Buffett Says U.S. Trade Imbalance Lures Sovereign Wealth Funds
By Josh P. Hamilton
March 1 (Bloomberg) -- Billionaire investor Warren Buffett stepped into a debate about the emergence of sovereign wealth funds, saying the government-controlled firms are fueled by U.S. spending overseas, not political motives.
``This is our doing, not some nefarious plot by foreign governments,'' Buffett, the chairman of Berkshire Hathaway Inc., said yesterday in his annual letter to shareholders. ``Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here.''
Countries including China, Russia and Dubai have deployed record central bank reserves to set up funds wielding as much as $2.9 trillion. Firms from Singapore, Korea, Kuwait and Abu Dhabi bought stakes during the past four months in Citigroup Inc., the biggest U.S. bank by assets, and Merrill Lynch & Co., the world's biggest brokerage. Officials from the U.S. Treasury Department and the Securities and Exchange Commission have said there's a risk government-controlled funds may invest to achieve political, rather than commercial, ends.
``He's right that we're the ones that created the problem in the first place,'' said Mohnish Pabrai, who manages $600 million at Pabrai Investment Funds in Irvine, California. ``The U.S. is better off if foreign governments buy Treasuries, because we have a printing press for them, but if I were running China's money, I'd be buying U.S. companies, oil reserves, hard assets too.''
Pabrai and a friend paid $650,100 last year in an annual charity auction to have lunch with Buffett.
Warren's World
``Both the growth in size and number of these funds is such now that vigilance is required,'' Deputy U.S. Treasury Secretary Robert Kimmitt said in a Feb. 27 interview on Bloomberg Television. SEC Chairman Christopher Cox said in December that the state-run investment firms don't adequately disclose why they're buying stocks and other assets.
Buffett, 77, built Berkshire Hathaway over four decades from a failing textile manufacturer into a $215 billion investment and holding company. The stock rose 29 percent in 2007 and about 4,700 percent in the 20 years through Dec. 31, six times more than the Standard & Poor's 500 Index, dividends included. The feat made Buffett an icon to shareholders and investors.
In his annual letters, Buffett offers his view of market conditions, potential investments, corporate governance and economic policy, as well as his plans for Omaha, Nebraska-based Berkshire.
Fear and Greed
Along with insurance operations and a stock portfolio valued at $75 billion at yearend, Berkshire owns businesses ranging from candy making and residential real estate brokerage to utilities and corporate jet leasing, giving Buffett an insider's perspective on many facets of the economy and finance.
Buffett released the shareholder letter with Berkshire's 2007 full-year and fourth-quarter financial results. Net income in the quarter fell 18 percent to $2.95 billion, or $1,904 a share as profit from insurance units fell. The company's shares dropped $250, or 0.2 percent, to $140,000 yesterday in New York Stock Exchange composite trading.
Berkshire said it owned a 1.3 percent stake in Sanofi- Aventis SA, France's largest pharmaceuticals company, at yearend. The 17.2 million shares cost $1.47 billion and had appreciated by $109 million, Berkshire said.
In last year's letter, Buffett said his method was to ``be fearful when others are greedy, and be greedy when others are fearful.''
Party's Over
He said Berkshire followed that maxim by rushing to insure coastal properties after 2005's Hurricane Katrina caused prices to double and triple. Berkshire, which gets about half its profit from insurance, sold less of the coverage in 2007 as prices dropped.
``The party is over,'' Buffett said in yesterday's letter. ``It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down.''
Fourth-quarter underwriting profit from Berkshire's insurance business dropped 46 percent to $465 million, led by declines at auto insurer Geico Corp. and reinsurance units. Reinsurance is coverage for insurance companies.
The worst housing recession in a quarter century hurt Berkshire's building-related companies. Profit fell 17 percent to $109 million at Shaw Industries, the world's largest carpet maker. Earnings also dropped at Acme Brick and Johns Manville.
Buffett applied the strategy of greed in the face of fear when defaults on mortgage-related securities surged during the past year.
MBIA, Ambac
The losses threatened the credit ratings of bond insurers including MBIA Inc. and Ambac Financial Group Inc. Berkshire formed a company in December to compete with the firms, charging more to guarantee payment on municipal debt while avoiding the mortgage-related securities that jeopardized their credit ratings.
As defaults on mortgage-related securities climbed, Buffett offered to assume $800 billion of municipal bond obligations from MBIA, Ambac and FGIC Corp. in exchange for more than $9 billion in premiums. None of the companies have said they'll accept the terms.
``When you have an adversary who's embattled, in a corner and has no other options for survival, they'll do anything,'' said Charles Hamilton, an analyst at FTN Midwest Securities Corp. in Nashville, Tennessee. ``He was just seeing if they were desperate enough to have to take the deal.'' Hamilton rates the stock ``neutral.''
Four Contenders
Buffett revealed in last year's letter his decision to split the roles of chief executive officer and chief investment officer when he steps down. He previously said the CEO spot will go to one of three Berkshire managers, whom he hasn't identified. He has said his health is good and he has no plans to retire.
Four ``young to middle-aged'' candidates have been selected for the investing post, Buffett wrote in yesterday's letter.
``All manage substantial sums currently,'' he said. ``The board knows the strengths of the four and would expect to hire one or more if the need arises.'' They range from ``well-to-do to rich,'' and ``all wish to work for Berkshire for reasons that go beyond compensation,'' Buffett said.
To contact the reporter on this story: Josh P. Hamilton in New York at jphamilton@bloomberg.net .
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