Financial History Issue 115 (Fall 2015) | Page 19
© Louie Psihoyos/CORBIS
Lawrence A. Cunningham
In 1965, when 35-year-old Nebraskan
Warren Buffett took control of Berkshire
Hathaway, Inc., a dying New England
textile company, the local press portrayed
him as a Wall Street takeover artist: a
liquidator of the sort that inspired Danny
DeVito’s fiendish character in “Other
People’s Money.” True, Buffett acquired
Berkshire on the cheap — for a fraction
of its $22 million book value of $19.24
per share — and eventually shuttered the
mills. But he has always campaigned vigorously against hostile bids, heavy borrowing, asset flipping and other controversial Wall Street practices.
Buffett became a vocal critic of Wall
Street, as he favored cash to debt, held
companies for the long term and defended
trustworthy managers against short-term
pressures. His oratory sounded more like
the high-minded defender of the corporate
bastion in “Other People’s Money,” played
by Gregory Peck, than an apostle of greed.
Speaking as the reluctant interim chairman
of Salomon after its 1991 bond trading scandal, for instance, Buffett famously broadcast
to Congress a new credo given to his Wall
Street bankers: “Lose money for the firm,
even a lot of money, and I will be understanding; lose reputation for the firm, even
a shred of reputation, and I will be ruthless.”
In addition to steady criticism, however, Buffett has also been a vital friend to
Wall Street. His stint as Salomon chairman followed from Berkshire’s “white
squire” stake in the investment bank,
designed to deter a hostile takeover bid.
The year was 1987, when Salomon’s largest
shareholder grew frustrated with management and flirted with selling a 12% block
to Ron Perelman, the corporate raider
who had recently seized control of Revlon.
Fearful of being next, Salomon CEO John
Gutfreund turned to Buffett, who pledged
fidelity while buying a sizable issue of convertible preferred stock yielding 9%.
Berkshire Hathaway CEO Warren Buffett.
Buffett’s cultivation of a reputation for
offering hands-off long-term capital dates
back to 1973 when Berkshire accumulated
a stake in The Washington Post Co. Buffett vowed loyalty to CEO Kay Graham,
who soon asked him to join the board. In
1986, Buffett went further when Berkshire
took a large position in Capital Cities/
ABC, giving its managers, Dan Burke
and Tom Murphy, proxy power to vote
Berkshire’s shares as they saw fit. During
that era of hostile takeovers, Berkshire and
Buffett likewise backed managers against
raiders at companies such as Champion
and Gillette, and defeated Ivan Boesky’s
run at Scott Fetzer, paying $315 million
to acquire the conglomerate, which Berkshire still owns to this day.
Wall Street values Buffett’s reputation
along with Berkshire’s balance sheet. In the
25 days after the 2008 collapse of Lehman
Brothers, Berkshire invested $15.6 billion
in numerous companies, when most of
corporate America was starved for credit.
For one, Berkshire staked $5 billion for
preferred stock in Goldman Sachs, paying
a 10% dividend and redeemable for a 10%
premium. Berkshire also got an option to
buy a similar amount of Goldman common stock at $115 per share, below the market price of $125, making it “in the money.”
In 2011, after the crisis passed, Goldman redeemed the preferred. So Berkshire
earned a few years of dividends plus the
buyback p