Berkshire’s Credit Risk Soars on $37 Billion Bet (Update2)
By Daniel at 19 November, 2008, 11:20 am
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By Erik Holm and Shannon D. Harrington
Nov. 18 (Bloomberg) — The cost of protecting against default by Warren Buffett’s AAA rated Berkshire Hathaway Inc. has almost tripled in two months, a sign of just how skittish investors have become amid the global financial crisis.
The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, is more than four times that of rival insurer Travelers Cos. At those levels, the swaps are typical of companies rated Baa3 by Moody’s Investors Service, one level above junk. The price may have risen on concern that the billionaire’s firm could lose a $37 billion bet on world stock market values more than a decade from now.
“That’s just so stupid,” said Mohnish Pabrai, head of Pabrai Investment Funds and a Berkshire shareholder. The swap buyers are projecting “present circumstances into infinity” and concluding Buffett’s bet will cost the company $40 billion, Pabrai said. “It will never happen,” he said.
For the swaps to pay off, Berkshire would have to exhaust its $33.4 billion cash hoard, and Buffett’s decades-long record as the world’s most successful investor would have to come to a cataclysmic end. President-elect Barack Obama seeks him out for advice and the world’s biggest firms, including Goldman Sachs Group Inc. and General Electric Co., turned to Berkshire for capital and the prestige that comes with Buffett’s backing.
Buyers of default protection are being charged 1.45 percentage points more for Berkshire swaps than for insurance against Allstate Corp. Allstate last month had its credit grade cut by Fitch Ratings after hurricane claims and declines in its investments caused a $923 million third-quarter loss. Berkshire has remained profitable amid the worst financial crisis since the Great Depression, and wouldn’t pay out on its stock market bets, if it lost them, until at least 2019.
Unlikely Target
“If you were going to start picking companies that are going to default, you probably wouldn’t put Berkshire at the top of the list, so it’s totally unexpected to see them there,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Greenwich, Connecticut-based hedge fund Ram Partners LP. Of the swaps, he said: “I wouldn’t buy them, and yet it’s there.”
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