After I got my new router connected. I started steam and started looking at all the settings, and I found the magic setting for me atleast. Under File->Settings, Friends tab, the Automatically sign into Friends has to be unchecked. It is checked by default I think, because I don't remember ever checking it. I tested by exiting Steam, disconnected from my wireless network (note: I did NOT disable my nic) and then starting Steam. It prompts me to retry or go to offline mode. I click offline mode and it works fine.
Now my question is why doesn't Stream just start in offline mode no matter what that is set to. I think everyone knows if you are in offline mode Friends isn't going to work.
Also what do other people have that set to, and how does offline mode work for you?