| Submit your comments on this article |
| Home Front Economy |
| Berkshire Profit Plunges 96% on Stock Market Bets |
| 2009-02-28 |
| (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. posted a fifth-straight profit drop, the longest streak of quarterly declines in at least 17 years, on losses from derivative bets tied to stock markets. Fourth-quarter net income fell 96 percent to $117 million, or $76 a share, from $2.95 billion, or $1,904 a share, in the same period a year earlier, the Omaha, Nebraska-based firm said in its annual report. Berkshire, where Buffett serves as chairman, chief executive officer and head of investing, suffered as the benchmark Standard & Poor's 500 Index turned in its worst year since 1937. Liabilities widened on derivatives linked to world equity markets, though the contracts don't require Berkshire to pay out until at least 2019, if at all. "This is an abnormal time," said Tom Russo, a partner at Gardner Russo & Gardner, in an interview before the earnings were released. The derivatives, Russo said, "are pegged to a market that's declining, so you're going to see some losses on those." Berkshire shares have fallen 44 percent in the past year as the value of the firm's top stock holdings dropped and losses increased on the derivatives. Nineteen of the top 20 stocks in Berkshire's U.S. portfolio, valued at $51.9 billion as of Dec. 31, declined last year. Coca-Cola Co., Berkshire's top holding, dropped 26 percent. American Express Co. plunged 64 percent. Oil producer ConocoPhillips fell 41 percent. Derivative Bets Book value, a measure of assets minus liabilities, fell 9.1 percent in the three months ended Dec. 31 to $109.3 billion on the declines in the equity and fixed-income portfolios and the derivatives writedown. Berkshire's liability on equity derivatives grew about 49 percent in the quarter to $10 billion. "Derivatives are dangerous," Buffett said in his annual letter to shareholders that accompanies the yearend results. "Our expectation, though it is far from a sure thing, is that we will do better than break even and that the substantial investment income we earn on the funds will be frosting on the cake." |
| Posted by:Fred |
| #10 Notional value is $35.5b. If the indexes fall in half as of 2019, Berkshire is on the hook for $18b. Berkshire’s derivative contracts were sold to undisclosed buyers for $4.85 billion. Under the agreements, Berkshire must pay out if, on specific dates starting in 2019, four market indexes are below the point where they were when he made the agreements. In the meantime, Berkshire can invest the cash. Buffett has been buying preferred shares and debt of companies including General Electric Co. and Harley-Davidson Inc. to lock in yields as high as 15 percent. The indexes, which include the S&P and three others Buffett hasn’t identified, would all have to fall to zero for Berkshire to be liable for the entire $35.5 billion that’s at risk. The liabilities on the derivatives -- those expected to have affected book value in the fourth quarter -- are accounting losses that reflect the falling value of the stock indexes, not cash that Berkshire has paid out. “There’s the potential for significant losses on that position,” said Bill Bergman, an analyst with Morningstar Inc. who gives Berkshire five stars, his firm’s highest rating. “But this is what they do. They’re in the risk absorption business, and in the long term it’s hard to see how there are going to be significant losses in 2019 or later.” |
| Posted by: Zhang Fei 2009-02-28 22:18 |
| #9 I believe Buffett wrote plain vanilla put options on various world equity indexes. The problem for him is if we end up with a Japan-like scenario (where equities fell 80% over 19 years). Depending on the size of these positions, Berkshire could lose its shirt and then some. This year's report will include the fuller description that Buffett promised U.S. regulators he would provide about how Berkshire values its derivatives contracts. Many involve put options that are tied to where the Standard & Poor's 500 and three other stock indexes are trading starting in 2019. |
| Posted by: Zhang Fei 2009-02-28 21:38 |
| #8 From Buffet's Letter to Shareholders “there’s another less pleasant reality: During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt… Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.” |
| Posted by: Skunky Glins 5*** 2009-02-28 19:09 |
| #7 Further proof that Buffet is better at making money by owning insurance companies (the core of his company - Now you know why his politics suck) than he is by trading stocks. |
| Posted by: Mike N. 2009-02-28 17:40 |
| #6 retaining their original capital Not sure what you meant by that but BH is a holding company and they have lost substantial capital as shares they own have fallen. BTW, the article alludes to very long options BH sold and which represent a huge future (potential) liability. Only time will tell, but they will either be seen a slamdunk surefire bet or incredibly reckless. |
| Posted by: phil_b 2009-02-28 17:18 |
| #5 Fourth-quarter net income fell 96 percent to $117 million, or $76 a share, from $2.95 billion, or $1,904 a share, in the same period a year earlier In other words, they still made a profit and are retaining their original capital which is something a number of other venerable institutions can't claim. |
| Posted by: Procopius2k 2009-02-28 16:49 |
| #4 Buffett can make mistakes. And his politics suck. |
| Posted by: OldSpook 2009-02-28 16:30 |
| #3 Lucky for him he's such a young man with many years ahead of him to recover. |
| Posted by: Besoeker 2009-02-28 14:22 |
| #2 Warren must have crossed the red & black wires when he assembled this one. *Ouch*, that's gonna leave a mark. Well done! |
| Posted by: Ricky bin Ricardo (Abu Babaloo) 2009-02-28 13:47 |
| #1 From Buffett's 2002 report "I view derivatives as time bombs, both for the parties that deal in them and the economic system." Warren must have crossed the red & black wires when he assembled this one. |
| Posted by: Anguper Hupomosing9418 2009-02-28 13:44 |