Buffett’s Berkshire loses Aaa credit grade from Moody’s
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Credit-rating firm Moody’s Investors Service dinged its biggest shareholder today: Moody’s took away its coveted Aaa rating from Warren E. Buffett’s Berkshire Hathaway Inc. and Berkshire’s flagship reinsurance unit, National Indemnity.
Berkshire, which last month reported that its earnings dived in 2008, was cut two notches, to Aa2. National Indemnity was dropped one notch, to Aa1. Ratings on other Berkshire insurance units, including Geico and General Re, also were reduced.
The moves weren’t unexpected, after Moody’s rival Fitch Ratings cut its AAA rating on Berkshire last month and Standard & Poor’s warned that its AAA grade for the company was in jeopardy.
But Moody’s is in a somewhat awkward position, because Berkshire Hathaway owns 20% of its parent, Moody’s Corp.
Buffett in the past has been asked whether there was potential for conflict of interest because of his stake in Moody’s. High credit ratings are particularly important to insurance companies, which comprise one of Berkshire’s biggest business lines.
‘It would be wrong if we tried to pressure Moody’s, but that’s never happened,’ Buffett said in an interview in May 2008, according to Bloomberg News. ‘I have no contact with the management of Moody’s. I can’t recall ever calling them in my life.’
Buffett’s investment in Moody’s has been controversial because of the role the credit raters played in stoking the financial crisis, after they affixed top ratings to subprime mortgage bonds that later crashed in value.
Berkshire, like most other companies, has been slammed by the recession triggered by the credit crunch. The company’s earnings plummeted last year to $5 billion from $13.2 billion in 2007.
Moody’s said its rating cut reflected ‘the impact on Berkshire’s key businesses of the severe decline in equity markets over the past year as well as the protracted economic recession.’
For National Indemnity, ‘Falling stock prices have reduced its investment portfolio value and, in turn, its capital cushion,’ Moody’s said. Still, it described National Indemnity’s capital base as ‘robust.’
Moody’s announced the ratings cut after markets closed. Berkshire’s Class B shares fell $5 to $2,915 in regular trading. The stock is down 9.3% this year.
Just a handful of AAA-rated U.S. companies remain, including Exxon Mobil Corp. and Microsoft Corp. General Electric Co. lost its AAA rating last month.
-- Tom Petruno