On March 28, Warren Buffett, the legendary value investor, sat in his office at Berkshire Hathaway’s Omaha headquarters, working at the plain wooden desk that his father had once used, waiting for Dick Fuld’s call. A day earlier, the call had been arranged by Hugh “Skip” McGee, a Lehman banker, who had reached out to David L. Sokol, chairman of Berkshire Hathaway-owned MidAmerican Energy Holdings. (Buffett receives such pitch calls almost daily, so he regarded this one as a fairly routine matter.)
He didn’t know Fuld well, having met him on only a few occasions; the last time they had been together, he had been seated between Fuld and Paul Volcker, the former chairman of the Federal Reserve, at a Treasury dinner in Washington in 2007. Wearing one of his trademark off-the-rack, no-fuss suits and tortoise-rimmed glasses, Buffett had been making the rounds when he had managed to spill a glass of red wine all over Fuld just before dessert arrived. The world’s second-richest man (after Bill Gates) turned crimson as the dinner guests—a group that included Jeffrey Immelt of General Electric, Jamie Dimon of JP Morgan Chase, and former Treasury secretary Robert Rubin—looked on politely. Fuld had tried to laugh the spill off, but the wine had landed directly in his lap. The two hadn’t seen each other since.
When Debbie Bosanek, Buffett’s longtime assistant, announced that Dick Fuld was on the line, Buffett set down his Diet Cherry Coke and reached for the receiver.
“Warren, it’s Dick. How are you? I’ve got Erin Callan, my CFO, on with me.”
“Hi there,” Buffett greeted him in his dependably affable manner.
“As I think you know, we’re looking to raise some money. Our stock ’s been killed. It’s a huge opportunity. The market doesn’t understand our story,” Fuld said, before launching into his sales pitch. He explained that Lehman was looking for an investment of $3 billion to $5 billion. After some back and forth, Buffett made a quick proposal: He indicated he might be interested in investing in preferred shares with a dividend of 9 percent and warrants to buy shares of Lehman at $40. Lehman’s stock had closed at $37.87 that Friday.
It was an aggressive offer by the Oracle of Omaha. A 9 percent dividend was a very expensive proposition—if Buffett made a $4 billion investment, for example, he’d be due $360 million a year—but that was the cost of “renting” Buffett’s name. Still, Buffett said, he needed to do some due diligence before committing to even those terms. “Let me run some numbers and I’ll get back to you,” he told Fuld before hanging up.
In Omaha, Buffett had already begun doing a little soul searching, uncertain if he could even bring himself to put his money into an investment bank again. In 1991 he had rescued Salomon Brothers when the storied New York investment house was on the brink, but he quickly realized then that he couldn’t bear the culture of Wall Street. If he now came to Lehman’s assistance, the world would be scrutinizing his participation, and he was well aware that not only would his money be on the line, but his reputation as well.
Even though Buffett had often traded in the market using hedges and derivatives, he despised the trader ethos and the lucrative paydays that enriched people he thought were neither particularly intelligent nor created much value. He always remembered how unnerved he had been after paying out $900 million in bonuses at Salomon, and was especially stunned when John Gutfreund, the firm’s chairman, had demanded $35 million merely to walk away from the mess he had created. “They took the money and ran,” he once said. “It was just so apparent that the whole thing was being run for the employees. The investment bankers didn’t make any money, but they felt they were the aristocracy. And they hated the traders, partly because the traders made the money and therefore had more muscle.” Buffett decided to hunker down that evening at his office and pick apart Lehman’s 2007 annual report. After getting himself another Diet Cherry Coke, he began to read Lehman’s 10-K, its annual report, when the phone rang; it was Hank Paulson.
Paulson began as if it were a social call, knowing all too well that he was walking a fine line between acting as a regulator and a deal maker. Nonetheless, he quickly moved the discussion to the Lehman Brothers situation. “If you were to come in, your name alone would be very reassuring to the market,” he said, careful not to push his friend too far. At the same time, in his roundabout way, he made it clear that he wasn’t about to vouch for Lehman’s books—after all, for years Buffett had heard him, as a top executive at Goldman, rail against other firms he thought had been too aggressive in both their investments and their bookkeeping.
After years of friendship, Buffett was familiar with Paulson’s code: He was a hard-charging type, and if he wanted something badly enough, he would say so directly. He could tell now that Paulson wasn’t pressing too hard. The two promised to stay in touch and then bade good night.
Buffett returned to his examination of Lehman’s 10-K. Whenever he had a concern about a particular figure or issue, he noted the page number on the front of the report. Less than an hour into his reading, the cover of the report was filled with dozens of scribbled page citations. Here was an obvious red flag, for Buffett had a simple rule: He couldn’t invest in a firm about which he had so many questions, even if there were purported answers. He called it a night, resolved that he was unlikely to invest.
On Saturday morning, when Fuld called back, there quickly seemed to be a problem separate and apart from Buffett’s concerns. Fuld and Callan were under the impression that Buffett had asked for a 9 percent dividend and warrants “up 40”—meaning that the strike price of the warrants would be 40 percent more than their current value. Buffett, of course, thought he had articulated that the strike price of the warrants would be at $40 a share, just a couple dollars from where they were now. For a moment, they were all talking past one another as if they were Abbott and Costello performing “Who’s on First?” Clearly, there had been a miscommunication, and Buffett thought it was just as well. The talks ended.
Back at his desk in New York, an annoyed Fuld told Callan that he considered Buffett’s offer to be preposterously expensive and that they should seek investments from other investors.
By Monday morning, Fuld had managed to raise $4 billion of convertible preferred stock with a 7.25 percent interest rate and a 32 percent conversion premium from a group of big investment funds that already had a stake in Lehman. It was a much better deal for Lehman than what Buffett was offering, but it hardly came with the confidence an investment from him would have inspired.
Later that morning, Fuld called Buffett to inform him of the success of his fund-raising effort. Buffett congratulated him but privately wondered whether Fuld had used his name to help raise the money.
Although he never brought the subject up, Buffett found it curious that Fuld never mentioned what he imagined was an important piece of news that had crossed the tape over the weekend: “Lehman hit by $355 million fraud.” Lehman had been swindled out of $355 million by two employees at Marubeni Bank in Japan, who had apparently used forged documents and imposters to carry out their crimes.
Once again it reminded Buffett of his experience at Salomon—this time when John Gutfreund and Salomon’s legal team hadn’t told him that the firm was involved in a massive auction bid-rigging scandal of Treasury bills, a scandal that nearly took down the firm.
