1995: What's going on at Salomon Brothers?

AUDIENCE MEMBER: Hello. I’m Tim Palmer (PH) from Dillon, Colorado. I have a question for you regarding Salomon.

In the past week, there’s been an article in The New York Times, The Wall Street Journal, and I believe it’s Businessweek, that were rather unflattering, as far as what’s going on with the management and your selection. There seems to be a — somewhat of a cultural clash there.

I don’t know that to be a fact. But I wondered, number one, how you keep yourself open to bad news before it’s news.

And what is going on in Salomon there, the compensation plan, et cetera? How do you think that, culturally, is going to work out?

WARREN BUFFETT: Charlie and I are always — we’re more interested in bad news, always, than good news. We figure good news takes care of itself. And one — we only give a couple of instructions to people when they go to work for us.

And one of them is to think like an owner. And the second one is to just tell us the bad news immediately, because good news takes care of itself. And we can take bad news, but we don’t like bad news late.

So, I would say, in connection with Salomon, that there is, and has been, some culture clash. And there probably almost always would be a culture clash in a business where there is that amount of tension.

Whether it be the entertainment business, or the investment banking business, or the sports business, there’s going to be a certain amount of tension when — between compensation to the people that work there and compensation to the owners.

And I think there’s been some — that strain has existed at Salomon from the day I was first there and far before that. I mean, I — that was no surprise. It’s understandable.

You’re seeing a tension, actually, in the airline business between the people that work there and capital. And it’s produced terrible results in the airline business. And the people that work there have been able to — and I’m not talking about USAir specifically, although that’s a case. But it goes beyond that.

They have had contracts, which were, as I pointed out in the report, were executed in an earlier age, which, essentially, will not allow — in many cases — capital to receive any compensation. And that produces a lot of tension.

You don’t have contracts like that in the investment banking business or Wall Street, generally. But you have that same sort of tension.

And changing a culture around, A, takes time and, B, probably takes some change in people. I mean, I don’t think that’s a great surprise if you expect to do it.

I have — I don’t think you can find two better people than Bob Denham and Deryck Maughan. They’re smart, they’re high-grade, they’re willing to work very hard. And there will be people that buy into the arrangements they want to have. And there are people that won’t.

Not all of the people that have left, by a long shot, are leaving of their own volition, but most of them are. But some aren’t. I mean, there — Salomon lost a lot of money last year. And many of the people that have left were not responsible for some of those losses, but some of the people were.

So, that is not something where you announce names in the paper. But some people are leaving because they can make more money elsewhere. And some people are, maybe, leaving because we think we can make more money without them. (Laughter)

Charlie?

CHARLIE MUNGER: Yeah, I don’t think the tensions that have been commented on within Salomon are all that unusual. I think they pretty well exist everywhere on Wall Street. And even in the banks, which have tried to imitate Wall Street. I just think it comes with the territory.

WARREN BUFFETT: I don’t know what percentage of the Goldman Sachs partners left this year, but they had tensions that were produced, obviously, when they had a bad year. And they’re going to have a bad year from time to time. Everyone’s going to have a bad year.

But it — the partners — the general partners — of Goldman Sachs, in the year ended November 30th, 1994, did not do well. They may have not done anything at all. And they’d made some very big money in prior years. And they’ll probably make some very big money in subsequent years.

But in the year when they didn’t make any money, it was a lot of turnover. And maybe some of that turnover, also, was not all at the volition of the general partners that you read about leaving. I don’t know the facts in that case.

But there’s a certain amount of tension that exists in Wall Street under any circumstances. And when you aren’t making money, there’s a lot of tension.