Buffett's Berkshire Hathaway Takes Hit

Investor Warren Buffett's holding company, Berkshire Hathaway, has been downgraded by the credit-rating agency Moody's. Buffett happens to be Moody's largest shareholder.

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Even the Oracle of Omaha is feeling the economic pain these days. Moody's said yesterday it was downgrading the credit rating of Warren Buffett's big holding company, Berkshire Hathaway. It's one of the most successful conglomerates ever, and Berkshire stock has made quite a few investors rich. But Moody's says the recession is hurting many companies in Berkshire's portfolio.

NPR's Jim Zarroli reports.

JIM ZARROLI: Over the years, Warren Buffett has dipped his toes into all kinds of businesses, from newspapers to furniture retailers to airlines. So, in a recession as broad and deep as this one, it's inevitable that some parts of his company have been burned, says Justin Fuller of Midway Capital Research.

Mr. JUSTIN FULLER (Midway Capital Research): They have businesses that range from carpet to airplane leases to manufactured housing. And certainly, across the board, they're seeing in many, many of their businesses, you know, lower revenue, decreased demand for their products. And so they're certainly not immune.

ZARROLI: Last year Berkshire Hathaway's profits fell 60 percent. This year, Buffett himself has acknowledged that the economy is in about as bad a shape as it's been in many years.

Mr. WARREN BUFFETT (Berkshire Hathaway): It's fallen off a cliff. And not only has the economy slowed down a lot, people have really changed their behavior like nothing I've ever seen.

ZARROLI: In an interview on CNBC last month, Buffett said the recession has helped some of Berkshire's businesses. They include GEICO, which has marketed itself as an inexpensive insurance company.

Mr. BUFFETT: On the reverse side, our jewelry stores just get killed in a period like this. And the high-end gets hurt the most, next down gets hurt the second most and the lowest people get hurt the least.

ZARROLI: As Berkshire's revenues have declined, the credit rating agencies have taken notice. Fitch has already downgraded the company, which makes it more expensive for Berkshire to borrow money in the corporate bond market. Standard & Poor's has it on a negative credit watch, and now Moody's has lowered its rating. It cited the impact of the recession on Berkshire's 80 plus operating businesses.

Ironically, Berkshire Hathaway owns 20 percent of Moody's, which might seem to be a conflict of interest, but Moody's insists it's able to be objective. And in this case, there are actually people who think Moody's might be judging Berkshire a little too harshly.

Gerald Martin is an assistant professor of finance at American University. He says, yes, Berkshire is affected by the recession like everybody else, but it is a diversified company with little debt.

Professor GERALD MARTIN (Finance, American University): Berkshire is sitting on quite a large cash reserve that enables them to weather the storm more than other businesses.

ZARROLI: Justin Fuller, who has a Web site devoted to Buffett, agrees. He says the rating agencies were criticized from missing the downturn in subprime mortgages and derivatives. And now they're rushing to downgrade whenever they see signs of trouble.

Mr. FULLER: They've almost broken their business model, you know, over the last few years. And they just, you know, are being really, really conservative. And, you know, they're going to - they kind of hit everybody. And now Berkshire is kind of the last one. They're pulling off AAA.

ZARROLI: Fuller notes that Buffett has been using the recession as an opportunity to bargain hunt. He's been able to acquire inexpensive stakes in blue chip companies like Goldman Sachs and General Electric. Once the recession ends, those companies are likely to rebound, which means Buffett could find himself even richer than he was before.

Jim Zarroli, NPR News, New York.

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