Moody's stake poses no conflict with bond insurance - Buffett

New York: Billionaire investor Warren Buffett said Berkshire Hathaway's ownership of almost 20 per cent of ratings firm Moody's poses no conflict with his company's municipal bond insurance business.

"It would be wrong if we tried to pressure Moody's but that's never happened," Buffett said Saturday in an interview with Bloomberg Television in Omaha, Nebraska, where his Berkshire is based. "I have no contact with the management of Moody's. I can't recall ever calling them in my life."

Berkshire's relationship with Moody's drew scrutiny last week from Connecticut Attorney General Richard Blumenthal after Moody's gave four-month-old bond insurer Berkshire Hathaway Assurance Corp. its top rating.

A favourable Moody's rating for Berkshire or a lower rating for a competitor could give Buffett's firm an advantage. The arrangement was a "clear and direct conflict of interest," Blumenthal said.

Berkshire is "a passive investor that has never contacted us regarding our ratings," said Tony Mirenda, a spokesman for Moody's, in an interview last week. "We have a longstanding policy of not discussing our ratings with shareholders and non- employee members of the board of directors."

Buffett and his insurance lieutenant, Ajit Jain, started the bond insurance company to compete with existing guarantors struggling to maintain their ratings. Standard & Poor's, a unit of McGraw-Hill Cos., also gave its highest grade to the Berkshire unit, which offers municipal bondholders protection from default by state and local governments.

"If Berkshire isn't triple A, I'm not sure which company would be," Buffett said. "We are one of the ten or so largest companies in the United States. It would be kind of silly if they didn't rate us," he said of Moody's.

Berkshire hasn't received a subpoena from Blumenthal, he said.

The new bond insurance unit had about $400 million in first-quarter sales, probably more than any competitor in the same time period, Buffett said Saturday during a question-and-answer session at Berkshire Hathaway's annual shareholder meeting.

"That was from a standing start," he said, crediting Jain for doing a "remarkable job."

The company has been involved in 278 transactions, Buffett said. Insurance for some securities backed by Berkshire, including bonds for the Arizona Sports and Tourism Authority and a Tennessee building authority, were rated only by Moody's through Friday, according to Bloomberg data. Berkshire has held about 48 million shares of New York-based Moody's since at least 2002, Bloomberg data show.

Successor

Meanwhile Barron reported that David Sokol, chairman of MidAmerican Energy Holdings, is the most likely candidate to lead Berkshire Hathaway once Buffett departs. The weekly newspaper cited no one.

Buffett, 77, said in his annual shareholder letter a year ago that the board had picked one of three executives at the company to succeed him, the newspaper said in its May 5 edition. This year, he wrote there are "three outstanding internal candidates" for the position.

In addition, Sokol's potential competition, Joe Brandon, the chief of Berkshire's General Re reinsurance division resigned last month, Barron's said. His resignation has further paved the way for Sokol's succession, as Brandon was seen as one of the three candidates to take Buffett's place, Barron's reported.

Other potential successors are Ajit Jain, 56, the president of Berkshire Hathaway Reinsurance; Tony Nicely, 64, the chief of Geico; and Rich Santulli, 63, who heads NetJets, Barron's said. Both Nicely and Santulli may be too old for the position, Barron's reported. Jain, unlike Sokol, doesn't have an apparent successor to his current position, Barron's said.

Some state officials have questioned the need for the bond insurance that Berkshire has begun to sell. They've criticised Berkshire competitors MBIA Inc. and Ambac Financial Group Inc. for charging too much, and said Moody's and its competitors exaggerated the risk that government borrowers will be unable to meet their obligations. Buffett, who often scolds corporate America for putting profits ahead of ethics, hasn't been spared from the criticism.

"It's only natural that you comport yourself in a way that pleases your owners," Tom Dresslar, a spokesman for California Treasurer Bill Lockyer, said of Berkshire's stake in Moody's.

"The perception, at the very least, is problematic. Are they going to rate municipal bonds fairly, or do it in a way that helps maximise income from Berkshire's bond insurance operation?"

succession plan

reassuring shareholders

Warren Buffett tried to reassure his shareholders that Berkshire Hathaway will be fine once he is gone, but the 77-year-old billionaire offered few new details of the company's succession plan.

Berkshire vice chairman Charlie Munger may have done more to reassure the roughly 31,000 shareholders at the company's annual meeting Saturday. "Well, we still have a rising young man here named Warren Buffett," Munger said, to which Buffett joked that everyone seems young to the 84-year-old Munger.

Munger continued, "I think we want to encourage this rising young man to reach his full potential." Several shareholders still asked about the succession plan and Berkshire's future.

Part of the reason why Michel Paquet and Lorie Armstrong made their second trip to the annual meeting from Calgary, Alberta, is that they're not sure how many more meetings will feature both Buffett and Munger.

"I will expect some volatility on the transition, but I'm ready for that," said Paquet, who plans to hold his Berkshire stock for many years to come.

To replace Buffett, Berkshire plans to split his job into three parts - chief investment officer, chief executive officer and chairman.

In his letter to shareholders, Buffett said the company's board has three internal candidates for CEO and four external candidates who could take over managing the company's $75 billion stock portfolio and $35.6 billion cash. Buffett said any one of the three CEO candidates and any one of the four CIO candidates could step in and do some things better than he does. "There will be no gap after my death in terms of having someone managing the money," he said.

- Bloomberg