Buffett, Seeing Crisis Abate, Makes A Move


Following large profit increase—not the least of which was seen in its insurance units—Berkshire has made an “all in” bet on the American economy with its purchase of Burlington Northern Santa Fe railroad.


(November 12, 2009) – Warren Buffett’s Berkshire Hathaway Inc., the large conglomerate that includes multiple insurance funds, is betting that the credit crisis has ended.


According to a November 6 filing by Berkshire, “the credit crisis has abated,” and, as a result, the company’s third-quarter profits tripled. The announcement comes concurrent with Berkishire’s largest takeover ever, a cash and debt purchase of the railroad, Burlington Northern Santa Fe Corporation.


Besides using freer credit markets to borrow funds for the Burlington purchase, Berkshire has benefited from the lower rates available to governments and corporate borrowers. Berkshire previously has offered insurance against defaults through credit default swaps (CDSs), but the loosening of the credit markets make firm bankruptcies—and, thus, potentially large payouts on the CDSs—less likely. In the first nine months of 2009, Berkshire paid out nearly $2 billion after CDS bets went against the storied company.


The company’s insurance units—often a source of large profits for Buffett, as well as the source for many of his investments—more than quadrupled in the third quarter to $363 million. However, going forward, the company plans to underwrite less insurance in order to protect capital following the Burlington purchase.


 “Management will continue to constrain the volume of business written in light of the pending Burlington Northern Santa Fe acquisition,” Berkshire said in the filing. “Restricted access to credit markets at affordable rates in the future could have a significant negative impact on operations.”

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>