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SALOMON CAME OUT OF THE difficult period in fine shape, and in time, most
of the company's top executives landed on their feet. On the day Gutfreund fell from power, his lawyer met with Buffett and Munger in California
in an attempt to negotiate a severance package. Though Buffett and
Munger say they still like Gutfreund, a dispute arose over how much
departure money he was entitled to receive. Salomon's board offered
Gutfreund $8.6 million, but he asked for a lot more-some reports say as
much as $55 million. Gutfreund went to battle with Salomon over benefits, stock options, and legal fees that he said the firm owed him. No luck.
An arbitration panel ruled against him, leaving him with no severance,
options, or bonuses. Nothing at all.30. 31

Under an agreement with the SEC, Gutfreund agreed to pay a
$100,000 civil penalty and was barred from running a securities firm
without special approval from the SEC. "I didn't do anything illegal and
wasn't charged with doing anything illegal," he told a Business Week
reporter.32

After leaving Salomon, Gutfruend established his own office, where
he became an advisor and investor in companies with capitalizations of
$50 million or so. A member of the controversial Trilateral Commission,
he still moves in high circles.33

As for John Meriwether, he eventually was suspended from the securities industry for three months and was fined $50,000 for his role in the
Salomon incident.3' When Meriwether was ready to return to Salomon,
Deryck Maugham, whom Buffett tapped to run the investment banking
business, offered him a job with less responsibility than he'd previously
had. Meriwether rejected the offer, and led a group of Salomon defectors
to create a new hedge fund based in Greenwich, Connecticut, informally
dubbed Salomon North, or the Dream Team.

Salomon's atmosphere, even under Gutfruend, had been contentious
and that did not entirely change.35 Traders and Wall Street insiders
were critical of the way Denham and Maugham ran the company, especially their attempts to limit in Salomon's extremely high salaries and
bonuses for traders, compensation that grew faster than the company's
earnings did.

Some disgruntled employees left Salomon, including the core members of Meriwether's former team, who joined him at his new company,
the glamorous but ill-fated Long Term Capital Management.

LTCM was a highly sophisticated attempt to use the Black-Scholes
risk model, a formula commonly favored by commodity traders, plus
other mathematical models, to allow LTCM to safely and profitably trade in international markets. Meriwether assembled a team that included two
of the professors who developed and refined the formula, Myron Scholes
and Harvard professor Robert Merton, along with former Federal Reserve
officer David Mullins and of course, the crack traders from Salomon.

The minimum investment in LTCM was $10 million, but because of
the team's towering credentials and contacts, they quickly raised $3 billion. The returns in LTCM's first three years were fabulous: 20 percent in
the first, 43 percent in the second, and 41 percent in the third.

Then in 1997, the fourth year, returns fell to 17 percent. That same
year a real estate crisis erupted in Thailand and rapidly spread throughout
Asia, and in August of the next year, Russia defaulted on its international
debt, which created worldwide panic in financial markets. LTCM's mathematical models failed so badly that it lost $500 million in a single day. In
September, Meriwether sent a letter to investors saying the fund had lost
$2.5 billion or 52 percent of its value that year.36 Though the fund held
some valuable assets, because LTCM was highly leveraged, it was trapped
when margin obligations came due. According to some accounts, the
fund's global investment positions amounted to $1.25 trillion, frighteningly close to the annual budget of the United States government. It became clear that if LTCM collapsed, there would be reverberations around
the globe.37

The LTCM problems erupted when Buffett was on a wilderness trip
with his friend Microsoft founder Bill Gates. Never much of a technical
person, Buffett's only contact with the outside world was a satellite telephone. Munger was on vacation in Hawaii and making telephone connections by satellite was problematic, so they never actually discussed a
bail-out offer Buffett made to LTCM.

Buffett offered to buy the ailing LTCM portfolio for $250 million and
recapitalize it with $3 billion from Berkshire Hathaway, plus $700 million
from the insurance giant AIG and $300 million from the investment banking house Goldman Sachs. None of LTCM's contingent liabilities would be
picked up and there would be no management position for Meriwether
and his team. Meriwether rejected the offer, and not long afterward was
rescued through pressure from the Federal Reserve Bank by a consortium
of 14 commercial banks who themselves had something to lose if LTCM
went under. The 14 contributors put up $3.6 billion. Meriwether and his
people held on to a 10 percent stake in the company and would run it
under the supervision of an oversight committee. With enough capital to
allow the investments to play out, Meriwether was able to work his way
through the difficulties and by mid-year 1999 was back on his feet.38 He repaid the banks, and a few weeks later quietly closed the fund. Some
original investors, however, never got their money back.

Though he remained at arm's length from the LTCM drama, Munger
had an opinion about it. The hedge fund known as Long Term Capital
Management recently collapsed through overconfidence in its highly
leveraged methods, despite IQs of its principals that must have averaged
160," he said. "Smart, hard-working people aren't exempted from professional disasters of overconfidence. Often, they just go aground in the
more difficult voyages they choose, relying on their self-appraisals that
they have superior talents and methods."39

THE SALOMON AFFAIR FIRMLY ESTABLISHED Munger and Buffett as voices of integrity in the business world, but it also showed how tough they could he.
Corporate leaders, no matter how deeply entrenched they may seem,
shouldn't mess with Buffett and Munger when they're on the war path
of righteousness.

"When the final chapter is written, the behavior evinced by Salomon
will be followed in other, similar cases," said Munger. "People will be
smart enough to realize this is the response we want-super prompteven if it means cashiering some people who may not deserve it.,, 41)

Among the many lessons to be learned from the Salomon episode,
said Munger, is that when serious problems arise, the reaction of top management must be both swift and thorough.

"It was a huge mistake for John Gutfruend not to go to the New York
Fed when he saw that Mozer was in trouble," said Munger. "The Fed
would not have called for Gutfreund's head. Face your big troubles. Don't
sweep them under the rug."

As well-publicized as Salomon's debacle was, Munger says the same
sort of thing is likely to happen again in the future. "Warren and I will
never stop criticizing some aspect of investment banking culture. It's
hard to have people floating around in a miasma of billions without an occasional regrettable act."

In mj, whole life nobody has ever accused me of being humble. Although humility is a trait I much admire, I don't think
I quite got my full share.'

Charlie Munger

,HE Los ANGELES FE.I>ERAL COURT HOUSE, across the street from the
Dorothy Chandler Music Center, is a famous edifice. It often is used
as a movie or television backdrop and was seen daily on television during
the O.J. Simpson murder trial. In the summer of 1999, the Daily Journal
Corporation, publisher of the legal newspaper the Los Angeles Daily Journal, was in court there facing an unfair trade practices suit brought by
the tiny Los Angeles Metropolitan. On most days of the trial, an artfullydressed older man wearing extremely thick glasses sat in the spectators'
gallery watching the proceedings. Finally Charles T. Munger, chairman of
the Daily Journal Corporation, was called to the witness stand.

Ronald Olson, Munger's attorney, knowing Charlie's personality, had
warned his client to limit his testimony to simply answering the questions. At first Charlie did fairly well, but gradually he slipped into the persona he occasionally displays at the Berkshire Hathaway annual meeting
and shares every year at the Wesco Financial Corporation gathering. Charlie began to wax philosophical about his life, his work, and his fascination with newspapers and the news business. The plaintiff's attorney,
Thomas Girardi, objected, asking the judge: "And what would the court think about asking Mr. Munger if he could reply directly to Mr. Olson's
questions? This is beyond the pale."

Girardi insisted that he'd practiced law long enough to know what
was going on. "This obviously is an orchestrated attempt-Munger has
his chair turned toward the jury, trying to he cute: 'I lost money here, I
lost money there.' This is totally wrong."

The judge instructed Olson to keep his client strictly to the business
at hand.

"I'll do the best I can," said Olson.2

About an hour later, the plaintiff's attorney again had enough of
Munger and complained to the judge:

He's a real smart guy, I know it, Ron knows it, the court knows it. And I
think it's totally inappropriate the way he's behaving. And it's forcing me as
a lawyer to have to jump up every time that he goes on his diatribe. He's yet
to answer one question directly out of the 42 questions that have been
asked so far.3

The judge seemed perplexed at what to do, since it was becoming
clear that Charlie's way was Charlie's way, and he might not have any
other method of answering questions. Finally the judge simply asked that
Mr. Munger avoid hearsay, and the trial continued.

A half hour later, in the middle of testimony regarding how much the
LA Metropolitan might he worth if sold, Munger was still on the witness
stand. Suddenly he let out a howl.

"Ow, Ow, ouch, ouch, ouch."