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  When they branched out on their own, Hills was 31 years old and Carla Anderson Hills was 28. To them Munger, who was only 38 but had the demeanor of a much older person, represented grey hair and maturity.

  Carla Hills was a native Angeleno who attended Stanford, where she made a name for herself playing tennis. She then went on to Yale Law School, and after graduating in 1958, worked for two years as Assistant U.S. Attorney in Los Angeles.

  "My father had a great working relationship with Carla Hills," said Molly. "He thought she was a great working lawyer." Though Molly wasn't consciously aware of it at the time, her father's respect for Carla Hills may have been a signal that it was acceptable for Molly to study law as well.

  Some of the lawyers brought clients with them into the new firm and Charlie was no exception. Rod Hills estimates that in the early years, Charlie's clients provided at least 10 percent of the work. In addition, Hills said Munger was instrumental in helping them hold on to existing clients and attract new ones.

  "We started out with Aerojet General and Federal Mogul," recalled Hills. "They all came with us because it looked like we had some substance with Charlie there. Charles Rickershauser had been with Gibson, Dunn and Crutcher, but was California's corporations commissioner. He wouldn't have joined our firm if Charlie hadn't been there. Because he did, we got the Pacific Coast Stock Exchange as a client."

  Hills said the practice started off with a healthy burst and quickly got even better. "The first year we made any real money in the firm, all of a sudden I was rich, I'd made money. Somebody had made a suggestion about a tax shelter investment. I said, `Charlie, I've got this terrific investment opportunity.' I thought it was great, but Charlie said, `I have a much better idea fora tax shelter.' He said `Give me the money.' I said, `As a matter of interest, what are you going to do with it?' He said, 'I'm going to keep it. You're going to lose it either way. I'll pay the taxes on it and will be eternally grateful for the contribution.' I took that as my lesson not to invest in this tax shelter."

  Rod and Carla Hills were partners in the firm from 1962 to 1974. Carla gained experience in anti-trust and security cases and also taught at the University of California at Los Angeles as an adjunct professor. The Hills switched to careers in politics when in 1973 Carla was offered the post of Assistant U.S. Attorney General in the administration of Richard M. Nixon. The offer became void after Attorney General Elliot L. Richardson resigned in the "Saturday night massacre" of the Watergate affair in February 1974. However, William B. Saxbe, the next attorney general, renewed the offer. Hills became Assistant Attorney General in charge of the justice Department's civil division. In 1975, she was nominated Secretary of Housing and Urban Development by President Gerald R. Ford. She served as U.S. Trade Representative from 1989 to 1993 in the cabinet of President George Bush. She now has a consulting firm, Hills & Co., that works with corporations on trade issues.

  Rod Hills also clambered up the White House political ropes. He left Munger, Tolles in 1974 to become White House General Counsel to President Gerald Ford and then ended up as chairman of the Securities and Exchange Commission. He now has a consulting firm, Hills Enterprises, and spends most of his time on corporate workouts, reorganizing or closing down troubled companies. His most publicized assignment was with the now defunct Drexel, Burnham Lambert following its junk bond scandal. Most recently Hills has worked with Federal Mogul Corp. and Waste Management Inc.

  Once ensconced in Washington, the Hills stayed but they remain connected to Munger, Tolles. Of the Hills' four children, three became lawyers. Their daughter Allison married Kelly Klaus, an attorney in the Munger, Tolles' San Francisco office.

  During those early years, Charlie kept cementing relationships that he felt were valuable to the firm, including attracting Chuck Rickershauser, another former clerk at the U.S. Supreme Court, as a partner. Munger and Rickershauser met in 1965 when Munger was moonlighting as a real estate developer. A new statute had been enacted in California dealing with condominium-like projects. It was a change in the concept in real estate law, and Munger thought the legislation hadn't been written properly. Rickershauser was about 36 years old at the time and was serving as corporations commissioner under Governor Pat Brown.

  "Charlie wanted a slightly different version of the law than what was written. I refined it to change it," said Rickershauser. Several years later they met at a party, and Charlie helped recruit Rickershauser for Munger, Tolles. Of the young lawyers brought aboard in the early years, Ronald Olson and Robert Denham have become the best known.

  Ron Olson graduated from the University of Michigan School of Law in 1966, spent a year at Oxford, then in 1968 clerked with U.S. Court of Appeals Judge David Bazelon in Washington, DC. He had decided to stay in Washington when his appointment was over until a law school classmate suggested that he come to LA and join him at Munger, Tolles.

  "Two weeks before our son was born I told my wife I was going out to California to take a look," said Olson. °I came back and told my wife I thought we ought to go. Why? I never met a more interesting group of people. Charlie was not with the law firm. But his values were very much part of it. I heard stories about him when I was recruited, and to this day, recruits who come through this firm hear Charlie Munger stories."

  When Olson eventually met Munger, his first impression was typical of what others saw. "Gee, he's an old man," thought Olson. "He was in his 40s. For years his mother probably told him, `Charlie, you should act your age, meaning you should be more mature.' Charlie, from the first day I met him, was the most wise, most mature, most sensible man I ever met. Now his chronological age is just catching up with the wisdom lie accumulated very early in his life."

  To be sure, said Olson, "He can be maddening. He can talk over the best conversationalist I know. His opinions are never hidden. Our political opinions are quite different. He's a conservative Republican and I'm a Democrat and we differ on how to solve a social problem, but in the end, we come out the same."

  California Lau' Business once described Olson, who grew up in a small town in Iowa, as one of the country's top "rainmakers"-a partner who lures new business to a firm. Olson won recognition for arranging a $400 million settlement between his client Merrill Lynch and Orange County in a famous case involving junk bonds. Not had, considering that the county was seeking $2 billion in damages. Olson advises clients such as Atlantic Richfield Company, Universal Studios, and Michael Ovitz, the former Walt Disney president.' In 1998, when California lawyers ranked themselves, Olson took the top spot in the list of most influential lawyers.

  Katharine Graham, a regular member of Buffett's inner circle, was impressed with Olson when they met and had lunch in Washington. 'He is dynamic. A really fabulous guy. He was Warren's securities guy for a long time. The most prominent deal maker in Los Angeles. Wasn't that $90 million Ovitz settlement amazing?"

  Graham was referring to the settlement package of Michael Ovitz, former number two executive at Disney Inc., who left after a falling out with top executive Michael Eisner. The Ovitz's package is sometimes valued as high as $140 million or much lower, depending on the price at which Disney's stock is trading.

  Robert Denham, who served as Munger, Tolles managing partner from 1985 to 1991, gained national prominence when Buffett and Munger called him and Olson to New York to help sort out the bond-trading scandal at Salomon Brothers, Inc. Denham was in New York for seven years and before lie left, lie became Salomon's chairman.

  Denham grew up in West Texas and learned about Munger, Tolles when he was a student at Harvard Law, where like Munger, he won a Sears Prize. "In 1969 to 197(), Rod [Hills] taught at Harvard. Carla was writing an anti-trust book. Very interesting people. The Hills had my wife and me to dinner. Molly [Munger] was there. Molly was a senior at Radcliffe."

  After talking to Hills, Denham decided to give Munger, Tolles a onceover by working there in the summer of 1970. He was impressed with what lie found. "The firm stands for value oriented toward busine
ss. It stands for integrity. The same thing Charlie stands for, this firm stands for."

  Denham first encountered Munger the summer he worked as an intern. "My earliest impression was of someone who was very smart, very focused, had a lot of really close human relationships, who cared a lot about his friends. As I began doing legal work for him-in 1971 or 1972-that gave nee a much better perspective on him. He is an unusually smart client. He understood legal work quite well and the business issues. Working for him was hard, demanding, but it's the best work you can do, because you learn a lot from it. Any good law firm is fundamentally in the business of selling judgment. That's a critical part of the way Charlie practiced law. Solid legal skills and understanding of business issues."

  Thanks in part to Munger's name and his connections, explained Den- ham,"We've been able to recruit very, very well. Part of that recruiting success is that we can recruit into elite declination. Lots of very able people get turned down. This is an intellectually elite institution." One applicant went so far as to describe it as "elitist, snobby, and competitive."i

  The hiring rules are strictly followed, no matter who the applicant. Not long after she graduated from Harvard, Molly Munger applied at Munger, '1'olles for an associate's position. She interviewed with Carla Hills, but Hills did not offer her a job, allegedly because Molly had not made the Harvard Law Review. Apparently in Hills estimation, that meant Molly's credentials weren't quite up to Munger, Tolles's standards.'

  When new graduates are interviewed at Munger, Tolles, they are told that grades are the main criteria by which they will be evaluated. "Even your undergrad record is picked over," said one applicant. "God help you if you only graduated cum laud Isic], rather than magna or summa."

  Of its 130 lawyers, 17 are former U.S. Supreme Court clerks. MTO (as its members call Munger, Tolles) added seven new partners in the year 2000, graduates of Georgetown University Law Center, the University of California at Los Angeles (UCLA), the University of Southern California (USC), the University of Michigan Law School, Stanford Law School, and Yale Law School. While most law firms have two associates per partner, with the associates carrying the heaviest work burden, Munger, Tolles partners have to do more of their own work, since only about half the lawyers on the staff are associates.

  Perhaps one of the most nurturing things Charlie Munger did for MTO was to bring in a small group of companies as clients, it group that later became Berkshire Hathaway Inc. As Berkshire grew in size, influence, and prestige, so did Munger, Tolles.

  "Berkshire-Hathaway has had a huge impact on the firm ... the ability to work for Warren Buffett and the opportunity to be the lawyer for Berkshire-Hathaway?" noted Hal Borthwick. And I'm not saying, by the way, that Berkshire's business produced massive amounts of gold. Its consistent work, but by and large Warren and Charlie run that business so as to stay out of trouble. At the same time, in the early days they bought businesses that had troubles they thought they could fix. Blue Chip Stamps was a case in point where they took over control of a company that had, I don't know, 10 cases against it? Their calculated judgment was that they would win or cheaply settle all the cases. They did. It cost some money, took a long time, but they got a good deal, right? But it's a tremendous amount of help to have something like Berkshire built into the client base. It's a stamp of approval. Some general counsels will say, 'You know, if they're good enough for Warren Buffet, I think they're okay for us, too. Give 'em a call.'"

  Because Berkshire's business grew at a steady but manageable rate, Munger, Tolles was able to keep pace, adding staff and expertise as required. Today, the offices of Munger, Tolles & Olson occupy several floors in a russet marble wedge, one of it pair of skyscrapers on Bunker Hill. The offices are across the street from the Los Angeles Museum of Contemporary Art, in a part of town that has magnificent edifices, but is only blocks from areas that look like the back streets of Mexico City. A short distance from the cappuccino shops and elevators filled with people dressed in exquisitely tailored suits, the streets are redolent with the aroma of taco stands, the sounds of sidewalk vending stalls and Latin music.

  Munger, Tolles & Olson now specializes in corporation, securities, and business litigation, labor relations, anti-trust law, taxation, real property, trust, probate, and environmental law. The firm has a particularly large business litigation practice.

  In addition to being Berkshire's chief counsel since the 1970s, Munger, Thlles has represented the Philippine government in its efforts to recover funds from Imelda and Ferdinand Marcos. They represented the Alyeska Pipeline Service Co. in disputes arising from the Exxon Valdez Alaska oil spill. They were legal counsel in the restructuring of Vons Cos., a western-states grocery store chain. They have done substantial work for the Northrop Corp., Litton Industries, Southern California Edison, Bank of America, Unocal Corp., and MCA Inc. MTO performs pro Bono work for numerous groups, including the Western Center for Law and Poverty and for the homeless of Los Angeles.

  Munger, Tolles is known for creating a democratic and fairly unique compensation system designed to make the firm a meritocracy. As a result, when conditions are right the highest-paid partner can earn at least five times more than the lowest paid.

  Every January the partners-there are now 62-get a ballot listing the names of all the partners with a blank after each name. The firm's net income for the previous year is printed at the bottom of the ballot. Each partner fills in the amount of money he or she thinks every participant should make, with no rules other than that the numbers must add up to the net income for that year. 'T'here are no points, no shares, no extra credit for seniority. When the partners vote, they can take seniority into consideration, but they also consider a person's ability to find business and represent clients successfully.'

  "We vote on disbursement, then everybody gets to see how everyone else voted," explained Olson. "There isn't a compensation committee-a lawyer-by-lawyer pitch on how valuable he or she was to the law firm. It's a whole different dynamic. Rod, Roy [Tolles], and Charlie together were the ones who came up with the process. It's a yearly check on how you are perceived."

  After the ballots are in, the firm then plots the numbers and names on a grid, allowing each attorney to see how he or she ranks in the eyes of every other, by name. The compensation committee reviews the numbers, talks privately with each partner, and then settles on a final compensation figure. The system, claim the partners, encourages good manners. People think twice before riling anyone who will influence their salaries.

  "People have said this must be very brutal," says John Frank, a Munger, Tolles partner. It is open, but it's not brutal. You can't give a whole lot of money to one person without taking it away from others, which imposes a certain civility on things."'

  "They think of themselves as a more intellectual bunch than most law firms," said Anne Larin, a former associate who later joined the legal staff at General Motors Corp. "And I liked that."'

  Although he has not worked there for years and his name is no longer on the brass plate, Rod Hills claims, "Pound for pound, it is the best firm in the country."

  CHARLIE WAS STILL PRACTICING LAW, though not full time, when he, Jack Wheeler, and later Al Marshall were running Wheeler, Munger. The Wheeler, Munger offices at the Pacific Stock Exchange were so cramped that if Charlie got a sensitive call from a client, he asked Al and Vivian, their secretary, to step outside so that he could maintain confidentiality. Al and Vivian would stand around in the hall, on one foot and then the other, and wait.

  Within three years of founding Munger, Tolles, Charlie dropped out. He finally left the firm in 1965 because he believed that he would never again need to rely on legal fees. He transferred his remaining balance at the firm into the estate of a partner who died young. Clearly, Munger had been plotting his escape from law for quite a while.

  Al Marshall said Charlie once summed up practicing law this way: "Too often, if you absolutely kill yourself over an impossible client and get a ten strike, your rew
ard is you get to do it all over again for an equally impossible client." Despite his love of his father and grandfather and respect for their work, it was a relief to Munger to quit the law.

  "I hire lawyers, oversee lawyers, it's not that I don't use law or lawyers. But I was entirely willing to give up working for other people as a lawyer," said Munger. "I had a huge family. Nancy and I supported eight children.... And I didn't realize that the law was going to get as prosperous as it suddenly did. The big money came into law shortly after I left it. Also, I preferred making decisions and gambling my own money. I usually thought I knew better than the client anyway, so why should I have to do it his way? So partly, it was having an opinionated personality. And partly, it was a desire to get resources permitting independence."

  Munger hoped to use his wealth, when he felt secure with it, to emulate his childhood idol, Benjamin Franklin. "Franklin was able to make the contribution he did because he had (financial) freedom." Munger came to understand that in order to be truly wealthy, a person needed to build ownership in a business.

  "It was a classic thing my mother-in-law talks about," explained Hal Borthwick. "She says, it's always the lawyer who has the wonderful lifestyle, with the kids in the schools and the nice home in the nice neighborhood. She says, of course, you are living at a level your clients are living at, right? What you forget is your clients are building capital where, as an attorney, you're not. There is no capital value to your practice, so when you do retire one day, your income disappears. You have nothing other than maybe your house and so you sell the house and move to the desert or whatever."