Berkshire's Sokol Resigns After Lubrizol Stock Purchases

NEW YORK (Reuters) - One of Warren Buffett's favored lieutenants, who was seen as his leading heir apparent, resigned after buying shares in a company he then repeatedly pushed Buffett to acquire.

The resignation of David Sokol from his roles as chairman of Berkshire Hathaway units MidAmerican Energy and NetJets is a reputational blow for Buffett, the 80-year-old "Oracle of Omaha" who recently sealed a $9 billion deal for Lubrizol Corp .

"Especially in a situation like this, the brand is everything. Often, when you violate that brand for any reason whatsoever, your goose is cooked," said William Larkin, fixed income portfolio manager at Cabot Money Management. "I have not ever heard of something like that coming from Berkshire."

Buffett said on Wednesday that Sokol bought shares of Lubrizol last December, sold them, then bought more shares in early January. He subsequently presented Buffett with the idea of buying the company.

Buffett said he was originally not in favor of the idea but warmed to it after Sokol told him of a conversation with Lubrizol's chief executive. Berkshire ultimately announced its purchase of Lubrizol for $135 per share, a 28 percent premium, on March 14.

In his annual letter to shareholders this year, Buffett praised Sokol for engineering a turnaround at NetJets, a business where he had no prior experience, and for his accomplishments at MidAmerican.

A year earlier, he called Sokol "an enormously talented builder and operator," and in 2009 he proclaimed that Sokol would run any business with which he was associated "in a first-class manner."

Most Buffett watchers thought Sokol was the top candidate of the three or four Berkshire executives most frequently mentioned as potential future CEOs of the company, given the legendary investor's enthusiasm for him.

Buffett said on Wednesday that he did not feel Sokol's purchases were unlawful.

Berkshire did not release Sokol's March 28 letter of resignation, though Buffett said that in the letter Sokol had mentioned his desire to pursue philanthropic efforts.

How to make a cool $3,000,000 quickly

Mr. Sokol purchased 2,300 shares of Lubrizol on Dec. 14, which he then sold on Dec. 21, according to Mr. Buffett. On Jan, 5, 6 and 7, Mr. Sokol bought 96,060 shares “pursuant to a 100,000-share order he had placed with a $104 per share limit price,” Mr. Buffett’s statement said.

Todd Combs the 80-year-old Warren Buffett as investment chief at Berkshire Hathaway

The 39-year-old Combs has run a small Greenwich, Conn., hedge fund, Castle Point Capital, with $400 million of assets invested almost entirely in financial stocks. (See table.) He reportedly has a good record, with his fund up 35% since 2005. Buffett called the diligent, low-key Combs a "100% fit for our culture."

Different Strokes

As their top holdings show,Todd Combs and Berkshire approach investing in very different ways.

BERKSHIRE Value (bil)
Coca-Cola /KO	$12.0
Wells Fargo /WFC	8.0
American Express /AXP	6.0
TODD COMBS Value (mil)
MasterCard /MA	$25.0
U.S. Bancorp /USB	24.0
State Street /STT	23.0
Source: Company reports

Berkshire would be a giant challenge for Combs, who will join it later this year. Its equity portfolio totaled $54 billion on June 30. Berkshire shares fell on Tuesday, the day after the Combs announcement. On the week, the Class A (BRKA) was down 4%, to $119,700, and the Class B (BRKB) also slid 4%, to $80.

Combs initially will run a small part of the Berkshire portfolio, with Buffett continuing to oversee all investments. This will let him assess Combs. Buffett has said his job will be split in two when he leaves Berkshire, with one person heading investments and the other acting as CEO. The likely CEO-in-waiting is 54-year-old David Sokol, now chairman of the company's large utility operations, whose profitable growth he orchestrated.

In the post-Buffett Berkshire, the CEO is apt to be much more important than the chief investment officer because most of the company's profits now come from more than 60 wholly owned businesses, including auto insurer Geico and the Burlington Northern railroad, rather than the stock portfolio.

Berkshire's equity portfolio accounts for about 25% of its stock-market value; now $205 billion. In the mid-1990s, the figure was above 60%. Buffett prefers to buy companies, rather than stocks, because he then controls all the profits, instead of simply getting dividends. Berkshire, which now pays no dividend, is likely to pay a sizable one post-Buffett, trimming the funds available to invest.

If Combs does ultimately run Berkshire's investments, big changes are unlikely, partly because longtime holdings, such as American Express, Coca-Cola and Procter & Gamble, have large embedded gains and would incur heavy taxes if sold. Combs also will have to broaden his focus beyond financial stocks. Buffett is comfortable in all major asset classes.

Berkshire made over $20 billion of attractive private investments during the financial crisis, including $5 billion of Goldman Sachs 10% preferred, because companies facing possible trouble figured that a Buffett investment would reassure Wall Street. Such juicy deals probably won't fall into the lap of Buffett's successor.

One unanswered question is whether Buffett wanted a younger, lesser-known investment manager, or whether higher-profile managers weren't interested in the job because of pay issues, or the challenge of following the world's greatest investor.

Berkshire is expected to report third-quarter results on Nov. 5. Barclays Capital analyst Jay Gelb expects earnings of $1,960 per class A share, up 48% from the level a year earlier. Book value could rise 4%, to above $90,000, Gelb wrote in a client note.

Buffett's Successor Likely To Be Chinese Hedge Fund Manager Li Lu

It's a "foregone conclusion" that Chinese-American hedge fund manager Li Lu will become one of Berkshire Hathaway's top investment officials, Charlie Munger told The Wall Street Journal in an article published on the front page of today's WSJ.

Munger, Berkshire's vice chairman and Warren Buffett's long-time friend and business partner, met Li Lu in 2003 and soon tapped him to invest some of his family's money.

Mostly thanks to a big bet on Chinese auto- and battery-maker BYD Co., Munger got a great return on the money invested with the now 44-year-old Li Lu. They later convinced Buffett to put $230 million of Berkshire's capital into BYD, an investment that has since increased six times in value.

Buffett is quoted in the Journal article as saying that Li Lu is a candidate to be one of Berkshire's money managers, but he's not as definitive as Munger.

The WSJ article tells the story of Li Lu's upbringing in relative poverty in China. He later was a student leader in the Tiananmen Square protests in 1989 before fleeing to America, where he wrote a book about the experience. He got a scholarship to Columbia University in New York, where within six years he had earned undergraduate, law and graduate business degrees.

He then started a hedge fund, whose headquarters are in the same Pasadena, Calif., office building as Wesco Financial Corp., which Munger chairs and of which Berkshire owns 80 percent. His hedge funds have made 26.4 percent annualized since 1998, compared with 2.3 percent for the S&P 500. His company is called Himalaya Capital Management.

Li Lu's philosophies on investing are right out of the Buffett playbook -- find a few great investments in a lifetime, bet big and you'll do just fine. That's what he did with BYD. Berkshire shareholders will hope he can do the same again, assuming Munger is correct about his odds of becoming one of the people eventually tasked with filling Buffett's giant shoes.

Berkshire Hathaway unit to buy CNA's asbestos, pollution liabilities for $2 billion

(Reuters) - A unit of Warren Buffett's Berkshire Hathaway Inc. will take over asbestos and environmental pollution liabilities now held by CNA Financial Corp. in exchange for a $2 billion fee.

CNA, which is 90 percent owned by conglomerate Loews Corp., said Berkshire's National Indemnity Co unit would take over $1.6 billion of net liabilities, retroactive to Jan. 1, and assume responsibility to handle claims.

The agreement has a $4 billion limit, and covers credit risk on third-party reinsurance tied to the liabilities. CNA is also transferring the right to $200 million of receivables.

Thomas Motamed, chief executive officer of Chicago-based CNA, said in a statement that the transaction would "effectively eliminate a significant source of uncertainty" for the nation's seventh-largest commercial insurer.

CNA said it expected to incur a $375 million after-tax loss when the transaction closes later this quarter.

Berkshire and National Indemnity, both based in Omaha, Nebraska, did not immediately return requests for comment.

National Indemnity is overseen by Ajit Jain, whom analysts believe may be one of the top candidates to eventually succeed Buffett as Berkshire's CEO.

Insurance typically accounts for half of Berkshire's results, and the company's size often lets Buffett take on insurance exposure, including to hurricanes and terrorism, in exchange for upfront payments that he can invest elsewhere.

In 2006, Berkshire took on $7.1 billion of claims from the Equitas affiliate of Lloyd's of London, which Buffett said was created to handle asbestos claims and a "tidal wave" of environmental and product claims dating from the 1980s.

Buffett told shareholders in a February 2007 letter that despite uncertainty over the timing and size of potential claims, "Ajit and I think the odds are in our favor."

Asbestos exposure has long been a problem for insurers. While many companies by the mid-1970s had stopped using asbestos for fireproofing and insulation, litigation persists because after-effects can take decades to surface.

In its annual report, CNA said it incurred $155 million of additional asbestos and environmental pollution exposure in 2009, citing larger claims, increased trial activity and changes in case law.

It said trends might worsen because lawyers who once sued companies that are now bankrupt seek out other targets, while court rulings on pollution claims have been "inconsistent."

Berkshire has about 80 operating businesses and tens of billions of dollars of common stock investments. It ended March with $25.67 billion of cash.