This is a fun excerpt (with my edits) from this conversation between Barry Ritholtz and Chris Davis:
Davis: “I met Charlie [Munger] long before Warren [Buffett]. The reason was I was trying to sell a business. My grandfather, as I started going through his accounts and going in there on the weekends, he had a business called Securities Lending. And I don't know how well you know that business.”
Ritholtz: “Any time you're going to short a stock, you need to borrow from somebody and it's going to cost you a little.”
Davis: “It's going to cost you a little margin. So my grandfather's view was he had a portfolio of appreciated stocks that he was never going to sell. And he said if somebody wants to short the stock and pay me to borrow it, fine. And the number one borrowed stock in those days was Berkshire Hathaway, of course, because you couldn't borrow it anywhere because everybody had the certificates.”
Ritholtz: “They literally had the paper certificates.”
Davis: “Yeah, there was very little Berkshire that was in street name and it was an individual people and therefore you couldn’t borrow it.”
Ritholtz: “It was locked away and safe.”
Davis: “Yeah. So he had a big holding and he had a broker-dealer, Shelby Cullom Davis was a registered broker-dealer [CRD #767]. And so he could lend out the shares and make a couple hundred basis points a year extra return on top of the Berkshire return. So that's how he started in the securities lending business.
But gradually the guy who was doing it for him and administering it said, wow, you know, we can also help. We've got all these people that want to short all sorts of different securities, and we can act as what was called a broker finder. We'll go out and find the securities for these people to short, and we'll make a little, a little spread as they go through. Well, this business grew and grew and grew. And soon there were, you know, 17 employees in this securities lending business. And it was a big operation.
And my grandfather by then was, you know, probably in his 80s and was nervous because, you know, as I went through the list of counterparties with him, there were firms we had never heard of. There was this one called LTCM and I said, what is this LTCM, we've got like, you know, $500 million … $800 million lent out to them. What? Oh, that's Long Term Capital Management. So we talked about it. He said, yeah, I think we gotta get rid of this thing.
And he said, fine, well, see if you can find somebody to take it over, because we do have 17 employees and they made their careers here. We're not going to fire everybody. And so we started calling around and I thought, what characteristics do we need? We need a lot of excess capital, someone who holds ideally an appreciated portfolio of securities, you know, sort of a triple A type balance sheet. And somebody that can understand. So I thought, well, Berkshire.
So, a wonderful friend in those days named Bob Lenzner was a reporter at Forbes. Our kids were in the same elementary school. And I got to know him. Just, you know, watching basketball games for third graders or something, and I heard his name around and he said, he mentioned casually in the conversation that he had met this brilliant guy, Charlie Munger.
And I said, well, I know who Charlie is, but I'm dying to meet him. And so Bob arranged for us to have breakfast, and Charlie was in New York and I went down, it was at the Millennium Hotel, down by the World Trade Center. And I went down and I sat down and introduced myself to Mr. Munger. Pleased to meet you. I'm Chris Davis, and I said, you know, I'm working with my grandfather. Shelby Cullom Davis & Company. And have I got a business for you? And I pitched our securities lending business, and Charlie put up his hand after about four minutes and he said:
‘I have no intention of buying a business run by seven guys named Vinnie.’
And Barry, it was the perfect description. We had Vinnie, Tony, Mikey, Nicky. And so we did end up finding a buyer eventually. And it wasn't really a buyer. We just did sort of an earn-out. We just wanted everybody … we just wanted them to have jobs. And so they all got a job at a broker-dealer.”
As someone who pays hundreds of thousands of dollars every year for “locates” to a mysterious, opaque “lending pool,” I too found this story very funny.
