(Corrects Buffett’s previous wealth figure to $62 billion from $68 billion in paragraph 3)
* Large market exposure, derivatives, cited as reason for cut
* Buffett’s tight grip on Berkshire also cited as reason
* First major ratings agency to cut Berkshire’s ‘AAA’ rating
* Cut comes after GE’s top rating was cut by S&P (Recasts, adds background, byline, changes dateline)
By Muralikumar Anantharaman
SINGAPORE, March 13 (Reuters) - Warren Buffett’s Berkshire Hathaway was stripped of its ‘AAA’ credit rating, barely hours after General Electric Co lost its top-tier rating, as the global financial crisis pummels America’s corporate titans.
Ratings agency Fitch cut Buffett’s insurance and investment company by one notch to “AA-plus”, citing concerns about Berkshire’s (BRKa.N) equity and derivatives investments, as well as Buffett’s tight grip on the company.
The downgrade is another setback to Buffett, 78, coming a day after the billionaire lost his position as the world’s richest man to Microsoft Inc (MSFT.O) founder Bill Gates, according to Forbes’ annual list. Buffett’s net worth plunged to $37 billion from $62 billion last year, the list said.
“Fitch views the company’s potential earnings and capital volatility derived from its large, unhedged market exposures as inconsistent with the stability required at the ‘AAA’ level,” the ratings agency said in its statement on Berkshire (BRKb.N).
Those exposures include Berkshire’s equity investments, as well as its holdings of derivative contracts tied to equity and credit markets, Fitch said.
Fitch is the first major credit agency to cut Berkshire’s “AAA” rating. The move comes after General Electric Co (GE.N) was stripped of its ‘AAA’ rating by Standard & Poor’s on Thursday. [ID:nN12349101]
Berkshire invested $3 billion last year in GE, buying preferred shares with the option of acquiring another $3 billion in common stock at $22.25 per share.
Known as the Sage of Omaha for his long history of successful investments, Buffett was caught out by the global financial crisis.
Berkshire’s net worth tumbled $10.9 billion in the final quarter of 2008 and profits fell 96 percent, due mostly to losses on derivatives contracts tied to the stock market. Berkshire had $4.65 billion of net investment and derivative losses in 2008.
Buffett has defended his use of the derivatives, which helped drive Berkshire’s annual profit to a six-year low.
Investors should distinguish Berkshire’s derivatives from others that dramatically increased financial leverage, made banks “almost impossible for investors to understand,” and threatened the collapse of companies such as investment bank Bear Stearns Cos and mortgage financiers Fannie Mae and Freddie Mac, Buffett said in his annual letter to Berkshire shareholders.
Fitch also noted Berkshire remains too closely linked to Buffett to merit a “AAA” rating.
“Fitch views this risk as unrelated to Mr. Buffet’s age, but rather Fitch’s belief that BRK’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett,” it said, referring to Berkshire.
Berkshire generates about half its results from insurance, including auto insurer Geico Corp, but operates more than 70 businesses that offer such things as carpeting, ice cream, paint, real estate services and underwear.
Fitch lowered Berkshire’s senior unsecured ratings by two notches to “AA”. However, it affirmed its “AAA” insurer financial strength ratings on the company’s insurance and reinsurance subsidiaries. The outlook for all of Berkshire’s entities is negative.
Berkshire Class A shares closed on Thursday at $87,500 on the New York Stock Exchange. They have fallen 34 percent over the past year, while the Standard & Poor’s 500 .SPX has dropped 43 percent. (To read the full text of the ratings announcement, click on [ID:nWNA8947] (Additional reporting by Rafael Nam in HONG KONG; Editing by Lincoln Feast)