Friday, May 2, 2008
Warren Buffetted By Derivatives, Ratings Agency Probe
Omaha, Nebraska based Berkshire Hathaway's (NYSE: BRK.A and BRK.B) first quarter profits were dragged down 64% by $1.6 billion worth of pre tax losses related to derivatives contracts. Here's the full Q1 report from Berkshire, and a synopsis from Reuters via the New York Times. Net income fell to $940 million, or $607 a Class A share, from $2.6 billion, or $1,682, a year earlier. Operating profit fell 13 percent, to $1.93 billion, or $1,247 a share, from $2.21 billion, or $1,434, as earnings from insurance underwriting fell by more than two-thirds. The derivative losses stemmed from Berkshire’s exposure to contracts aimed at making money if junk bonds stayed out of default and stock indexes rose. In February, Mr. Buffett revealed that Berkshire ended 2007 with $40 billion of exposure to 94 of these contracts.
The WSJ takes the long view. Excluding investments derivatives, which Berkshire called "usually meaningless," the company reported per-share earnings of $1,247. The company said it believes the contracts that led to the losses will "prove profitable over the 15-20 year periods they cover," but could lead earnings to "swing widely" because of reporting rules.
Berkshire Hathaway's Annual General Meeting is scheduled for the 3rd of May 2008, to be held at the Qwest Center in downtown Omaha, Nebraska. Last year' AGM drew 27000 investors from around the world. [Update: Here's the Wall Street Journal report on Berkshire's AGM. The highlights - 30,000 investors, overnight rain and cancelled flights. Warren Buffett's letter to share holders was notable for the fact that he warned investors not to expect returns like in the past. He also reassured share holders about the company's succession plans. Mr. 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 in cash.
With regard to his new municipal bond insurer, Hathaway Assurance, Buffett said it had racked up premium volume in the first quarter of more than $400 million, which Mr. Buffett said wasn't only bigger than that of its biggest competitor, but possibly more than all of the premium volume of all of its rivals combined. "This whole company has been built in just a couple of months," Mr. Buffett said, adding that the fledgling company completed 278 transactions. "And that's from a standing start."]
Another important Buffett item doing the rounds in the news is Buffett's new municipal bond insurer, Hathaway Assurance Corp. It seems Connecticut Attorney General Richard Blumenthal is investigating a possible conflict of interest created by Berkshire's 19.5% stake in ratings agency Moody's, considering the importance of any ratings provided to Hathaway Assurance by Moody's. The probe is part of a general investigation into conflicts of interest in the credit ratings industry. Report from Reuters says that Blumenthal told the FT that Berkshire's ownership of 19.5 percent of Moody's, which issued a top rating to Berkshire's new bond insurance business, "certainly creates an appearance of a conflict of interest". Blumenthal said in the report that the examination was only "a slice" of the probe, adding: "We are not making any allegations, and we reached no conclusions. We are not challenging any of the specific ratings."
A detailed piece on this from Erik Holm, Bloomberg News, says that Moody's gave its top rating last week to Berkshire Hathaway Assurance Corp., created in December as existing bond insurers struggled to maintain their AAA ratings. A favorable rating for Berkshire by New York-based Moody's, or a lower rating for competitors including MBIA Inc. and Ambac Financial Group Inc., may give Buffett's company an advantage.
A related news item from Forbes reports that Standard & Poor's Ratings Services granted Berkshire Hathaway Assurance Corp. (BHAC) 'AAA' financial strength with a stable outlook. 'The ratings on BHAC are based on a guaranty from Columbia in favor of BHAC that extends the Columbia 'AAA' rating to BHAC,' said S&P's credit analyst Damien Magarelli.
While there is a faint chance that Moody's could be asked to recuse itself from providing ratings for Hathaway Assurance Corp., the chances of this investigation actually resulting in ny kind of action against Hathaway Assuarance are very low, considering that Berkshire entered into the bond insurance business on the express urging of the New York Superintendent of Insurance, Eric Dinallo, who had personally called Ajit Jain, the Head of Berkshire's reinsurance business, asking for help in tackling the pressures on the existing bond insurers.
The WSJ takes the long view. Excluding investments derivatives, which Berkshire called "usually meaningless," the company reported per-share earnings of $1,247. The company said it believes the contracts that led to the losses will "prove profitable over the 15-20 year periods they cover," but could lead earnings to "swing widely" because of reporting rules.
Berkshire Hathaway's Annual General Meeting is scheduled for the 3rd of May 2008, to be held at the Qwest Center in downtown Omaha, Nebraska. Last year' AGM drew 27000 investors from around the world. [Update: Here's the Wall Street Journal report on Berkshire's AGM. The highlights - 30,000 investors, overnight rain and cancelled flights. Warren Buffett's letter to share holders was notable for the fact that he warned investors not to expect returns like in the past. He also reassured share holders about the company's succession plans. Mr. 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 in cash.
With regard to his new municipal bond insurer, Hathaway Assurance, Buffett said it had racked up premium volume in the first quarter of more than $400 million, which Mr. Buffett said wasn't only bigger than that of its biggest competitor, but possibly more than all of the premium volume of all of its rivals combined. "This whole company has been built in just a couple of months," Mr. Buffett said, adding that the fledgling company completed 278 transactions. "And that's from a standing start."]
Another important Buffett item doing the rounds in the news is Buffett's new municipal bond insurer, Hathaway Assurance Corp. It seems Connecticut Attorney General Richard Blumenthal is investigating a possible conflict of interest created by Berkshire's 19.5% stake in ratings agency Moody's, considering the importance of any ratings provided to Hathaway Assurance by Moody's. The probe is part of a general investigation into conflicts of interest in the credit ratings industry. Report from Reuters says that Blumenthal told the FT that Berkshire's ownership of 19.5 percent of Moody's, which issued a top rating to Berkshire's new bond insurance business, "certainly creates an appearance of a conflict of interest". Blumenthal said in the report that the examination was only "a slice" of the probe, adding: "We are not making any allegations, and we reached no conclusions. We are not challenging any of the specific ratings."
A detailed piece on this from Erik Holm, Bloomberg News, says that Moody's gave its top rating last week to Berkshire Hathaway Assurance Corp., created in December as existing bond insurers struggled to maintain their AAA ratings. A favorable rating for Berkshire by New York-based Moody's, or a lower rating for competitors including MBIA Inc. and Ambac Financial Group Inc., may give Buffett's company an advantage.
A related news item from Forbes reports that Standard & Poor's Ratings Services granted Berkshire Hathaway Assurance Corp. (BHAC) 'AAA' financial strength with a stable outlook. 'The ratings on BHAC are based on a guaranty from Columbia in favor of BHAC that extends the Columbia 'AAA' rating to BHAC,' said S&P's credit analyst Damien Magarelli.
While there is a faint chance that Moody's could be asked to recuse itself from providing ratings for Hathaway Assurance Corp., the chances of this investigation actually resulting in ny kind of action against Hathaway Assuarance are very low, considering that Berkshire entered into the bond insurance business on the express urging of the New York Superintendent of Insurance, Eric Dinallo, who had personally called Ajit Jain, the Head of Berkshire's reinsurance business, asking for help in tackling the pressures on the existing bond insurers.
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