Buffett's Berkshire Loses Moody's Top Credit Rating (Update1)

By Erik Holm
Bloomberg News
April 8, 2009

April 8 (Bloomberg) -- Billionaire Warren Buffett's Berkshire Hathaway Inc. had its top-level Aaa credit rating cut by Moody's Investors Service on the falling value of stock markets and the impact of the recession on profit.

The rating was cut two levels to Aa2 on "the severe decline in equity markets over the past year as well as the protracted economic recession," Bruce Ballentine, a Moody's analyst, said in a statement today.

The downgrade trumps a one-level cut by rival firm Fitch Ratings last month, and follows an announcement by Standard & Poor's that it was reviewing Berkshire's credit. Last year was the Omaha, Nebraska-based company's worst since Buffett took over in 1965, as the company had losses on derivative bets tied to stock markets and corporate bonds.

"There's a bit of a 'covering your backside' mentality with the ratings firms," said Justin Fuller, a partner at Midway Capital Research & Management who runs the buffettologist.com Web site. "The new thinking seems to be that you can't have any companies out there with a triple-A rating anymore, but most people who deal with this company don't have too many questions about their financial strength."

Moody's, whose parent company is 20 percent-owned by Berkshire, said the global recession caused a decline in profit and cash flow at the firm's units tied to housing, construction, retailing and consumer finance. Berkshire has businesses that make carpet, paint and insulation, units that sell mobile homes and prefabricated houses, and others that sell jewelry, furniture and custom frames.

Geico, General Re

Moody's also cut its financial strength or credit ratings on Berkshire insurance units including Geico Corp., General Re Corp. and National Indemnity Co. Insurers depend on high credit ratings to keep down the cost of raising capital and reassure policy holders that their claims will be covered.

Last year, Moody's gave a Berkshire bond-insurance business its top rating as competitors in that industry faltered. A favorable Moody's rating for Berkshire or a lower rating for a rival could give Buffett's firm an advantage. Connecticut Attorney General Richard Blumenthal called arrangement a "clear and direct conflict of interest."

"It would be wrong if we tried to pressure Moody's but that's never happened," Buffett said in an interview in May 2008. "I have no contact with the management of Moody's. I can't recall ever calling them in my life."

'No Leverage'

Tom Russo, a partner at Gardner Russo & Gardner, said in an interview today that Buffett "clearly had no leverage" over the Berkshire credit rating from Moody's. Russo's firm manages holdings including Berkshire shares.

The increase in Berkshire's liabilities on 251 derivatives, coupled with a drop in equity holdings, last year contributed to the steepest decline in the book value per share in Buffett's 44-year tenure.

Book value, a measure of assets minus liabilities, is the measure cited by Buffett in the first sentence of his annual letter to shareholders. By that metric, he still outperformed the return of the benchmark Standard & Poor's 500 Index in 2008.

-- With reporting by Bryan Keogh in New York. Editors: Dan Reichl, Peter Blumberg

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