Friday, February 21, 2014

Charlie Munger on Salomon and the importance of a good reputation

Comments on the Salomon crisis 
What was interesting about that day was that it would have had reverberations that would have made the Long Term Capital Management blow-up look like nothing if the Secretary of the Treasury, Nick Brady, hadn’t reversed the government’s decision to suspend Salomon from participating in government Treasury auctions. Nick Brady’s family was one of the original shareholders of Berkshire but sold out before Warren came on. 
Nick correctly recognized that the New England textile industry was doomed and sold all of the family’s Berkshire stock. His cousin held on until Warren came on and even after. By making this correct decision, one branch of the family benefited from lollapalooza effects. 
Because of this, Nick Brady knew all about Warren, and I think he trusted Warren. [During their phone call on that fateful Sunday afternoon,] there was a catch in Warren’s voice. Faced with a decision that would have had catastrophic impact had they made the wrong decision, but when Nick heard the catch in Warren’s voice, he realized how concerned Warren was and trusted him when he said he needed some reversal of an announced Treasury decision. 
Getting a good reputation in life can have remarkably favorable outcomes, and not just for Warren. If Salomon had gone under, it wouldn’t have been trouble for Berkshire but would have been terrible for the country and Warren.