Berkshire Hathaway Reports 96 Percent Drop In 4Q Profit

OMAHA, Neb. — Warren Buffett's Berkshire Hathaway Inc. reported a 96 percent drop in its fourth quarter profit because of largely unrealized losses of $3.25 billion on investments and derivative contracts.

The Omaha-based company released its results Saturday morning along with Buffett's annual letter to shareholders.

Berkshire reported net income of $117 million, or $76 per Class A share, in the quarter ending Dec. 31. That's down from net income of $2.95 billion, or $1,904 per share, in the same period a year ago.

The two analysts surveyed by Thomson Reuters expected Berkshire to report fourth quarter net income of $1,486.50 per share on average. The estimates typically exclude one-time items.

Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.

Buffett said the retail businesses, such as the furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year, and they will likely continue to perform below their potential in 2009.

But he said Berkshire's utility and insurance businesses, which includes the insurer Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.

Most of the investment losses that affected Berkshire's results were unrealized losses on long-term derivative contracts, some of which are tied to the value of stock market indexes.

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Buffett has predicted the company's derivative contracts will ultimately be profitable partly because Berkshire has received $8.1 billion in premiums up front for them. That allows Berkshire to invest the premium money until the contracts start maturing a decade from now.

Buffett said he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor.

"If we lose money on our derivatives, it will be my fault," Buffett said.

Berkshire has to estimate the value of its derivatives every quarter. Buffett says he supports that mark-to-market accounting, but the formula used to estimate that value can produce absurd results for long-term contracts.

For the full year, Berkshire's net income fell to $4.99 billion, or $3,224 per share, down from last year's $13.21 billion, or $8,548 per share, in 2007.

Andy Kilpatrick, the stockbroker and author who wrote "Of Permanent Value: The Story of Warren Buffett," said Berkshire's results were still impressive given how they compare to the rest of the world.

"I would argue that he's more competitive than ever in the world," Kilpatrick said.

Buffett estimates Berkshire's book value _ assets minus liabilities _ declined 9.6 percent to $70,530 per share in 2008. Berkshire's book value declined only one other time under Buffett, and that was a 6.2 percent decline in 2001.

But Berkshire's 9.6 percent decline still beat the S&P 500's 37 percent decline in 2008, the report said.

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On the Net:

Berkshire Hathaway Inc.: http://www.berkshirehathaway.com

Warren Buffett's 2008 letter: http://www.berkshirehathaway.com/letters/2008ltr.pdf

Comments

[NTexasHillbilly]

Folks switching to Geico to save money? That's a laugh. I pay for half what Geico quoted with State Farm.

[Slapmewhenitsover]

It is all BS. Warren thinks people will feel sorry for him. You know, like he is in the same boat as everyone else.
I we abolished money, Warren and his kind would have NOTHING to trade!
Then who would be poor?
I am tired of listening to this guy talk without offering solutions.

[frankiestage]

96% decrease still puts you 4% above water, so count your blessings. This drop we're experiencing now is all a part of the aftermath of Bush's big 8-yr lie. The banks' collective reaction has been to fold their arms and declare they don't want to play anymore in the messy sandpile that they created. At least we're near bottom. Shudders will continue well into the 4th quarter, but we're probably at least 3/5's through this slog.

[orangepetal]

Right in line with the market. It does not take a genius to know that everybody who felt invincible in the banking and energy sector of the market has crashed in a way that is daunting to even perceive. It is the classic total crash.
Mistakes, yes there were many mistakes, but to 'err is human' (someone important said that). The b!tch is paying for the mistakes. Let's all hope Obama is not making mistakes because I'm not sure that is good at all. The budget is huge and I'm not sure massive government spending is the right way to CHANGE things. Change the options, stop allowing the private sector to gorge the consumer. All it would take is pen to paper. That wouldn't cost a penny and probably would help even more people.
Oh, but I forgot, Buffet doesn't support that. Rip off Americans and then ease your conscience by pouring your money into Africa, while China buys massive amounts of raw materials from tyrants who do not invest in their people. I CBW but that is how the picture looks to me. It is not a free market when corporate America serves her own interests above the public interest by conning and buying off Washington. The power does not belong to big business or Washington DC players, it belongs to the people.

[curiousasheck]

Consumers aren't spending on ANYTHING but necessities. Berk could end up being another one of those to big to fail fairy tales at the rate things are going.

[Badfickle]

As usual Buffet is taking a very long view. He's betting that the terrible time now is a buying opportunity and that 10 years from now people will look back and say "man I wish I would have gotten in there." Now maybe this problem is bigger than that. Possible. But taking the long view is what made buffet so good at what he does.

[AxelDC]

At least they are making money. Most other companies are reporting records losses, so tiny profits are amazing!

[jerrypl]

Buffett reporting a 96% loss tells all of us that consumers have stopped spending their cash. The nation is shrinking and equities will see a continued fall in value.

http://eye-on-washington.blogspot.com

[Melissa]

And he was one of the financial guys that way advising Obama!