Recession hits Berkshire --- Buffett's plain talk on Moody's ratings and modern finance
Berkshire Hathaway Inc.'s first-quarter operating profit fell from a year earlier as many of the company's businesses suffered from the recession, Chairman Warren Buffett said Saturday.
Berkshire's first-quarter operating earnings fell to $1.7 billion from $1.9 billion a year earlier, Mr. Buffett said at the company's annual shareholders meeting. Operating earnings exclude investment and derivative gains and losses. He didn't mention net income.
Berkshire is to report full quarterly results on Friday.
Book value per share, a common metric Berkshire uses to track performance, declined 6%, mostly because of a decline in the value of Berkshire's investments.
The company ended the quarter with $22.7 billion in cash and cash equivalents, but a $3 billion cash disbursement for its 2008 investment in Dow Chemical Co., made a day after the first quarter closed, left the company with less than $20 billion in cash, Mr. Buffett said.
Berkshire owns 67 noninsurance operating companies, and many of these businesses are in economically sensitive industries such as retailing, manufacturing and real estate.
Mr. Buffett's remarks came during a long session with shareholders in which he and longtime partner Charles Munger answered shareholder questions. Mr. Buffett fielded one of the more anticipated questions early on: What is his opinion of Moody's Investors Service, which rated billions of dollars of mortgage securities triple-A that subsequently lost value, and is a large holding of Berkshire?
Mr. Buffett's answer was characteristically simple. Everyone made the same mistake: thinking that housing prices would continue to increase forever. "Basically, four or five years ago, virtually everybody in the country had this model in their heads, formal or otherwise, that house prices could not fall significantly," he said, later adding that "it was stupidity and the fact that everyone else was doing it."
But he also said that if Moody's had started to take a negative view on residential real estate, the ratings firm would have been hauled before Congress to testify about why it was hurting the U.S. economy with its bearish ratings.
Mr. Buffett said most of Berkshire's businesses outside of insurance and the regulated utility industry suffered in the first quarter. "We're lucky to be in the insurance and utilities businesses," Mr. Buffett said.
Reported first-quarter earnings from Berkshire's utilities business declined "somewhat" from a year earlier, he added.
The decline was mainly from marking the value of Berkshire's holdings of Baltimore utility Constellation Energy Group Inc. shares to market and a final payment the company made to buyout options related to its acquisition of MidAmerican Energy Holdings a decade ago, Mr. Buffett reported.
"All of the other businesses are basically down" during the first quarter, Mr. Buffett said. "We will continue to do quite well in our insurance and utility operations. We won't do well in other operations."
Mr. Buffett also warned that one type of credit derivative written by Berkshire has deteriorated in recent months.
These derivatives require Berkshire to pay when losses occur at companies that are included in several high-yield, or junk, indexes. The standard contract runs for five years and is tied to 100 companies, although the average life of Berkshire's contracts are now less than three years.
Berkshire made $97 million in payments in these credit derivatives in 2008. Mr. Buffett warned in his latest shareholder letter in late February that losses have accelerated sharply amid a rash of bankruptcies.
Those derivatives have "turned worse since I wrote the annual report," Mr. Buffett said Saturday.
Messrs. Buffett and Munger also made clear their complete disdain for the use of higher-order mathematics in finance.
"There is so much that's false and nutty in modern investing practice and modern investment banking," Mr. Buffett said.
Regarding complex calculations used to value purchases, he said: "If you need to use a computer or a calculator to make the calculation, you shouldn't buy it."
By Alistair Barr and Scott Patterson
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