Moving from managing a hedge fund to managing money for Warren Buffett might seem like a dream for a professional investor.
But the switch carries a hefty price, Buffett said Tuesday, continuing his criticism of what he says are unfairly low tax rates for high-income people.
Specifically, Buffett said, the two Berkshire Hathaway Inc. money managers — Todd Combs and the one announced Monday, Ted Weschler — will be paying roughly twice the income taxes they owed while managing their own hedge funds.
"They'll be doing exactly the same thing," Buffett said — evaluating investment opportunities and deciding when and how much money to invest and when to sell off investments. Yet the federal code will tax their Berkshire salaries and bonuses at 30 percent or more, twice the 15 percent they would owe while managing their own hedge funds.
This week, President Barack Obama proposed making hedge fund managers pay higher taxes on some of their income, a provision he said would raise federal tax revenue by $18 billion a year. During last week's speech to Congress on the economy, Obama endorsed Buffett's criticism that the wealthy pay much lower tax rates than average wage earners.
Tuesday, Buffett returned to the issue — the subject of his New York Times opinion piece last month — in a brief interview after taking part in a dedication ceremony at the University of Nebraska Medical Center.
He said the higher tax bill that Combs and Weschler will owe under Berkshire "doesn't bother them one bit," repeating his belief that the wealthy are willing to pay higher taxes as part of the "shared sacrifice" the nation needs to fairly resolve federal budget problems.
Under federal income tax laws, a hedge fund manager is paid mostly by receiving a percentage of the profits that the fund makes, often in the 20 percent range. If a fund makes $100 million, the manager would get $20 million.
But instead of paying the top 35 percent income tax rate, the manager pays 15 percent on the money, which is called carried interest income.
The lower tax rate is intended to compensate managers for putting money at risk while making the investments, because the value of investments can decline as well as increase.
Combs managed an investment fund in Connecticut before joining Berkshire early this year. Weschler is winding up his hedge fund in Charlottesville, Va., and will start working for Berkshire early in 2012.
Buffett said Tuesday that he first met Weschler in July 2010 after Weschler's $2.6 million bid in a charity auction won the right to dine with Buffett. The two met again at last April's annual meeting of shareholders of Berkshire, the Omaha investment company of which Buffett is chairman and CEO, and for a third time in July after Weschler again bid $2.6 million in this year's charity auction.
Buffett made the job offer at the second July dinner.
"He's our kind of guy," Buffett said Tuesday. "He'll think of Berkshire first."
Buffett and Weschler share a love of reading financial reports, and both have invested in Bank of America stock. But while Buffett, 81, prefers such relatively sedate sports as golf and table tennis, the 50-year-old Weschler has run marathons. Bloomberg News reported that he completed the 2007 New York City Marathon with a time of 3:30:02.
Bloomberg said Weschler's fund bought 2 million Bank of America shares in the first quarter of 2009 when the credit crunch pushed down financial stocks. When he sold them a year later, the shares' value had more than doubled.
Bruce Kershner, who formerly worked for Weschler, told Bloomberg that his investment approach may serve him well under Buffett.
"All he liked to do was read and read and read," said Kershner, president and founder of Bethesda, Md.-based Kershner & Co. "He said he took vacations and he would just read his financial statements."
Michael Bills, the former chief operating officer of Tiger Management LLC, which invested in Weschler's fund, said, "This is a brilliant move for Berkshire. We are fortunate to have been limited partners with Ted and think the world of him."
Peninsula is a three-person office, with Weschler assisted by an analyst and an office manager at its office above a bookstore in downtown Charlottesville.
Weschler worked at W.R. Grace & Co., a chemical company, from 1983 to 1989. Peninsula has owned 10.8 million shares of Grace stock since at least the third quarter of 2003, with the value rising more than 10-fold in that time, Bloomberg reported.
Weschler "has expressed continued support for Grace" and plans to retain 40 percent of the fund's shares in the chemical maker after other holdings are distributed to investors, said Greg Euston, a Grace spokesman. Grace has been under federal bankruptcy protection for a decade, seeking to limit financial exposure from more than 100,000 asbestos-related injury claims.
Weschler purchased Bank of America stock when it was worth an average of $6.73 per share and sold it when the average was $16.23. Berkshire owned Bank of America stock from mid-2007 until the end of 2010, a period when it lost more than two-thirds of its market value.
Buffett recently invested $5 billion in Bank of America but purchased preferred stock with a 6 percent annual dividend rather than common stock.
Derek Kerr, finance chief at US Airways, told Bloomberg that Weschler helped bring other investors on board to complete the 2005 merger of US Airways Group Inc. and America West Holdings Corp.
"He impressed us as a good, long-term-oriented investor," Kerr said. "You could tell, from the people that came in and asked questions after he had committed, that he knew a lot of people and was well-connected in the investment community."
Thomas Preston, general counsel at Delaware State University who serves with Weschler on the board of a savings bank, said that Weschler's readings include the annual letters that Buffett writes to Berkshire shareholders and that Weschler distributed copies of the letters to fellow bank directors the past few years.
Preston told Bloomberg that Weschler bought the bank directors a round of Route 66 root beers to celebrate an investment in the 1990s that saved the bank.
"I remember Ted saying to the board, 'You guys have done a fantastic job, and here's a root beer that commemorates the stock price today,' " Preston said. "He said, 'I fully expect you to double this stock price.' Of course, things haven't worked out quite that way. But, you know, he's into gestures like that. I've still got the bottle of root beer sitting around here somewhere."
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