On September 4, 1991, Warren Buffett sat before members of Congress and apologized.
“My job is to deal with both the past and the future,” Buffett told a House subcommittee.
“The past actions of Salomon are presently causing our 8,000 employees and their families to bear a stain. Virtually all of these employees are hardworking, able and honest.”
Buffett was not apologizing on behalf of actions taken by himself, but those taken by members of investment bank Salomon Brothers, a New York-based firm that had been caught rigging Treasury bids.
Buffett, who joined the firm’s board of directors in 1987, was named chairman and CEO of Salomon Brothers in 1991 after John Gutfreund resigned. And Buffett’s most famous words from his prepared remarks came with his kicker.
“If [the employees of Salomon Brothers] follow this test, they need not fear my other message to them,” Buffett said. “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”
On Saturday, thousands will gather in Omaha, Nebraska for the Berkshire Hathaway annual shareholder meeting.
Buffett and Berkshire’s vice chairman, Charlie Munger, will hold court inside the CHI Health Center Omaha — an 18,000 seat arena in downtown Omaha — to field questions from shareholders, analysts, and the media.
But when Buffett sat down before lawmakers in 1991, he was well-known in investing circles but more-or-less anonymous to most Americans. Because while Wall Street attained some cultural caché in the 1980s — books were written, movies made, criminals jailed, and a market crash caught the public’s attention during the decade — finance as a dominant theme (perhaps the dominant) of American capitalism had not yet flourished.
When Buffett was called before the House, shows like “Shark Tank” and “Billions” were still decades off. And while Michael Lewis’ “Liar’s Poker” had been published and Michael Douglas had won an Oscar for his portrayal of Gordon Gekko in “Wall Street,” it wasn’t yet cool or sexy or a widespread aspiration to be an investor, an entrepreneur, to attach yourself to an idea or a portfolio of ideas and offer to the world, before anything else, something like your intelligence.
Before all of this, there was Warren Buffett.
‘Having a good reputation is really helpful in life’
On August 18, 1991, the Treasury Department banned Salomon Brothers from bidding at Treasury auctions.
In the end, the Treasury slightly modified the order, allowing Salomon to bid on behalf of clients, but only after Buffett’s personal plea to then Treasury Secretary Nick Brady.
“Nick Brady went with Warren because he trusted him,” said Munger in the recent HBO documentary “Becoming Warren Buffett.”
“It shows how having a good reputation is really helpful in life.”
Carol Loomis, long-time Fortune reporter and friend of Buffett’s, wrote in a 1997 article that Buffett called the day, “the most important day of my life.”
“It was a huge turning point for Warren,” Loomis said in the documentary. “And he believed that at that particular point, his reputation was on the line.”
And while Buffett’s actions in the summer and fall of 1991 may have saved Salomon Brothers from collapse, Buffett’s time at the firm was not all smooth sailing.
“Viewing Salomon as a long-term owner,” writes Roger Lowenstein in his biography “Buffett,” “Buffett saw a picture that was anything but pretty. Its assets had ballooned, yet its return on capital had vastly diminished… Buffett was convinced that the problem was rooted in Salomon’s extravagant bonuses.”
In response to this, Buffett took an axe to Salomon’s bonus pool for the year-end 1991, taking $110 million off the total package for the firm despite profits increasing from 1990. Bonuses were slashed for some 70% of the firm’s managers, and investment banking bonuses were cut by 25%, according to Lowenstein. Two-hundred and eighty people were laid off from the firm.
“Quite quickly sentiment toward Buffett soured,” Lowenstein writes. As one analyst told Lowenstein, “Some of us who have been [at Salomon Brothers] a long time felt a certain affection — a strong one — for John Gutfreund. Warren was a savior. You know how you feel about saviors. You love ’em but you also resent them.”
In his 1992 letter to Berkshire Hathaway shareholders, Buffett made but a passing reference to a period he called “The Salomon Interlude.”
“Last June, I stepped down as Interim Chairman of Salomon Inc after ten months in the job,” Buffett wrote.
“You can tell from Berkshire’s 1991-92 results that the company didn’t miss me while I was gone. But the reverse isn’t true: I missed Berkshire and am delighted to be back full-time. There is no job in the world that is more fun than running Berkshire and I count myself lucky to be where I am.”
Rarely at a loss for words, Buffett’s brevity on his time at Salomon speaks volumes about how hard the experience was. Or as Buffett wrote, “The Salomon post, though far from fun, was interesting and worthwhile.”
‘The dream that honesty is rewarded’
In her Buffett biography “The Snowball,” Alice Schroeder writes that, “Buffett’s testimony in Congress as the reformer and savior of Salomon had turned him from a rich investor into a hero.
“The success of his open and principled approach to a scandal touched the yearning for nobility in many people’s hearts: the dream that honest is rewarded; that the besmirched can be redeemed through honor.”
Buffett, in this moment, first embodied the American ideal that hard, honest work will be rewarded. This is the legend that lives on today. And Schroeder also captures how the Buffett we know today came of age — in his early 60s — in the years after the Salomon debacle.
“When Buffett walked into a room, the electricity was palpable,” Schroeder writes. “In his presence people felt brushed by greatness. They wanted to touch him. They became dumbstruck before him, or babbled inane remarks.”
This weekend, Buffett and Munger will hold court and answer questions. Many of these questions will be posed by journalists — including Loomis — and analysts, people unlikely to be intimidated by Buffett’s success or riches.
But a number of questions will also be asked by shareholders, Buffett disciples that feed the electric current which will no doubt run through Omaha on Saturday. The shareholders perpetuate the myth of Buffett as a small-town investor who does things the “right way.”
Of course Buffett, then and now, is not without his detractors. And the myth that Buffett is “merely” a small-town stock-picker is just that. But when the public gets ahold of your story arc, few developments will derail the narrative. Buffett’s first major foray into the public eye back in 1991, is its creation story.
NOTE: A version of this story was originally published on May 4, 2017.
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