We Created Our Own Mess, Says Buffett
harryh...@yahoo.com
By Josh P. Hamilton
March 1 (Bloomberg) -- Billionaire investor Warren Buffett stepped
into a debate about the emergence of sovereign wealth funds, saying
the government-controlled firms are fueled by U.S. spending overseas,
not political motives.
``This is our doing, not some nefarious plot by foreign governments,''
Buffett, the chairman of Berkshire Hathaway Inc., said yesterday in
his annual letter to shareholders. ``Our trade equation guarantees
massive foreign investment in the U.S. When we force-feed $2 billion
daily to the rest of the world, they must invest in something here.''
Countries including China, Russia and Dubai have deployed record
central bank reserves to set up funds wielding as much as $2.9
trillion. Firms from Singapore, Korea, Kuwait and Abu Dhabi bought
stakes during the past four months in Citigroup Inc., the biggest U.S.
bank by assets, and Merrill Lynch & Co., the world's biggest
brokerage. Officials from the U.S. Treasury Department and the
Securities and Exchange Commission have said there's a risk government-
controlled funds may invest to achieve political, rather than
commercial, ends.
``He's right that we're the ones that created the problem in the first
place,'' said Mohnish Pabrai, who manages $600 million at Pabrai
Investment Funds in Irvine, California. ``The U.S. is better off if
foreign governments buy Treasuries, because we have a printing press
for them, but if I were running China's money, I'd be buying U.S.
companies, oil reserves, hard assets too.''
Pabrai and a friend paid $650,100 last year in an annual charity
auction to have lunch with Buffett.
Warren's World
``Both the growth in size and number of these funds is such now that
vigilance is required,'' Deputy U.S. Treasury Secretary Robert Kimmitt
said in a Feb. 27 interview on Bloomberg Television. SEC Chairman
Christopher Cox said in December that the state-run investment firms
don't adequately disclose why they're buying stocks and other assets.
Buffett, 77, built Berkshire Hathaway over four decades from a failing
textile manufacturer into a $215 billion investment and holding
company. The stock rose 29 percent in 2007 and about 4,700 percent in
the 20 years through Dec. 31, six times more than the Standard &
Poor's 500 Index, dividends included. The feat made Buffett an icon to
shareholders and investors.
In his annual letters, Buffett offers his view of market conditions,
potential investments, corporate governance and economic policy, as
well as his plans for Omaha, Nebraska-based Berkshire.
Fear and Greed
Along with insurance operations and a stock portfolio valued at $75
billion at yearend, Berkshire owns businesses ranging from candy
making and residential real estate brokerage to utilities and
corporate jet leasing, giving Buffett an insider's perspective on many
facets of the economy and finance.
Buffett released the shareholder letter with Berkshire's 2007 full-
year and fourth-quarter financial results. Net income in the quarter
fell 18 percent to $2.95 billion, or $1,904 a share as profit from
insurance units fell. The company's shares dropped $250, or 0.2
percent, to $140,000 yesterday in New York Stock Exchange composite
trading.
Berkshire said it owned a 1.3 percent stake in Sanofi- Aventis SA,
France's largest pharmaceuticals company, at yearend. The 17.2 million
shares cost $1.47 billion and had appreciated by $109 million,
Berkshire said.
In last year's letter, Buffett said his method was to ``be fearful
when others are greedy, and be greedy when others are fearful.''
Party's Over
He said Berkshire followed that maxim by rushing to insure coastal
properties after 2005's Hurricane Katrina caused prices to double and
triple. Berkshire, which gets about half its profit from insurance,
sold less of the coverage in 2007 as prices dropped.
``The party is over,'' Buffett said in yesterday's letter. ``It is a
certainty that insurance industry profit margins, including ours, will
fall significantly in 2008. Prices are down.''
Fourth-quarter underwriting profit from Berkshire's insurance business
dropped 46 percent to $465 million, led by declines at auto insurer
Geico Corp. and reinsurance units. Reinsurance is coverage for
insurance companies.
The worst housing recession in a quarter century hurt Berkshire's
building-related companies. Profit fell 17 percent to $109 million at
Shaw Industries, the world's largest carpet maker. Earnings also
dropped at Acme Brick and Johns Manville.
Buffett applied the strategy of greed in the face of fear when
defaults on mortgage-related securities surged during the past year.
MBIA, Ambac
The losses threatened the credit ratings of bond insurers including
MBIA Inc. and Ambac Financial Group Inc. Berkshire formed a company in
December to compete with the firms, charging more to guarantee payment
on municipal debt while avoiding the mortgage-related securities that
jeopardized their credit ratings.
As defaults on mortgage-related securities climbed, Buffett offered to
assume $800 billion of municipal bond obligations from MBIA, Ambac and
FGIC Corp. in exchange for more than $9 billion in premiums. None of
the companies have said they'll accept the terms.
``When you have an adversary who's embattled, in a corner and has no
other options for survival, they'll do anything,'' said Charles
Hamilton, an analyst at FTN Midwest Securities Corp. in Nashville,
Tennessee. ``He was just seeing if they were desperate enough to have
to take the deal.'' Hamilton rates the stock ``neutral.''
Four Contenders
Buffett revealed in last year's letter his decision to split the roles
of chief executive officer and chief investment officer when he steps
down. He previously said the CEO spot will go to one of three
Berkshire managers, whom he hasn't identified. He has said his health
is good and he has no plans to retire.
Four ``young to middle-aged'' candidates have been selected for the
investing post, Buffett wrote in yesterday's letter.
``All manage substantial sums currently,'' he said. ``The board knows
the strengths of the four and would expect to hire one or more if the
need arises.'' They range from ``well-to-do to rich,'' and ``all wish
to work for Berkshire for reasons that go beyond compensation,''
Buffett said.
To contact the reporter on this story: Josh P. Hamilton in New York at
jpham...@bloomberg.net .
Last Updated: March 1, 2008 00:33 EST
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Mani Deli
Every time we get a positive statistic, we have to cut it in half to
arrive at the truth, and every time we get a negative statistic, we
have to double it to get the real picture. So you know that when the
New York-based Conference Board's Consumer Confidence Index falls to
75 in February from 87.3 in January, its lowest level since February
2003, and the Bureau of Lying Statistics reports that the PPI,
wholesale inflation, rose by 1 percent in January -- more than the
"experts" estimated -- on rising oil and food costs, you can just
imagine what the real truth might be. Even the official statistics
are nothing less than terrifying. Then we hear from Standard &
Poor's, which reports that U.S. home prices fell 8.9 percent in the
last three months of 2007 from a year earlier, its sharpest drop ever,
as two trillion in home equity is vaporized in one quarter. As this
news transpires, we of course get back-to-back rallies in the stock
markets as the Dow adds over 300 points. We guess that the lies about
the bailout of the monoline insurers who will have to be nationalized
later on take precedence over the obvious truth that real estate is
plummeting while inflation is exploding. Why worry about annualized
inflation of 12% that will either cause consumer prices to skyrocket
or corporate profits to evaporate? Not a problem, let's buy equities!
Traders who get burned in the stock markets at this point deserve
every bit of grief they have coming.
