There are any number of lessons one could take away from reading The Snowball, Alice Schroeder’s masterful biography of Warren Buffett, but probably the most striking is how often in his long career he’s watched the world of high finance and investing do its best to destroy itself.
We read constantly that the current crisis is the worst in generations. That’s true, but not for lack of trying. Read The Snowball and you can’t help feeling the meltdown was not only inevitable but well deserved; that in fact Wall Street -- driven by a stunning combination of bottomless greed and chronic myopia -- has been striving to bring it about for decades, and has come close to succeeding on several previous occasions.
Buffett is the world’s most successful investor. He’s the second richest man in the U.S., yet has never launched a business of his own, invented a product or masterminded a promotional campaign. He’s no Andrew Carnegie, John. D. Rockfeller, Steve Jobs or Bill Gates. He buys up firms and holds them forever, after spotting some monumental advantage to their business everyone else has overlooked. He has plenty of imitators, but none able to remotely replicate his spectacular success.
What’s astonishing is not only the consistency of his success, but his ability to avoid ruin in an industry that is constantly striving to run itself off a cliff. This is not an industry that seeks steady returns based on prudent business practices, carried out by sober-minded financial planners who keep the big picture in mind. The advertisements the industry loves to produce -- about the care and caution with which it approaches the market on your behalf -- is a total crock. Lowly advisers at the bottom of the scale may toil scrupulously to find wise investments for their clientelle of widows, savers and amateur market-players, but the money eventually funnels upward to a coterie of the world’s most avaricious people, blind to rules or regulations, contemputous of legalities, addicted to excess, ever-striving to find new ways to bypass accepted norms or conventions, intent only on accumulating more of everything for themselves, convinced of their right to do so no matter what the fallout.
Consider the last 30 years:
The 1980s was a period of junk bonds, corporate raiders and thieves like Michael Milken and Ivan Boesky, who destroyed companies, plundered their assets and left ruined shells loaded with debt. Didn’t matter: Wall Street got rich, the fees were enormous and the market soared -- until it crashed, of course, in 1987. Milken and Boesky went to jail, everyone read Bonfire of the Vanities and vowed that that could never happen again.
But it did. In 1991 a Salomon Brothers trader named Paul Mozer got caught in a flagrant swindle that brought the firm to the edge of bankruptcy, and the financial system to the brink of collapse. Buffett, with $700 million tied up in Salomon, was drafted to avert disaster and succeeded by the narrowest of margins. What’s alarming in the details of the Salomon story is how closely it resembles the present situation, with Salomon playing the role of Lehman Brothers. Buffett, serving as interim CEO, was convinced that allowing Salomon to fail would trigger a broader panic that could threaten financial stability in the U.S. and spread disaster abroad. All the great brains of the time -- the Treasury Secretary, the leaders of the Federal Reserve and the New York Fed, the head of the SEC -- thought he was overreacting and were determined to teach Salomon a lesson. Only minutes before markets were to open, spelling Salomon’s doom, was Buffett able to personally persuade Treasury Secretary Nicholas Brady to grant a reprieve and avert the cataclysm. It’s unfortunate that none of today’s brains read this chapter before allowing Lehman Brothers to fail.
Soon after came the tech bubble, a period in which Buffett -- who refused even to own a computer -- was widely ridiculed for refusing to succumb to the lure of obscure start-ups with nothing more than a dream to sell. One summer he delivered a lecture to a gathering of tech lords at Sun Valley, explaining that without an actual product to sell their easy profits would ultimately disappear, but was dismissed as old and out of touch. People quit their jobs to play the market full-time. People bet their savings that the market could never go down. The bubble peaked about eight months after Buffett’s lecture and then collapsed, wiping out $5 trillion in the next two years.
After the bubble came the crooks -- Enron, WorldCom, Tyco -- aided and abetted by the same bankers, lawyers, financiers and advisers who helped nurture the earlier disasters. Before Bernie Madoff there was Bernie Ebbers, Jeffrey Skilling, Ken Lay and Dennis Kozlowski. Citibank lent $5 billion to help fake gas puchases at Enron, J.P. Morgan and other banks lent $4 billion. Investors got crushed, their advisers got rich. One analyst, fired after the scandal, walked away with $30 million.
Buffett and his partner, Charlie Munger, began warning in 2002 that banks were courting disaster by flooding the world with complex products no one understood. “Buffett called derivatives 'toxic' and said they were 'time bombs' that were expanding unchecked and could cause a chain reaction of financial disaster,” Schroeder writes. In his 2003 letter to investors he called them “financial weapons of mass destruction.” Munger warned: “I’ll be amazed ... if we don’t have some kind of significant blow-up in the next five to ten years.” The meltdown landed five years later, right on time.
Knowing it was coming didn’t stop Buffett getting caught in the storm. Forbes calculates his personal net worth has fallen by $25 billion. Berkshire Hathaway shares are off 40%. Buffett suffers because he can’t simply sell off the vast holdings he has in dozens of companies and wait out the storm. All he can do is warn Wall Street against its latest attempt at self-immolation, and hope someone listens.
But no one ever does.
Photo: A portrait of Warren Buffett by artist Michael Israel, signed by Israel and Buffett, auctioned for charity last year.Related Links
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The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
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