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Old 11-20-2008, 09:41 PM   #1
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Default Is Warren Buffett losing his touch?

Thu Nov 20, 2008 2:59pm EST

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - Investors are wondering if Warren Buffett has lost his touch.

They are bailing out of Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) (BRKb.N: Quote, Profile, Research, Stock Buzz) stock and have lost some confidence that the insurance and investment company, run by one of the world's most admired investors since 1965, can pay its debts.

Berkshire stock has lost close to half its value since hitting a record high last December, as the company struggles with lower returns at its insurance businesses, the declining value of its stock holdings, and paper losses on derivative contracts.

Meanwhile, the cost of protecting Berkshire's "triple-A" rated debt has soared to a level more befitting a "triple-B" or even a junk-rated company.

Omaha, Nebraska-based Berkshire has nearly 80 businesses -- from car insurance to carpeting, clothing, food, kitchen utensils, and manufactured housing -- and owns tens of billions of dollars of stock.

Buffett's empire is diversified enough so that at any given moment many parts are unlikely to run on all cylinders.

"Everything you're seeing that affects other companies is eventually going to catch up with Berkshire," said Vahan Janjigian, author of the 2008 book "Even Buffett Isn't Perfect." "I'm not saying Berkshire is not well-run, but that even well-run companies will be hit in a severe recession."

Buffett, 78, was not available for comment.

Berkshire Class A shares fell as low as $74,100 a share on Thursday, their lowest level since August 2003.

That's down 51 percent from their record $151,650 set last December 11. It's also down 34 percent since Berkshire said on November 7 that lower insurance returns as well as investment losses led to a 77 percent drop in third-quarter profit, the fourth straight quarterly decline. Operating earnings were down 18 percent. Berkshire ended September with $33.37 billion in cash.

"We're buying Berkshire like crazy. It was our largest position, and we have made it much larger in the last two weeks," said Whitney Tilson, managing partner at T2 Partners LLC, a hedge fund firm.

"Investors are looking at the derivative exposure, seeing Berkshire marking losses, and it reminds them of AIG and other companies whose derivative exposures got them into trouble," he added. "They are coming to the insane conclusion that Berkshire faces similar risks."

He referred to American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), which got a $152 billion government bailout.


In Thursday afternoon trading, the shares were down $2,760, or 3.3 percent, to $81,240 a share on the New York Stock Exchange. The cost of protecting $10 million of Berkshire debt against default for five years rose to $490,000 annually on Thursday from $294,000 a week ago and $31,000 at the start of 2008, according to Markit.

"We're in an unusual time," said Peter Schiff, editor of Schiff's Insurance Observer. "It's like comparing a person having trouble making mortgage payments with a billionaire. The financial crisis affects them, but not in the same way."

Berkshire could have to pay as much as $37.04 billion between 2019 and 2027 under some derivative contracts if the Standard & Poor's 500 index .SPX and three other stock indexes are lower than when Berkshire entered the contracts. It obtained about $4.85 billion of premiums upfront.

At September 30, Berkshire had written down $6.73 billion on the contracts. Losses have almost certainly mounted since then. In October alone, Berkshire shareholder equity fell $9 billion, or 7.5 percent.

Buffett has said he expects the contracts to be profitable, distinguishing them from the "financial weapons of mass destruction" that he labeled other derivatives.

Berkshire also ended September with $10.78 billion in potential liabilities tied to various credit events, such as junk bond defaults, up from $4.66 billion at year-end 2007.

Moody's Investors Service said the global junk bond default rate could rise to 10.4 percent by the end of 2009 from 2.8 percent in October. With a typical junk bond yielding more than 20 percent, new financing is essentially nonexistent.

"Based on his 50-year track record selling insurance, I have a great deal of confidence he is selling these at the right price," Tilson said. "The critical thing is he does not have to post cash collateral until there are actual defaults."

A credit rating downgrade would likely not be material. Berkshire would have to post "nominal" additional collateral on derivatives of "far below 1 percent of assets" if Berkshire lost its "triple-A" ratings, Buffett's assistant, Jackie Wilson, said. It was posting no such collateral as of Sept 30, when Berkshire assets totaled $281.7 billion.


Berkshire has other exposures to falling markets.

It ended September with $76 billion in stock investments, including multibillion dollar stakes in American Express Co (AXP.N: Quote, Profile, Research, Stock Buzz), Coca-Cola Co (KO.N: Quote, Profile, Research, Stock Buzz), ConocoPhillips (COP.N: Quote, Profile, Research, Stock Buzz), Procter & Gamble Co (PG.N: Quote, Profile, Research, Stock Buzz) and Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz). Shares in all have fallen this quarter.

And investors have shrugged off Berkshire's investment of $8 billion in General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz) and Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz) preferred shares, with their 10 percent dividend yields. Shares of both have fallen, rendering Buffett's warrants to buy common shares worthless for the time being.

Buffett has been out of step with the markets before. After missing the late 1990s tech bubble, he gave himself a "D" for capital allocation in 1999, when Berkshire's book value barely budged, and the S&P 500, including dividends, rose 21 percent. Berkshire fared better in six of the subsequent eight years.

"Earnings of Berkshire's operating businesses will undoubtedly decline given the worldwide economic downturn," T2 Partners' Tilson said. "However, these businesses remain enormously profitable, and will almost certainly continue to be."

Schiff, of the Insurance Observer, expects Buffett will actually find new opportunities to win business or make acquisitions, in part because many insurance rivals are scrambling for capital. Several are applying to become bank holding companies to be eligible for the government's $700 billion financial rescue.

"When insurers lose capital, you're going to be more conservative with how much business you write," Schiff said. "Berkshire doesn't have this problem because its balance sheet is so strong. What they own may be worth less, but they get more opportunities to buy things at cheap prices."

(Additional reporting by Dena Aubin, Karen Brettell and Ciara Linnane; editing by Jeffrey Benkoe)
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Old 11-20-2008, 09:45 PM   #2
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I think Warren Buffet IS touched.


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Old 11-24-2008, 06:25 PM   #3
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Billionaire investor Warren Buffett, acknowledging investor concern, will provide more information on how he calculates losses on Berkshire Hathaway Inc.‘s derivative bets in the firm’s annual report early next year.

The report will disclose “all aspects of valuation” and cover “deficiencies in the formula” for pricing the derivatives, “which we nevertheless use,” Buffett said in an e- mail sent by his assistant, Debbie Bosanek.

The information may calm investors concerned about losses and potential ratings downgrades tied to Berkshire’s sale of derivative contracts. Buyers of the derivatives would be entitled to billions of dollars from Omaha, Nebraska-based Berkshire if four stock indexes drop below agreed-upon levels on dates beginning in 2019. Berkshire shares have fallen about 23 percent since Nov. 7, when the insurer said its liability on the contracts totaled $6.73 billion at the end of the third quarter.

Buffett’s e-mail said the four stock indexes, including the Standard & Poor’s 500, would all have to fall to zero for Berkshire to be liable for the entire $35.5 billion that’s at risk. The sum was estimated at $37 billion as of Sept. 30 in a filing and shrank because of fluctuations in currency exchange rates, he said.

Berkshire slipped $2,500, or 2.8 percent, to $87,500 at 4:04 p.m. in New York Stock Exchange composite trading.

No Questions

Speculation about the insurer’s liability drove up prices last week on credit-default swaps tied to Berkshire debt. Fixed- income investors buy credit-default swaps to protect themselves against the possibility that a company won’t meet its obligations, and prices rose last week to levels typical of a company rated one level above junk.

“The market is so panicked that even the most respected investor in the world can see the stock in his company fall more than 30 percent on no news, other than on rumors that are clearly false based on the disclosures he’s made,” said Whitney Tilson, managing director of T2 Partners LLC, a New York-based hedge fund with about $100 million under management. “We are in a sell first, ask questions later world.”

Tilson said his firm doubled its stake in Berkshire as the shares fell, increasing its holdings to 20 percent of assets under management from 10 percent, and buying some below $75,000 a share. The stock fell as low as $74,100 on Nov. 20, before rising to $90,000 the next day.

Investors also were concerned that Berkshire might have to put up collateral, draining cash and setting off a chain of events like those that brought American International Group Inc. to the brink of failure this year.

‘Very Minor’

In his e-mail, Buffett said the collateral requirements are “under any circumstances, very minor.” Berkshire had $33.4 billion in cash at the end of the third quarter.

Buffett sold the derivative contracts to undisclosed buyers for $4.85 billion through Sept. 30. Under the agreements, Berkshire must pay out if, on specific dates starting in 2019, the market indexes are below the point where they were when he made the agreements. In the meantime, Berkshire can use the cash to buy stock or make acquisitions.

The liabilities on the derivatives are accounting losses that reflect the falling value of the stock indexes, not cash that Berkshire has paid out. Chief Financial Officer Marc Hamburg told the U.S. Securities and Exchange Commission in July that the firm values the derivative contracts using a model that includes equity prices, interest rates, the dollar’s performance against other currencies and market volatility.

The SEC had asked for “more robust disclosure” on how Berkshire values the contracts.

To contact the reporter on this story: Erik Holm in New York at [email protected].
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buffett, losing, touch, warren

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