Everything Warren Buffett: CNBC: Fitch Downgrade of Berkshire Hathaway Reflects Industry-Wide Concerns About Financial Companies

Saturday, March 14, 2009

CNBC: Fitch Downgrade of Berkshire Hathaway Reflects Industry-Wide Concerns About Financial Companies

Topics:Derivatives | Credit | Warren Buffett

Berkshire Hathaway has lost its AAA credit rating from Fitch, but it doesn't look like the change is primarily due to any recent 'mistakes' by Warren Buffett and his holding company.

Almost at the top of its news release on the one-notch downgrade and negative outlook, Fitch says the move is part of a "broader review of insurance and financial services company ratings" due to the "current stressful economic environment."

It certainly makes it sound like Berkshire, or any other financial company, is going to have a hard time holding onto a triple-A rating in the current storm, no matter what it does or doesn't do.

"Fitch believes that 'AAA' ratings are not appropriate at the holding company level for financial-oriented enterprises given significant market volatility and correlation of risks under stress, recently observed throughout the global economy."

Fitch does specifically cite "potential earnings and capital volatility" from Berkshire's "large, unhedged market exposures" as being "inconsistent with the stability required at the 'AAA' level."

Those "exposures" include "large, concentrated equity investments" (Buffett is not a big believer in diversification) and the "various derivative contracts" that have caused so much concern among some investors, in part because they've generated large "mark-to-market" losses in Berkshire's earnings numbers.

Later in the release, however, Fitch echoes Buffett's own prediction that the long-term contracts will rebound in value before they mature years from now so that "the ultimate economic effects, while uncertain, are likely to be significantly less than indicated by the marks."

Buffett believes they'll eventually be profitable, and notes that Berkshire has been using the billions of dollars paid by the buyers of those contracts to make money-generating investments now.

Fitch also says its new, lower, ratings reflect a "long-standing" concern: the 'key man' risk posed by Warren Buffett himself. It has nothing to do with his age, says Fitch. Instead it attributes Berkshire's long-term success almost entirely to Buffett's abilities and says that the "concentration" is inconsistent with a triple-A rating.

While perhaps inevitable, the Fitch downgrade does appear to increase the likelihood the larger rating agencies, Standard & Poor's and Moody's, will also strip Berkshire of its top credit ratings.

Indeed, after General Electric's

GENERAL ELECTRIC CO

9.5302 -0.0398 -0.42%

NYSE

Quote | Chart | News | Profile

[GE 9.5302

-0.0398 (-0.42%)

] downgrade by S&P yesterday, only four companies besides Berkshire still have triple-A ratings from both S&P and Moody's: American Data Processing [ADP 35.04

-0.08 (-0.23%)