Berkshire: Bond Market Not Always Omniscient - Especially Lately

Remember back in February, when Warren Buffett went on CNBC and announced that the bond guarantors didn’t deserve their triple-A ratings because the bond market, in its infinite wisdom, didn’t price their debt at triple-A rates?

I thought at the time he was being, shall we say, disingenuous. The fixed-income market was then (and still is) going through enormous turmoil, and was hardly the efficient credit discounting mechanism Buffett seemed to believe. Plus, he had just offered to reinsure the guarantors’ muni exposure for an exorbitant price, so was essentially talking his book.

Anyway, Wendesday night Berkshire Hathaway sold $1 billion of five-year debt at 168 basis points over Treasuries—the equivalent A- paper. Now, I don’t think Berkshire Hathaway should be rated A- just because the bond market suddenly says so. And I suspect Warren Buffett doesn’t think that either. . . .  

Tom Brown is head of BankStocks.com.

Comments

[chris vale:]

Wow! Let's correct the facts first and then discuss your investing record, Tom. First, Buffett has said on numerous occasions that the bond market is subject to mispricing. He certainly does not advocate effiicient market theory, you must already know that. Second, the recent debt issuance is from Berkshire Hathaway subsidiary Berkshire Financial, and is not backed by the full might of Berkshire, which is why the bond market has discounted the issuance. Third, Buffett has a long record of speaking his mind, not "talking his book", as you claim. Berkshire's reputation, which is based in large part on the integrity of the CEO, is an enormous business advantage for Berkshire, and is a signifigant part of the moat they have created. To risk that priceless asset, which took decades to create, for some short term gain created by talking up his book, would be as foolish as buying Compucredit at $35 per share. Or First Marblehead... I don't have the heart to go on about your record, but please, it's beneath you and any other professional investor to engage in character assassination of Mr Buffett.

2008 Aug 01 11:58 AM

[PlentyOStocks:]

Yes, Berkshire's reputation, which is based in large part on the integrity of the CEO.

That said, I do think Buffett now having established his god-like status uses it to his advantage when he sees fit.

He enters the bond insurance business while proclaiming the business model dead. He calls credit default swaps crazy, then goes out and writes a ton of them.

I love how he has conned the SEC into letting him buy up all stock he wants of any company without having to disclose it until he is done buying. How does that benefit anyone but Berkshire?

2008 Aug 01 02:43 PM

[PlentyOStocks:]

To add to my earlier comment...(He enters the bond insurance business while proclaiming the business model dead. He calls credit default swaps crazy, then goes out and writes a ton of them.)

Both these statements by Buffett raised the prices of these type of contracts, allowing him to profit more once he started writing them. How is this really any different than Ackman having a plan to "save" Fannie and Freddie that just happens fits his hedge perfectly to maximize his profits.

2008 Aug 01 02:48 PM

[chris vale:]

Response to Plenty: Mr Buffett is frequantly misquoted. He has never called credit default swaps crazy, though he has been critical of derivatives in more general terms. However, he has been very clear that derivatives can be mispriced, and when they are, he is prepared to act accordingly. He has never proclaimed the bond insurer business model dead, there is no factual basis for that assertion whatsoever. I respectfully disagree that the SEC has been "conned". Mr Buffett simply files a petition that anyone can file and which is granted to Berkshire based on the simple fact that people really will follow his lead. But, it truly does benefit no one but Berkshire, and perhaps the SEC should not allow it.

2008 Aug 01 03:27 PM

[James Cullen:]

Buffett's derivatives quote applies to highly leveraged, long-lived, or exotic instruments like total return swaps. I suggest actually reading his letters...

collegeanalysts.com/20.../

2008 Aug 04 10:43 PM

[PlentyOStocks:]

You're right...he did not say they are crazy. The direct quote is "financial weapons of mass destruction."

I guess I actually understated his comment.

I admire Mr. Buffett's success, but find him very sad. He works all his life building up and counting his money. He never spends any of it, even on himself. He can't even think of anyone to give it to; he is leaving that up to Bill Gates. Think about it; it is the same as Ebenezer Scrooge. At least Scrooge gave money to Tiny Tim.

2008 Aug 04 10:51 PM