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Thursday, March 12, 2009

Fitch Ditches Berkshire Hathaway AAA

Ah, the mighty are fallen, or more accurately, falling.

Fitch is generally the first to whack ratings (unless you count the feisty but not given sufficient credit newcomer, Egan Jones).

Note this does not (yet) appear to affect Berkshire’s new muni bond guarantee business, since the insurance and reinsurance units kept their top ratings, albeit with a negative outlook.

From Bloomberg:

Billionaire Warren Buffett’s Berkshire Hathaway Inc. had its top-level AAA credit rating cut by Fitch Ratings, which cited concern about the potential for losses on the insurer’s equity and derivatives holdings.

Buffett’s role as chief investment officer also puts the company at risk if he becomes unable to do the job, Fitch said in a statement. Fitch cut the so-called issuer default rating on Berkshire to AA+, and senior unsecured debt to AA….

“Fitch views this risk as unrelated to Mr. Buffett’s age, but rather Fitch’s belief that Berkshire’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett,” Fitch said….

The company is backing derivatives pegged to corporate junk bonds, municipal debt and the performance of stock indexes on three continents, with liability of more than $14 billion as of Dec. 31.

Buffett said in an e-mail in November that collateral calls from the institutions on the opposite side of his derivative bets are “under any circumstances, very minor.” In a Bloomberg Television interview conducted last week, Buffett said he plans to sell more derivative contracts, which he personally negotiates. Some investors have said the derivatives may saddle the insurer with billions of dollars in losses…

The $37.1 billion in equity puts tied to four of the world’s stock markets — the largest portion of the derivative contracts — have “no collateral posting requirements with respect to changes in either the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit rating,” said the company’s latest annual report, released this month.

Buffett will “likely make money on at least the index put contracts,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP. “Even if he didn’t, his balance sheet would in no way be as weak as GE’s.”

More on this topic (What's this?)
Should you follow Warren Buffett’s latest moves? (Dividend Growth Investor, 2/18/09)
Berkshire Hathaway: Buy of the Century (Investment U, 3/3/09)
Buffett's Newest Stock Pick (Dividend Growth Investor, 8/18/09)
Read more on Berkshire Hathaway, Warren Buffett at Wikinvest

Topics: Credit markets, Derivatives

Email This Post Email This Post Posted by Yves Smith at 11:22 pm

7 Comments » Links to this post

7 Comments:

  • Anonymous says:
    March 12, 2009 at 11:47 pm

    Um, smack down for shrillin the tube so hard, the man trying to save his baby that he help to kill, RIP.

    skippy

  • ndk says:
    March 13, 2009 at 12:38 am

    Berkshire Hathaway Inc. had its top-level AAA credit rating cut by Fitch Ratings, which cited concern about the potential for losses on the insurer’s equity and derivatives holding

    So, uh, why not downgrade the insurance unit too?

    This feels like Fitch trying to do the right thing, which is laudable, but not yet being successful in that endeavor. The cited alternative is weak:

    … rather Fitch’s belief that Berkshire’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett,”

    This is a bizarre reason to downgrade a conglomerate like Berkshire, as I’m rather skeptical of the impact of any single individual in such a massive enterprise. We are long past the era of the lone genius, though perhaps not the lucky genius.

    Buffett will “likely make money on at least the index put contracts,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP.

    Likely, maybe, but by no means a certainty in a world with negative equilibrium real interest rates.

    “Even if he didn’t, his balance sheet would in no way be as weak as GE’s.”

    And in other news, the New England Patriots are likely to play better than the Detroit Lions.

    The situation grows more bizarre by the day.

  • Anarchus says:
    March 13, 2009 at 5:25 am

    The part of Buffett’s put-selling strategy that makes no sense to me is that he doesn’t need the investable cash – his problem is really being too large and having too much cash to invest . . . .

    Looking at some of his recent actions (the preferreds + warrants infusions to GE and Goldman Sachs), maybe he’s playing the spread game with highly positive NPV, but that’s not anything worthy of the great Buffett investment label, it’s just a weird kind of banking on a grand scale.

  • Dave says:
    March 13, 2009 at 8:33 am

    Warren should have stuck to his own formula / advice: staying away from derivatives (especially CDS) “weapons” and keeping his powder dry in terms of selling down during the bubble and then being long cash until well into the current cycle. There will be bargains to be had for sure, but Warren may be doing a lot less “shovelling” (his euphemism) of stocks into his portfolio than during previous corrections.

    And Warren if you’re reading this, your mega-insurance division (Achit’s group) sounds like a black-swan blowup just waiting to happen. Is berk too big to fail?

  • Anonymous says:
    March 13, 2009 at 10:35 am

    bizzare indeed

    buffett doing derivatives, shorts, cnbc(buffett of all people i thought would avoid cnbc). he may have a lot of capital, but it’s still going against what he’s preached in the past.

    and sometimes i think he’s for large bailouts because a lot of that money will flow in his direction. maybe, maybe not.

  • Anonymous says:
    March 13, 2009 at 7:23 pm

    Fitch are a rating agency. They are no better than the other two. Look at Fitch’s record in rating CMBS’s..and what % of their business revolved around this.

    Fitch needs to protect its franchise and calls like this are just aggrandisment.

    And as another comemntator stated, why no downgrade on the insurance arm?

    The rataing agencies are just limpets on Wall Street. And are still to be taken to task for their rating calls on sub-prime and the collateralised structured deals.

  • Hubert says:
    March 14, 2009 at 6:29 am

    This must be a joke.

    Without looking up figures: Berky may have some 100 Bn hard book on 300 bn assets. Could be an AA + or -. Whatever.

    But GE is an AAA with 10 bn of hard book and 700 bn of (probably worse) assets ?

    Please put this agencies out of their misery…..

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