 200 million shares of Coca-Cola, which now traded at an astronomical price. So, if Buffett was subtly signaling through his purchase of General Re that BRK was overvalued, did that mean that its underlying stocks-like Coca-Cola-were overpriced? If so, this could have implications for the entire market. It might mean the whole market was overpriced.

The king of the soft-drink world, Coca-Cola ruled with an aggressive swagger, a fizzy-dizzy arrogance. Buffett's stake in KO had multiplied fourteenfold over a decade, to $13 billion, and he had gone so far as to declare the company an "inevitable" to his shareholders, as if it were a stock he would never sell.16 He reasoned that Coca-Cola would send more swallows down more throats in each passing decade "for an investing lifetime," which made it about as close to immortal, for a brand, as you could get. Berkshire now owned more than eight percent of the company. Coca-Cola stock was trading as high as forty times its estimated 2000 earnings-a multiple that said investors believed the stock would keep rising by at least twenty percent a year. But to do that, it would have to increase earnings twenty-five percent a year for five years-impossible. It would have to almost triple sales, to a number nearly as large as the entire soft-drink market in 1999-again impossible.17 No amount of bottler sales or accounting finagles could produce results like that. Buffett knew it. Nevertheless, he did not sell his Coca-Cola stock.

The reason was partly inertia. Buffett liked to say he made most of his money by "sitting on his ass." Like the investors who kept their GEICO stock when it fell to $2 a share, inertia had protected him from many mistakes-both of commission and of omission. He also owned too much Coke to sell without creating a major headache. The symbolism of Warren Buffett-the "world's greatest investor" and a board member-dumping Coca-Cola stock would be unmistakable. The price of Coca-Cola could plunge as a result. Besides, with its effervescent mix of profit, product, nostalgia, show business, and likable people, Coca-Cola was Buffett's favorite stock. "The Real Thing" wasn't a slogan to him, it was an incredible cash machine that could grind out money forever, like the mill in the old fairy tale that endlessly ground out rivers of porridge, mountains of gold, or an ocean's-worth of salt.

Buffett carefully sidestepped these questions about the market and Coca-Cola when he used Berkshire stock to buy General Re, saying, "It is not a market call whatsoever."18 BRK, he said, was "fairly valued" before the merger, and the combined companies would create "synergy." When Charlie Munger was asked, he stated that Buffett had consulted him about this deal very late in the game. In effect, he disowned the deal.19 Not unexpectedly, investors began to reprice BRK as if either Berkshire and its holdings in stocks like Coca-Cola were overpriced or the deal's synergies would prove illusory.20 Or both.

Buffett's explanation later that summer at Sun Valley was that "we wanted to buy Gen Re, but coming with Gen Re was $22 billion dollars of investments." Many were stocks; Buffett promptly sold them. Adding $22 billion of bonds "changed the bond/stock ratio at Berkshire, which I was not unhappy with. It did have the effect of a portfolio allocation change."

So Buffett-who sat on the Coca-Cola board with Herbert Allen-was "not unhappy with" swamping BRK's stocks, including Coca-Cola, in an ocean of General Re's bonds. This statement in context made all kinds of sense. In his previous shareholder letter, Buffett had written that stocks were "not overvalued"-if interest rates stayed below average, and if businesses kept delivering "extraordinary" returns on capital-in other words, if the unlikely continued to occur. This statement was oblique enough to avoid looking like a forecast. Buffett thought those who were always out prophesying some turn in the market's direction usually wound up being wrong ten times out of two. So he rarely made statements about the market, and often played coy when he did. Still, it was unusually clever of him to work the words "not overvalued" into a sentence that said that the market was overvalued. People could read this message any way they wanted, but if they were smart, they got it.21 Likewise, Buffett was "not unhappy with" diluting his stock portfolio in the same Sun Valley speech, where he faced an audience filled with Internet CEOs at a time when Internet stocks were parthenogizing faster than naked mole rats. He accompanied his "not unhappy with" remark with the same warnings as in his letter: that interest rates must stay well below average and the economy stay unusually hot for the market to meet investors' expectations. This was also the same Sun Valley speech where Buffett had used his place at the pulpit to explain that investing is laying out money today to get money back tomorrow, like Aesop's bird in the hand versus the birds in the bush; that interest rates are the price of waiting for the birds in the bush; that for periods sometimes as long as seventeen years the market had gone exactly nowhere; and that at other times-such as the present-the value of stocks grows much faster than the economy. And, of course, he had closed this speech by comparing investors to a bunch of oil prospectors who were going to hell.

Thus, if Buffett was reshuffling his portfolio and focusing on bonds, perhaps it meant that he thought that it was now easier to make a living in bonds than stocks, and it was going to get easier still.22 The following October, he made another move that was just the opposite of what most people were doing-strikingly conservative by the standards of the market. He bought MidAmerican Energy Holding Company, an Iowa-based utility company with some international operations and a presence in alternative energy. He put in enough capital to buy just over seventy-five percent of MidAmerican for about $2 billion plus $7 billion of assumed debt, with the other twenty-five percent owned by his friend Walter Scott; MidAmerican's CEO, Scott's protege David Sokol; and Sokol's number two, Greg Abel.

Investors were mystified. Why would Buffett want to buy a regulated electric company? Admittedly, the business was growing moderately, was well-managed, and had attractive embedded returns that were relatively certain and would be so for as long as could reasonably be imagined.

Buffett saw this as a second cornerstone for Berkshire alongside the insurance business. He felt that he was working with excellent managers who could potentially put a lot of money to work in utilities and energy at predictable rates of return, which compensated for the limited growth. However, Buffett was already being ridiculed for his refusal to buy technology stocks. Now he had bought the light company. How dull!

But this was not how he thought. When it came to investing, the kind of electricity he sought was not the thrill of trading, but rather, kilowatts.

Buying MidAmerican and General Re significantly diluted the impact of Coca-Cola on Berkshire's shareholders, but Berkshire still owned 200 million shares of Coke. Buffett never stopped thinking about Coca-Cola, where matters continued to go awry. By late 1999, the value of his KO stock was down to $9.5 billion, dragging down the price of BRK with it. A short-term wobble didn't worry him-it never did-but thanks in large part to Coca-Cola, one share of BRK stock could no longer buy a top-of-the-line luxury sports car. Buffett kept turning over and over in his mind an incident back in June. Reports had trickled in that Coke products were poisoning children in Belgium and France. It was not hard to figure out what to do. The late Goizueta would have let "Mr. Coca-Cola," Don Keough, handle it: Fly over right away, visit the kids, shower the parents with free soft drinks, make compassionately clever remarks to the press. Instead, Ivester-who was actually in France at the time-returned to the U.S. without comment, leaving the local bottlers to deal with the mess.

Herbert Allen, never one to sit patiently on the sidelines, called Ivester and asked, Why on earth don't you get over there and show your face? And Ivester said, I've sent a team over, plus, those kids aren't really sick. Allen exploded in frustration. Look, he said, these aren't kids who marched around and said, "I'm going to 'get Coca-Cola' by saying I'm sick." They think they're sick. Whether they're sick or not, what harm would it do to go over and sit down with their parents and give them a lifetime supply of Coke?23 But it seemed to him that Ivester didn't understand any of that. As he saw it, Coca-Cola was not at fault. And that was that.

For weeks, the local bottlers kept trying to reassure the public that Coca-Cola products were safe. But then it turned out that maybe they weren't. The company admitted it had found mold and chemical contaminants in the bottling plants. But it insisted these were aberrations, surely not serious enough to sicken children. Buffett was horrified. The arrogant response played right into Coca-Cola's vainglorious image. Ivester had already had difficulty dealing with the European Union. Coca-Cola's ber-American style and the company's strategy of seeking exclusive marketing deals had earned it a reputation for extraordinary hubris. Over and over, European government officials slapped around Coca-Cola representatives in a Punch and Judy show. All over the world, headlines blared, and customers' trust in their beloved product dwindled.24 Weeks later, Ivester showed up in Europe and apologized in finely crafted legalese that never actually said, "We're sorry." The headlines died, and the Coke machines were plugged back in all over the continent. But the incident cost more than a hundred million dollars and impossible-to-measure damage to Coke's reputation. Buffett stewed.

Herbert Allen was stewing as well. Closer to the day-to-day management of the company, he questioned whether Coca-Cola was running off the rails. Despite the declining sales, at least 3,500 new employees had marched into Coca-Cola Plaza in Atlanta in the last two years. Allen looked at the burgeoning payroll and saw "a cancerous growth on the company."25 The company's strategy of adding on the periphery, growing by acquisition, and hiring thousands of new staff was not working. Quarter after quarter, Ivester promised to improve growth rates; quarter after quarter, Coca-Cola fell short. One day in Ivester's office, Allen asked him, What are you going to do? And Ivester said he didn't know; had no solution.26 "It had just overwhelmed him. Everything together had overwhelmed him. He did not know what to do," Allen says.

Floating above it all like the Goodyear blimp was Coca-Cola's millennially named Project Infinity. This "was one of those projects where everybody's computer would be linked up to the men's room so they'd know how much soap they were taking out of the dispensers," says Allen. Even the name, Project Infinity, seemed to refer to out-of-control spending in pursuit of ever-diminishing returns.27 It drove Allen nuts. He wanted to know what Coca-Cola was getting for its billion dollars. How was Infinity going to solve the company's basic problems?

Buffett was displeased but resigned to being displeased. He had encountered this on some scale at almost every company where he sat on the board. Therefore, he sighed to himself, "They all do it. The people who run information-technology departments always want the latest and greatest whiz-bang thing. No matter how smart you are, no matter how much you know, who can challenge them?

"We probably aren't going to sell any more Coca-Cola because of some computer project, and we will add more people instead of cutting jobs. The vendors have it rigged to make us update the software and hardware every couple of years or the system will stop working. So it isn't even a onetime expense.

"Controlling technology spending is one of the toughest problems in management. And it's particularly hard at Coca-Cola because a successful company is like a rich family. When you're prosperous it's very hard to instill discipline." Buffett, of course, did not run his own company-or his own rich family-that way.

And there was more disturbing news, via Don Keough, who remained the bottlers' best friend at Coca-Cola. He was now retired from the company and had become chairman of Allen & Co.-but Goizueta had kept him on as an adviser to the board. Keough was almost as much a part of Coca-Cola as he ever had been. Through Keough, Buffett heard that Ivester had been dictating terms to the bottlers in an unheard-of way. This troubled him, because so much of the good results produced by Ivester had come from reengineering the relationship between the bottlers and Coca-Cola. Now Ivester was pushing that same lever so hard that the century-long partnership between the company and the bottlers had broken down.28 Don Keough had become a sort of "father confessor to the disaffected" among the bottlers.29 They were in open revolt. Meanwhile, Ivester had snatched away Keough's official role, a dumb move since Ivester needed Keough on his side. He might be King Arthur, but Keough was Coca-Cola's Merlin and must be paid due respect.

This squeezing of the bottlers reiterated the question of whether Ivester really knew what to do about Coca-Cola's slowing sales growth. The philosophy at Coca-Cola had always been that it was all about the relationship with the customer. Ivester favored a continuation of the accounting solutions to business problems, troweling more makeup on Coke when the CEO's main job-as Keough and Allen and Buffett perceived it-was to make the Coke brand more popular around the world.

Since Goizueta had been engineering the company's earnings before he died, and Ivester was the engineer and reaped the rewards for doing so, why should he behave any differently now that he was CEO? As one board member put it, "The finance committee was the center of everything," which was odd for a marketing company like Coca-Cola. In the end, the mistake was not Ivester's. The board had deferred to Goizueta even after his death, when it followed his wishes and made the head of the financial engineering department the new CEO of Coke.

Still, Buffett was pretty sure that the problem so obvious to him was not so obvious to the whole board. As he ticked off marks against Ivester, Buffett spent the whole fall in a wrung-out state of anxiety. By Thanksgiving, the paralyzing limitations of his role as a board member, given the travails of Coca-Cola, had almost reached a breaking point.30 Then Fortune magazine, which had labeled Ivester "the 21st-century CEO" not two years earlier, published a highly critical piece blaming him for the company's problems.31 That was a bad sign. Fortune rarely smiled on CEOs whom Fortune smacked around this way, especially if the CEO had previously been featured in a flattering profile on the cover of the magazine. Being knocked off one's pedestal in public this way signaled that the powerful people whom Fortune's reporters used as sources were displeased, and on the brink of tossing away the teddy bear they had once embraced.

Right after Thanksgiving, Herbert Allen put in a call to Buffett. "I think we have a problem with Ivester," he said. "We picked the wrong guy," Buffett agreed.32 "That's about it," said Allen. They began to lay their plans.

They both estimated that it would take more than a year for the board to come around to their point of view that Ivester had to go-and that, says Allen, "would have been devastating to the company. So I think we decided, just as two individuals, to tell him the truth about how we felt."

Allen called Ivester and said he and Buffett wanted a meeting. They agreed to get together in Chicago, where Ivester would be stopping following a meeting with McDonald's.

On a cool, cloudy Wednesday, the first day of December 1999, Buffett and Allen flew into Chicago. Ivester's well-known obstreperousness kindled Buffett's dread of confrontation. He lashed down his anxiety, turtling into his shell. Later, it was reported that he appeared cold. The three men got down to business without preamble.33 Impersonally, Buffett and Allen told Ivester that they appreciated his efforts on behalf of Coca-Cola, but he no longer had their confidence.

Still, Ivester was not actually fired. Buffett and Allen lacked the authority to fire Ivester. "He might have won a board vote, and he knew that," Buffett says.

Ivester took the news stoically. He rushed back to Atlanta to call an emergency telephone board meeting for four days later, leaving the mystified board to wait in suspense.

On Sunday, Ivester told the board members that he had concluded that he was not the right person to run the company. He would step down immediately. This was exactly as Buffett and Allen had hoped. But he also said there would be no transition; he was leaving as of that day. As the board listened in stunned silence, he described it as a voluntary decision, and that was true-in the sense that it is voluntary to avoid the firing squad by walking the plank.34 Board members began asking what had happened. Was he sick? Was something terribly wrong at Coca-Cola? Why didn't they have any warning? Must the transition be so sudden? Ivester never wavered from his script.35 A while back the board had insisted, against some resistance, that Ivester put a name in an envelope that said who should succeed him if he were hit by a truck. The envelope was now opened to reveal the name of Doug Daft, head of Coca-Cola's Middle and Far Eastern divisions. Daft was halfway out the door to retirement, but the board, among them Buffett and Allen, instantly made him Ivester's successor, with apparently no serious discussion of any alternative.

The recriminations began as the market took a hatchet to the stock.36 Investors had figured out that Ivester was walking the plank. In private conversations with a few board members, he let on what had happened. The board now realized with varying degrees of outrage how much their role had been usurped.

With the media howling, it became clear that the company had better become more forthcoming. Fortune wrote an exclusive piece revealing details of the secret Chicago meeting.37 Ivester had negotiated a staggering $115 million consolation package, which angered both his detractors and his supporters; it gave the impression that he was either paid off or wronged. And observers now realized that an inner circle ruled the Coke board.

"It was carried out badly, except that there wasn't anything better that we could have carried out. It was almost a disaster the way we did it, but if we hadn't, it would have been a disaster for sure. I don't think we could have gotten the board to vote to make a change like that-bingo! I think the only way to have made a change fast is the way we did it. And it took both of us to get it done; if either of us had done it individually, it wouldn't have happened."

But by year-end, Buffett's reputation was suffering in an even more overt way, because the biggest, most profitable feat of stock selection that he had ever made, Coca-Cola, was down by one-third after Ivester's departure. That Buffett had felt forced to intervene in a particularly graceless way, which had backfired in public on both the company and himself, left the impression not that he had ridden to the rescue-as with Salomon-but that what he and Herbert Allen had done was the meddling of a couple of old men.