Monday, September 29, 2008

Warren Buffett and the only banker he trusts

AT midday on Tuesday this week, Byron Trott, a banker in Chicago, picked up the phone and speed-dialled a number in Nebraska. A flurry of other calls followed. Within hours, Trott's employer, Goldman Sachs, announced it had secured a $5 billion injection from Warren Buffett, America's richest man.

In the deal, Buffett also received the right to buy $5 billion worth of Goldman shares at $115 per share. Last night, they closed at $133, giving him a paper profit of $900 million.

But against the indecision over the rescue plan to bail out the banks, raging turmoil in the markets, shortage of credit and collapse of ­Lehman, ­Goldman's one-time rival, the securing of the support of Buffett, the legendary stock-picker from Omaha, worth an estimated $62 billion, is a spectacular coup.

Wall Street and the City are agog at the move. Other banks have struggled to find partners. They have had to extend ­begging bowls to sovereign wealth funds and other potential investors. Some have failed completely. But Goldman, super cool Goldman, got Buffett.

That's one way of looking at it. The other is that Goldman was desperate, fearful it didn't have the scale to survive on its own, worried its long-cherished independence was going to disappear. It had already been forced to ask the US government to treat it as a bank taking people's deposits rather than as a pure securities firm, thus giving it federal protection if needed.

The ending of that 139-year special status was a bitter pill but it wasn't enough: the once all-powerful Goldman was humbled. It needed help.
Buffett, who loves to play up his folksy image, says he had his feet up on his desk and was drinking Cherry Coke and eating mixed nuts when he got the emergency call. The truth is, he ­probably was.

He was told to name his price, to say what he would like to invest in Goldman and the bank would see what it could do. Buffett had received other such pleas in the past few hectic weeks but this was the one he wanted. He had been waiting nearly all his life for this moment.

Now 78, Buffett has built his entire reputation on being the hometown champion of Main Street USA, railing against the slick excesses of Wall Street, worshipped by his shareholders, many of whom followed him in the early days and have become multi-millionaires on the back of his success. But as Berkshire Hathaway, his holding company, has grown into a $200 billion empire, it has not done so on the back on banks.

Buffett, to put it mildly, can't stand them. In 1987, he became the biggest investor in Salomon Brothers, then a hot-shot investment bank, famous for its aggressive bond-trading. When it ran into trouble, he had to step in and run the whole show — something he hated. He couldn't believe what he found, couldn't understand how the bank could be so lax with other people's money: “Rather strange, frankly, to me, to think of having a business that employs close to $4 billion of equity capital and not knowing exactly who is using what.”

He railed against its bonus culture. He cut $100 million from the bank's bonus pool. In the end, he gave up, handing over control to Bob Denham, a lawyer who subsequently sold the business. Buffett's verdict? “Far from fun.”

Yet the man who pays himself $100,000 a year, named his corporate jet The Indefensible because he has attacked other bosses for indulging in private planes and still lives in the same house in Omaha he bought for $31,500 in 1958 is coming to the aid of the bank with the biggest name on Wall Street, which pays colossal bonuses: Goldman Sachs.

Not surprisingly, the bank's chief executive Lloyd Blankfein is hailing his arrival as a triumph, boasting that “arguably the world's most admired and successful investor” has chosen their company.

Buffett's presence, said a spokesman, will add to the bank's “fire power and flexibility”. He said it was an “insurance policy for if conditions get very bleak”. At the same time, he stressed, it enabled Goldman to pick off bargains, if it chooses, from the package being constructed by US Treasury secretary Hank Paulson (himself a former head of Goldman). “The Paulson plan presents major opportunities for us,” he said. “We will be interested in seeing what distressed assets are available.”

In Omaha, Buffett's thoughts could go back to his childhood and the person he adored more than anyone, the man he called his “best friend”, his late father, Howard, a stockbroker.

The biggest event in the early lives of the Buffett children came when they reached the age of 10. Then Buffett Senior would take them from the east from the Plains to show them the ­majesty and power of New York. In 1940, father and son boarded the night train from Omaha. Leila, Warren's mother, waved them off. He was holding a stamp album and one of the places he wanted to see was the Scott Stamp and Coin Company in Manhattan. They were to go to a baseball game and a toy train display. The youngster (aged just 10, don't ­forget) was also keen to visit the New York Stock Exchange.

Howard also took the opportunity to do some serious networking. He went to see Goldman Sachs. “That's when I met Sidney Weinberg, who was the most famous man on Wall Street,” Buffett tells Alice Schroder in his forthcoming authorised biography, The Snowball.

“My dad had never met him. He had this little tiny firm out here in Omaha. But Mr Weinberg let us in, maybe because a little kid was along or ­something. We talked for about 30 ­minutes.”

As the senior partner of Goldman, Weinberg had a grand office that left the boy from the Mid-West speechless. As they left, Weinberg asked him: “What stock do you like, Warren?” Recalls ­Buffett. “He'd forgotten it all the next day but I remembered it for ever.” What particularly impressed him, said ­Buffett, was that “he talked to me as if I was a grown-up”.

Fifteen years later, and Buffett was back on Wall Street, as a young stockbroker with the firm of Graham-Newman. “Gus Levy (who later ran Goldman in the 1970s) was a good friend of mine when I worked in Wall Street. In 1955, we only had four wires to Wall Street firms and one of them was to Goldman Sachs and Gus was on the other end of the phone.”

While Buffett remained friendly with Goldman, he maintained a deep disdain of bankers, preferring to remain in Omaha as he grew Berkshire Hathaway and rely upon his own team of advisers. He likes to choose his own deals and hates having to go through bankers and paying their fees. When he did spend time inside a bank, at Salomon, his cynicism was reinforced.

It took a banker not unlike him in many respects to break down his resistance. Now 49, Byron Trott was also born in the small-town Mid-West, near St Louis, Missouri. “There was no local place for kids to buy clothes other than Wrangler jeans or overalls,” said Trott. So as a teenager he persuaded his father to sign for a $30,000 loan to launch his own clothing shop for teenagers (in his teens, Buffett and a friend bought a used pinball machine that they rented to a barber's shop and they expanded to six more).

He captained his school's football, baseball and basketball teams and went to the University of Chicago. There, he started another business, selling sportswear to the students. After graduating, he became a broker, working for Goldman in St Louis and then as an investment banker in Chicago.

He was made partner in 1994 and was one of those lucky enough to be a partner at the time of the bank's flotation in 1999, when the average payout was $64 million each and some partners received in excess of $100 million. In 2002, he used some of his money to buy a three-acre site in the Chicago lakeside suburb of Winnetka where he built a 27,596 square feet compound, complete with main house, coach house, boathouse and pool house.

Since 1996, Trott has headed the bank's 13-state Mid-Western division, handling takeovers and fund-raisings for corporate clients such as agriculture giant Monsanto, Hallmark greeting cards, FTD floral deliveries and NuVox telecommunications. A workaholic, he puts in 18-20 hour days and is usually flitting between boardrooms across the vast region. “I'd rather have him as my investment banker than my spouse,” said one client, “he works too hard.”

Another said: “Byron is not your typical investment banker. He is a facilitator of good ideas, whereas most investment bankers are just out to motivate you, to get you excited about a product that they are going to market where the investment banker gets a huge fee.”

Trott made it his business to go after Berkshire Hathaway and its redoubtable leader. Buffett came round to Trott's drive and energy and allowed him to advise him. Three acquisitions followed: kitchenware company The Pampered Chef, child clothing retailer Garan and groceries distributor McLane.

This last, from supermarket group Wal-Mart, earned high and, given Trott's job, extremely rare, praise from Buffett. In his letter to shareholders in 2003, he singled out the banker for ­special mention: “He understands Berkshire far better than any investment banker with whom we have talked and — it hurts me to say this — earns his fee. I'm looking forward to deal number four (as I'm sure is he).”

That, from Buffett, was the ultimate accolade. In 2007, he delivered Buffett the $4.5 billion purchase of Marmon Holdings from Chicago's super-wealthy Pritzker family. He's been described as “the only banker Buffett likes” and has even been tipped as his possible successor at Berkshire Hathaway. In his 2008 newsletter, Buffett says: “Byron Trott of Goldman Sachs — whose praises I sang in the 2003 report — facilitated the Marmon transaction. Byron is the rare investment banker who puts himself in his client's shoes.” He adds: “Charlie and I trust him completely,” a reference to Berkshire vice chairman Charlie Munger.

This week's buy reflects Buffett's regard for Trott and his bank. But ­Buffett isn't in this for charity. “He's effectively lending $5 billion to them which is nothing to him at 10 per cent,” said one ex-Goldman banker. “His money is safe, unless they go bust, which they won't. In addition, he's got an option over another $5 billion which makes him $50 million every time the stock goes up $1. He's f *****g them. It's brilliant.

“It's the same as you lending me $100 at 10 per cent ­interest on the loan and me giving you options over $100 worth of shares at a discount to the current market price. It's a fantastic piece of business for Buffett.”

There are two sides to every transaction of course. Goldman can claim, rightly, it has managed in the middle of a financial maelstrom to attract the best investor of his generation, one of the greatest ever, on board. Buffett can say that just this once, he is pitching into a bank because it was too good an opportunity to miss.
They're both right. His “best friend”, his father Howard, would be thrilled.

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