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Considered a bond-trading wizard, John Meriwether was deeply involved in the technical movements of the market. One of the highest
paid executives at Salomon, he is reported to have been compensated $89
million in a year in which Gutfreund earned only $3.5 16 While
Meriwether, Strauss, and Mozer let Salomon down, Gutfruend's behavior
was most bewildering, even disappointing to Munger and Buffett.

"To Charlie Munger, Gutfreund evoked all that was noble in Salomon's
tribal culture, particularly its willingness to lay its capital on the line. He
had a grandeur that the newer breed of executive lacked," wrote financial
author Roger Lowenstein. 17

Gutfruend was known as a tough-willed operator, and served at
Salomon's helm for 13 of the 38 years he'd been with the company. A
gruff man who had little tolerance for the media, Gutfruend was credited
with building Salomon into an investment banking power house. He told
recruits at Salomon to come in each morning "ready to bite the ass off
a bear."'s

But rather than acting boldly, in this case, Gutfruend engaged in
what Charlie described as a "thumb-sucking response." When the board
met that August and learned Gutfreund had been withholding information critical to the operation of Salomon as an on-going business, his credibility with the board of directors was destroyed.'`

MIUNGER FLEW FROM MINNESOTA To New York and met Buffett on Saturday,
August 17. The two immediately went into talks with Gutfruend and
other Salomon top managers that lasted until 11 iM. Full disclosure of the
events and the players remained a top priority.

"Charlie insisted that they get the whole truth out," said Buffett. "We
didn't know what would happen. He worked on Saturday from about 3 i i.
through Sunday," said Buffett, "then went to Washington with me on
Monday."

Buffett and Munger immediately called in Munger, Tolles & Olson's
top guns, Ron Olson and Bob Denham. They would help deal with complex legal issues and a cadre of irate federal regulators ready to file criminal charges. Olson says that Munger's contribution to getting matters
under control was "most important because it was made early, on August 18. He was there for the critical board meeting. In the middle of the
day, the decision to waive attorney client privilege between the Salomon
board and previous lawyers had a lot to do with why Salomon wasn't
criminally indicted. Buffett and Munger made that decision together. We
would give them everything we had as fast as we could get it. In the end,
they decided not to indict. We built the confidence that the new leadership would clean the place up, that they were not rotten to the core, not
involved in the problems."

It wasn't until after Buffett and Munger met with Securities and Exchange Commission chairman Richard Breeden, that they began to get a
bigger picture. They eventually learned that Gutfreund had received a
letter from Gerald Corrigan, the president of the Federal Reserve of
New York, who said that the bidding irregularities called into question
Salomon's continuing business relationship with the Fed, and Corrigan
demanded a comprehensive report within ten days of all "irregularities,
violations, and oversights" Salomon knew to have occurred. It was disturbing that Salomon's directors had to learn of the letter on their own .20

"He gave it to outside lawyers but didn't send a copy to the directors," recalled Munger of Gutfreund. "Warren and I went into that crisis
without knowing all the facts. We got mildly nebulous responses. If we'd
known, we would have worked it differently."

The message from the Federal Reserve Bank of New York to Salomon
was clear said Munger. "Old management, your time is over. We can no
longer trust you. We can't have you being a prime dealer. We paid attention to our sovereign, and our views changed as our cognition improved."
As for Gutfreund's failure to paint a complete picture for the board, "we
had no option of forgiveness."'

Gutfreund and Thomas W. Strauss, the firm's president, both resigned on August 18, 1991. It was a tragic come down for Gutfreund, the
man Business Week once called "King of Wall Street."

SALOMON WAS TEMPORARY SIJSPENI)EI) FROM trading and nearly shut down by
the government, prompting Salomon's own lawyers to start working on a
back-up bankruptcy plan. In a single week, Salomon's share price plummeted from above $36 per share to under $27. The run on Salomon's own
debt securities forced the company to take the unprecedented move of
halting trading in its own securities. To stop the carnage, it would be necessary to convince the public that Salomon wasn't on the rocks. Ron
Olson and Bob Denham played central roles in helping Salomon get
through the scandal with minimal damage.

"At least five authorities-The SEC, the Federal Reserve Bank of New
York, the U.S. Treasury, and the U.S. attorney for the Southern District of
New York and the antitrust division of the Department of justice-had
important concerns about Salomon," Buffett wrote in Salomon's 1992 annual report.22

The implications of not resolving the legal issues effectively would
have been dire, said Buffett. "If we had declared bankruptcy, and we were
close, $1 billion in transactions would not have cleared that should have
cleared. There was drama, personality, and terror. It was like a (doomsday) machine."

Senator Daniel Moynihan went to New York to ask if he could be of
help, since there were 9,000 jobs in New York at risk. Berkshire also owns
the Buffalo Neu's in the state Moynihan represents. "We said to Moynihan,
the New York Fed chairman (Gerald Corrigan) is a dominant man with his
nose out of joint," explained Munger. "He will resent political interference. We asked Moynihan to go back to his office and stay out of it, which
is what he did."

While Warren dealt with management issues and communications
with the pivotal players, "Charlie was able to step back and think about
broader legal issues," said Denham. "Thinking rapidly and intensely about
strategy. At the end of the week in New York, the decision was made that the general counsel of Salomon should resign. Saturday morning Warren
called and asked if I could be the general counsel."

The resignations of Gutfreund, Strauss, and the general counsel were
not enough to satisfy the regulators. It would be necessary to appoint
new management, someone regulators and the public would believe was
completely ethical and trustworthy. Buffett was the obvious candidate,
but Munger told him he would be crazy to take the job, a warning that
did not stick.13

"When Warren realized the problem, he volunteered, which they
took him up on," said Munger. "He had a good reputation. Nick Brady
(Secretary of the Treasury) backed off a little, enough of a signal. Based
on Brady's backing off, we know it gave us credibility."

After Buffett and he traveled to Washington, DC to testify before
Congress about the scandal, Munger decided to go home and thereafter
served as a long-distance advisor, except when he needed to be present as
a Salomon board member. "Charlie thought I was doing what I could,"
said Buffett. "It was sort of out of our hands. We sort of behaved and
hoped they wouldn't kill us."

Even after he returned to California, Munger stayed connected, said
Denham. "Afterward, we talked about issues and strategy. Charlie was a very
involved director. He had real ideas about the best way to approach things."

Serving on the Salomon Board was an intense experience, but the
fact that Munger was in his late 60s did not seem to matter, explained Lou
Simpson, who also was a director.

"Health and age do not slow Charlie down at all," observed Simpson.
"He got off the plane (from Los Angeles) and came directly to Salomon
meetings and was sharp as a tack. The Salomon meeting was an afternoon meeting, then another meeting the next morning, then the next day
Charlie was on his way home."

"A lot of the time we would all stay at the Millennium on the West
side. We'd have a board dinner, and walk back," recalled Simpson. Occasionally Nancy Munger would come along and she and Charlie visited
their son Barry, a freelance photographer who lived in Manhattan's
Tribeca neighborhood. When Nancy made the trip, the Mungers stayed at
the Carlyle on the upper East side.

"There was not a lot of socializing at Salomon," said Simpson. "It was
pretty businesslike. There were lots of problems and considerations we
had to deal with. A dramatic time in everyone's life. I'm sure that Warren
and Charlie got a lot more than they bargained for."

Simpson served on Salomon's board for five years, four of them as
chairman of the audit committee where Munger served as a committee member. "He was a very active, questioning member," said Simpson. "The
audit committee at Salomon was pro-active, a probing group of people. We
had three-hour meetings at least. Charlie, to a lot of people in management,
was a pain in the rear. He seized on tough issues and came hack to them.
There were a lot of issues that were difficult-accounting, management,
derivatives, risks involved. You want in a group of people someone who
points out that the emperor has no clothes. Management will present the
positive side. It's harder to get people who will point out the pitfalls, risks,
and so on. I suspect people thought Charlie was a crank. Things would be
going well, then he'd say-'hut you've got this issue of off-the-balancesheet items. And commissions.' To understand the operations of a business
is exhausting, very intense. I remember many many flights between here
and Los Angeles, five- to six-hour flights. He spent the whole time reading
and re-reading audit material. He added a lot of value in just questioning
practices and the way to think about these practices."

Munger also helped keep the team energized. "I felt I had just about
wrung myself out in the case," recalled Ron Olson. "Then I would run
into Charlie. He'd say, You can take it.'"

Buffett gives Olson and Denham credit for the final Salomon settlement, a relatively light penalty of $290 million and no criminal charges.
Salomon also was allowed to keep its prestigious and lucrative status as a
primary dealer in government securities.

As part of the legal settlement, Salomon admitted that in several 1991
Treasury auctions, it improperly hid for substantially more than the 35
percent of an issue that any one firm is permitted to seek. Salomon also
admitted submitting bids in the names of customers who had not authorized the company to make bids on their behalf, thus allowing Salomon to
buy more securities than it was allowed. Paul Mozer was suspended from
his job in August and later pleaded guilty to lying to the Fed. He served
four months in prison.''

As for the final resolution, "The shareholders came out very well in
that situation, better than they had any reason to expect, if they knew the
real facts," said Simpson.

Though many at the company thought the settlement was a nearmiracle, Salomon wasn't out of trouble yet. Difficult, ongoing management issues remained, not the least of which was the question as to who
would run the company after Buffett.

Buffett and Munger, who are among the lowest paid top corporate executives in the United States, were displeased with Salomon's compensation system. Buffett pointed out that 106 people in the securities unit had
each earned $lmillion or more in 1990, even though the division's overall results were below average that year. "Employees producing mediocre returns for owners should expect their pay to reflect this shortfall," Buffett
wrote in the company's quarterly report.ZS

When Buffett took the helm at Salomon, however, Munger became
even more tolerant of his use of a corporate jet, "The Indefensible."
Munger said that if any CEO is entitled travel by private airplane, it is
Buffett. "It's the most deserved jet in corporate America."2(

BuFFFTT STAYED ON THE JOB AT Salomon Brothers for nine long and exhausting months, but he didn't intend to do the job indefinitely. There were
rumors that a Wall Street insider such as Fund America CEO John Byrne or
former Federal Reserve Chairman Paul Volcker would be named to the
post when he stepped aside. In 1992, Buffett caught the financial community off balance when he named the Texas-born Bob Denham as chairman and chief executive officer.'

When the Salomon story first broke, Denham had moved to New
York on three days notice to serve as an outside counsel. When it was necessary to replace Salomon's general counsel, Denham took the job. Finally
he realized it would be a very long haul and purchased an apartment in
Battery Park City. It was not an easy assignment for Denham, whose wife
was a high-level academician in California. Rebuilding Salomon was a
daunting task and some issues, such as the granting of excessive bonuses,
were never resolved to Munger's and Buffett's full satisfaction.

"The problems at Salomon proved more difficult and it was a closer
thing, a closer call than I thought going in," said Denham. "It became
clear to me that this is hard enough working away from home, and it
could have a had ending-not career enhancing. But after government issues were resolved, it was clear the company would survive. The time as
CEO was terrifically interesting and challenging in a lot of ways. There
were more good times than bad times and it had a good conclusion."

Denham's wife moved to New York to join him, and in 1997,
Denham's job was finally completed. Salomon was sold to Travelers
Group Inc. for $9 billion, and Denham went hack to Munger, Tolles &
Olson." When he returned to Los Angeles, his wife, who had been a faculty member at Fordham University in the interim, was named president
of Pacific Oaks College and Children's School."

Berkshire's stake in the Salomon sale turned into a 3 percent ownership of Travelers worth $1.7 billion. In 1998, Travelers merged with Citi-
corp, forming the world's largest financial service firm. Together they
offer banking, securities sales, and insurance services.