TEN
The Crest of a New Wave
IN JULY 1957, Howard and Dottie invited the Fletchers and the Edgertons to Harbor Island to catch up. “Put a couple of extra bolts in the diving board,” Edgerton responded, “and practice up on your finest martinis.”1
All three men had come a long way since 1941. After seventeen years of marriage, Howard and Dottie's home had been transformed when Dottie gave birth to a son on February 3, 1950. Howard senior spoiled Howard junior and pronounced him a genius, just as his father had done with him. The Edgertons’ children, a daughter and a son, were grown and in college or graduated. Fletcher's children were also entering adulthood. Charlie's oldest son, Kim, had worked for H. F. Ahmanson & Co. at the age of fourteen. He spent the summer of 1942 as a “runner and sorter,” picking up insurance contracts at one agency and delivering them to another.2 After graduating from Stanford University in 1950, he went to work for his father, who was grooming him to become president of Home Federal. With seven-year-old Howard junior evidencing precocious intellectual abilities, Howard also imagined the day when his son would take over his empire.
All three men had benefited substantially from the growth of the savings and loan industry and the incredible expansion of home ownership in Southern California. By 1957, Home Savings and Loan was the largest in the country. Edgerton’s California Federal ranked sixth. Charlie Fletcher's Home Federal was seventy-seventh.3 But each approached business differently.
Edgerton had survived his prewar brush with the law to become a leader in the trade association. He served on committees and became president of the California Savings and Loan League in 1948. Seven years later, he was elected president of the U.S. Savings and Loan League.4 He was also actively and visibly involved in public policy. On three occasions, Edgerton had tried to convert California Federal from a mutual to a stock company, a conversion that would have given him equity and a much greater stake in California Federal's growth. Each time, the government turned him down. “I wasn't smart enough to realize that I should have forgotten this little company and gone out and organized a new one,” he later lamented.5
Charlie Fletcher had inherited money and position, and his intellect added to his good looks and charisma. He had failed to win reelection to Congress in 1948, but he stayed involved in federal policy making, especially on housing issues. “He thought private industry and home ownership were better than building big [public housing] edifices like they had in Chicago and New York,” Kim Fletcher remembers. But he believed government had a role to play in housing. Home Federal underwrote the first VA tract in the San Diego area. As a lender and citizen, Fletcher also became active in antipoverty programs in San Diego. He and his wife, Jeannette, were both involved in the Urban League.6
Of the three, Howard alone never bore the industry's mantle of leadership. He appreciated and respected his competitors, who, like Edgerton and Fletcher, were often his friends, but he often went his own way. California Federal and Home Savings battled for customers in many of the same neighborhoods in Los Angeles and Orange Counties. That rivalry helped to keep Home strong. “The better your competition,” Ahmanson once told a reporter, “the better it makes you.”7
Ahmanson also had good reason to maintain his relationships with Edgerton, Fletcher, and potential savings and loan competitors. Despite the rivalry for market share and bragging rights in the industry, fire insurance was still important to all of them. In this arena, Ahmanson needed the political support of his longtime customers.
THE CONTINUED IMPORTANCE OF THE FIRE INSURANCE BUSINESS
The changing regulatory environment may have been one reason that Ahmanson got into the savings and loan business. It also offers a case study in the political competition associated with the managed economy. As Edgerton had warned Ahmanson and Fletcher in 1944, independent insurance agents were exerting increasing pressure on legislators to prevent mortgage lenders, especially savings and loans, and automobile financing companies, from tying insurance policies to loans. Savings and loans countered that revenues from writing insurance helped thrifts to attract and retain personnel. Mortgage lenders and auto dealers also asserted that they had a legitimate right to participate in the selection of the insurer. Their money was on the line.
Across the country, independent insurance agents were starting to score victories on this issue of “coercion.” In 1944, the U.S. Supreme Court had broken with tradition and ruled that insurance companies were in fact engaged in interstate commerce and thus could be subjected to the federal anti-trust and fair trade practices acts.8 The court's decision brought new pressure on tying relationships between lenders and insurance. It raised the specter of antitrust prosecution. It also put new pressure on state legislators to enact anticoercion laws.
State efforts to regulate these tying relationships gained momentum in 1941 when Nebraska passed a Small Loan Act that prohibited a lender from requiring the borrower to purchase insurance from the lender. Between 1947 and 1950, fourteen other states passed similar laws.9 In California, state senator George Miller Jr. introduced an “anticoercion” bill in January 1949.
Economic interests rallied to support and oppose Miller's bill. Independent insurance agents and brokers sent more than sixty supportive letters and telegrams to the committee considering the measure, but lenders—especially savings and loans—along with contractors and nearly two dozen insurance agents opposed the bill.10 Governor Earl Warren apparently sided with the independent insurance agents, but as one of Warren's chief deputies noted, “The Legislative branch has not been willing to join in taking this progressive step.”11
The legislature did agree to study the issue.12 The report issued by the Assembly Interim Committee on Finance and Insurance in 1950 suggested that changing the pervasive practice of tying insurance to mortgage loans would not be easy. Testimony from Commissioner Luke Kavanaugh of Colorado noted, “While I think our statute on unfair competition is a good one . . . it is practically impossible to enforce some of its provisions. For instance building and loan institutions, and others about to make a loan, want to write the insurance. If they cannot write the insurance they refuse to make the loan. If any insurance department attempted to stop this indirect coercion, it would have time for nothing else.”13 In Georgia, insurance commissioner Zack Cravey offered a similar perspective. Noting that the law passed by the state legislature included “no sanctions” against violators, he believed it would do little to deter lenders. “The procedure prescribed by the act is so extensive and its sanctions are so slight that I am disposed to believe it will not serve as a strong deterrent.”14 In Ohio, a subsidiary of General Motors went to court to block a similar law from taking effect.15 With this kind of testimony, Ahmanson and the savings and loan industry were able to block new legislation in California through most of the 1950s.16
Meanwhile, H. F. Ahmanson & Co. continued to nurture its relationships with thrift managers.17 Every issue of the Savings and Loan Journal published by the California Savings and Loan League featured a full-page, inside-cover ad for H. F. Ahmanson & Co. Every year at the state convention, H. F. Ahmanson & Co. sponsored the major cocktail party. But few people in the industry or the marketplace really knew how profitable the company was until one day in 1951 when a young man in Omaha paid Hayden Ahmanson a visit.
UPSTART IN OMAHA
Warren Buffett had never seen a cheaper stock. He was only twenty years old, but he had been picking stocks for years. Recently graduated from Columbia University, he was poring over the pages of Moody's Bank and Finance Manual "with the zest of a small boy reading comics,” looking for good deals.18 National American Fire Insurance shares were selling for an amount equal to the company's annual earnings. An investor could recoup the cost of investment with the earnings from a single year. Anything further would be gravy.19 Most surprising, National American was headquartered a block and a half away from his father's investment management company's office.
Hayden Ahmanson undoubtedly recognized the name of the son of Omaha's former congressman and was friendly right from the beginning. He recounted the history of National American.20 “He told me all about Howard, how he had gone west to California. He told me about his boys who were out there. He advised me to go there, saying that's where the real opportunity is.” Buffett heard the awe in Hayden's voice.
He also realized that Howard Ahmanson was steering the best low-risk insurance business from Home Savings’ mortgages to National American, ensuring that losses were remarkably low and National American was extremely profitable.21 As Buffett later discovered, Howard had also enhanced National American's value by selling small portions of the equity of Home Savings and Loan and another thrift to National American.22
Howard didn't want anyone else in the market for National American's shares. He owned nearly 70 percent of the company's stock. The rest was still sitting in the drawers of Nebraska and Iowa farmers and small-town merchants who had bought the stock in 1919 and had little idea what it was worth. Hayden had given a local stockbroker a list of all of National American's shareholders. That broker quietly kept tabs and when someone was ready to sell, he bought the shares on behalf of H. F. Ahmanson & Co.
Buffett wanted in on this good deal and began looking for shares to buy. He was willing to pay thirty-five dollars a share, but finding stock was difficult. Hayden's broker “regarded me as a punk kid,” Buffett recalls. He refused to sell shares to Buffett and wouldn't let him see the list of stockholders. When Buffett attended National American's annual meeting and asked to see the list, Hayden politely but firmly refused.23 Then Buffett left Nebraska for Wall Street to work for his idol and mentor, the legendary investor Ben Graham. Over the next four years while he was in New York, he quietly continued to accumulate National American stock, but it was slow going.
Buffett returned to Omaha in 1956.24 While establishing several investment partnerships that would eventually make him famous, he and his lawyer and friend Dan Monen decided to pursue National American's shares more aggressively. Buffett visited the office of the state insurance commissioner to research the history of the first directors of National American. He reasoned that these investors would have bought stock and encouraged their friends and neighbors to buy some as well. With Buffett's list, Monen barreled down two-lane highways in his red-and-white Chevrolet, pulling into small rural towns to track down the oldest residents. He asked about the former directors of National American and tried to discover what had happened to their stock.25
Word spread that there were buyers and the stock's price climbed. When it reached one hundred dollars a share, according to Buffett, “that was the magic number, because it was what they [the shareholders] had paid in the first place.”26 Suddenly lots of people wanted to sell. Monen found his biggest cache of stock in the small town of Eustis, the “sausage capital of Nebraska,” where the original stock promoters had given a local banker a seat on the board of directors.
Not wanting to alert Howard and Hayden to the run they were making, Buffett and Monen left the shares in the names of the previous owners, using a power of attorney to exercise control. When they had accumulated nearly two thousand shares, or approximately 10 percent of the equity, Buffett walked into Hayden's office. “I plopped them all down and said I wanted to transfer them to my name.”
“My brother's going to kill me,” Hayden groaned.27
Buffett had never met Howard Ahmanson. “All I knew was that this guy was smart, and he was in a field that I was interested in—insurance,” Buffett recalls.
Buffett held onto the stock for about a year. “I knew Howard would have liked to buy it,” Buffett laughs, “but he wasn't going to pay some kid a big profit to get it.”28 Around the fall of 1958, Buffett sold his stock to a wealthy New York businessman who had made his money with Welch's Grape Juice, netting a profit of more than one hundred thousand dollars.29 According to biographer Roger Lowenstein, this was “Buffett's first big strike.”30 To Ahmanson, it was a nuisance, but Howard had one reason to be grateful: Buffett had helped to redeem his father's legacy. At one hundred dollars a share, some shareholders felt that they had finally gotten their money back (though this ignored four decades of opportunity cost!).
POLITICAL PRESSURE ON INSURANCE
What Buffett saw in National American's stock became increasingly apparent to others. The synergy between Home Savings and National American Insurance was very profitable. By the beginning of 1957, H. F. Ahmanson & Co. was writing more than 50 percent of all the fire insurance on homes in Los Angeles and Orange Counties.31 This accounted for 80 percent of National American's business.32 For each of these policies, H. F. Ahmanson & Co. received a commission from National American. Since Howard owned most of the stock of National American, he also accumulated capital in the unpaid dividends that were held to bolster National American's reserves.
Independent insurance agents, who struggled to compete against Ahmanson's behemoth, continued to complain to regulators, legislators, and other elected officials. They suggested that Home Savings coerced builders seeking financing to buy fire insurance from National American. Home Savings & Loan's executives countered that borrowers could buy fire insurance from 135 highly rated capital-stock companies. Unsatisfied, the critics noted that the list didn't include any mutual or reciprocal companies, no matter how highly rated.33 A U.S. Department of Justice investigation failed to reveal a case worth pursuing.
While one arm of the government looked at the growing market power of National American, another saw the advantages in the company's increasing scope and scale. In December 1960, H. F. Ahmanson & Co., representing National American, won an exclusive contract worth two million dollars a year in premiums from the California Department of Veterans Affairs to provide fire insurance on all CalVet-financed homes. The exclusive contract, negotiated by Robert DeKruif, brought cries of outrage from other insurance agents. Previously, nearly three hundred firms had been supplying fire insurance to the CalVet program. State Director for Veterans Affairs Joseph M. Farber, however, argued that the old system was inefficient and costly to the program's veteran home buyers. He estimated that the new agreement would save CalVet's 150,000 property owners $5.15 million a year. Moreover, H. F. Ahmanson had agreed to expand coverage under the agreement to include damage caused by landslides and other earth movement—a critical concern in many areas of the state.34 With a deal that offered more coverage at a lower rate, Farby asked, how could the state go wrong?
With the CalVet deal, Ahmanson once again demonstrated how adept he and his organization were at aligning their business interests with the policy ambitions of government. Ahmanson also showed his continued ability to find profits in serving the financial needs of middle-income Californians. In the late 1950s, however, he began to shift his emphasis to focus on conventional home buyers who did not need government subsidies. He also looked for opportunities to broaden the scope of his business operations by launching businesses in related financial services.
CONTINUED DIVERSIFICATION IN FINANCIAL SERVICES
Howard opened the Ahmanson Bank and Trust Company in 1958 in luxurious offices at 9145 Wilshire Boulevard. Advertisements in the Los Angeles Times made it clear that he did not intend to invade the field of general commercial banking. Instead, he proposed to “serve, and serve with exceptional facilities, the forgotten area of banking—the substantial personal account.” The bank's slogan, “A Distinguished Bank for Distinguished People,” said it all. Ahmanson promised that in his private bank, customers would not wait in line. “You will be served by the most highly paid staff per person in banking, and we hope the most competent.” If customers couldn't come to the bank, an officer would come to them. To make sure that children would be discouraged from coming to the bank, Howard had the counters designed so that small children couldn't reach them with their jars of pennies.35 “We do not propose to be all things to all men,” Ahmanson continued, “but we do promise to put service above profit—to excel in the field we have chosen—to remain permanently a strong, conservative, independent bank.”36
From some points of view, becoming a banker should have been easy for Howard Ahmanson and his organization. In reality, according to Robert DeKruif, “We were a horrible flop.” Banks offered a much broader array of services than savings and loans and required different kinds of analytical skills to assess risk. After a number of years in the business, Howard conceded it wasn't going anywhere. “We're only good when we concentrate in home loans,” he confessed.37
Ahmanson's recognition of the importance of focusing on homes was reflected in other conversations. As an aspiring young executive in Ahmanson's empire in the early 1960s, John Notter dreamed of a career in international finance. One day, he rode with Howard in his limousine to the Ahmanson house at La Quinta and told Howard about his ambitions. He pointed out that with Home's capital base there was nothing that would preclude it from getting into international markets. Howard responded, “I made my fortune here in California. There's no reason to go international. There's no reason to go to New York. I'm staying right here.”38 The lesson of the White Spot hamburger joint in Lincoln stayed with him—stick with what you know and what works.
ONE BILLION
In the summer of 1961, Business Week noted the emergence in Southern California of a new breed of millionaires who had “struck it rich in the fast-growing savings and loan industry, which is prospering most dramatically in California.” Howard Ahmanson, “the richest of this new group,” was profiled on the cover with Home's headquarters at Wilshire and Rexford rising behind him. With a white handkerchief folded neatly into his suit coat pocket, he gazed away from the camera, his thinning hair tousled by the wind. The caption noted that he “has been the fastest stepper in a trend that has reshaped mortgage lending.”39
The magazine surveyed Ahmanson's empire: near-total control of Home Savings and Loan, majority control of National American Insurance Co., the Ahmanson Bank & Trust, and a “commanding stake” in two savings and loan holding companies: United Financial Corporation and First Surety Corporation (which was on the verge of going public). When asked how he had built his empire, Ahmanson gave the impression “that he has achieved his position more by accident than by design.”40 In fact, Howard had shrewdly ridden and driven the rise of the savings and loan industry along the crest of the great wave of postwar home building.
Two weeks before Christmas that year, Howard and Home Savings celebrated a milestone. The company had surpassed the billion-dollar mark for assets. Howard invited six hundred people to a luncheon celebration in the ballroom of the ornate Biltmore Hotel overlooking Pershing Square in downtown Los Angeles. The attendees included the mayors of Pasadena, Beverly Hills, and Los Angeles as well as several members of the Los Angeles County Board of Supervisors.41 Art Linkletter served as the master of ceremonies. When it came time for Howard to speak, the audience rose for a standing ovation. He choked back the emotion, his blue eyes watering, his ruddy face flushing even more deeply. He abandoned his prepared speech. Instead, he began to name each of the executives who had played a key role in Home's success, summarizing their contributions.42
At times, the great success of Home Savings and the wealth that derived from all of his business activities seemed stunning even to Ahmanson. Like other American entrepreneurs who amassed great fortunes, he was increasingly besieged with requests for money for local charities and institutions. He and Dottie opened their checkbook to many requests. Their social life was set to the rhythm of charity events, but they were not big donors. As his health improved, Howard and Dottie returned to racing on the high seas and they continued to travel. But increasingly Ahmanson was thinking about aesthetics and the relationship of art to commerce and community.