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S&P Revises Berkshire Hathaway's Outlook to Negative

Posted on 25 Mar 2009

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Warren Buffett's Berkshire Hathaway Inc. may lose its AAA credit rating from Standard & Poor's because values have fallen in its equity portfolio and capital has shrunk at the insurance operations.

The rating could be cut in the next 12 months, S&P said in a statement yesterday about the Omaha, Nebraska-based insurance and investing firm. An S&P downgrade would be the second for Berkshire after Fitch Ratings stripped its AAA rating on March 12. S&P said any downgrade probably would be a one-level cut.

“Pretty much any company in the world has to have a negative outlook at this point,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington who has studied Berkshire. “It’s a reflection of the economy more than it is something that’s happening at Berkshire Hathaway.”

Berkshire stock fell 32 percent in 12 months on concern that the equity portfolio may decline and amid speculation that Buffett's bets on derivatives -- instruments he has called “financial weapons of mass destruction” -- will crush profit. S&P noted that the derivatives still have at least 10 years to run before Berkshire would face payments.

S&P may cut its rating if “continued substantial deterioration in the equity markets hurts capital further, or if it appears that the insurance group will not be able to restore capital back to the ‘AAA’ level," according to the statement.