Warren Buffett on Business: Principles from the Sage of Omaha

12.1. Background

In 1987, Berkshire Hathaway purchased, for $700 million, Salomon Brothers redeemable preferred stock and, in effect, became the company's largest shareholder.

In December 1990 and February 1991, managing director Paul W. Mozer, a 34-year-old bond trader, made U.S. Treasury securities trades above the legal limit for any one institution, as well as secret and unauthorized trades in Salomon client accounts, which were then transferred to Salomon's books.

Salomon's chairman (John Gutfreund), president (Thomas Strauss) and in-house counsel (Donald Feuerstein) admitted knowing of these violations for four months without telling Salomon's board of directors or Buffett.

At the center of this experience was a single day—what he has called "the most important day of my life." Sunday, August 18, 1991—in which the U.S. Treasury first banned Salomon from bidding in government securities auctions and then, because of Buffett's efforts, rescinded the ban. In the four hours of suspense between the two actions, Buffett struggled passionately to ward off a tragedy he saw threatening to unfold. In Buffett's opinion, the ban put Salomon, the company now being priced at $9 billion, in sure danger of immediately filing for bankruptcy. Even more important, he believed on that day, as he does now, that the collapse of Salomon would have shaken the world's financial system to the core.^[]

Following is an account of how Buffett saved Salomon from the brink of collapse and restored the ...