Despite paying the largest penalty ever assessed against a financial firm by the Securities and Exchange Commission, Goldman Sachs is still an attractive target for government panels investigating the financial crisis. Goldman agreed to pay a $550 million settlement on July 15 in connection with the Abacus case in which the SEC alleged that Goldman failed to disclose key information regarding the portfolio selection process. Today, the Financial Times reported that Goldman is facing a separate inquiry by the Financial Crisis Inquiry Commission (FCIC) regarding the company’s use of derivatives.
In a warning that was largely ignored at the time but proven correct in subsequent years, Warren Buffett referred to derivatives as “financial weapons of mass destruction” in his 2002 letter to Berkshire Hathaway shareholders. Critics of Berkshire’s recent involvement in derivatives often like to point out the superficial inconsistency between Mr. Buffett’s earlier warnings and his willingness to enter into derivatives contracts in recent years. Today’s Wall Street Journal article regarding Berkshire Hathaway’s lobbying efforts related to the financial regulatory reform bill are already raising charges of hypocrisy. Let’s take a brief look at the facts and how the legislation may impact Berkshire Hathaway.
Carol Loomis has written a “must read” article on derivatives which appears in the July 6 issue of Fortune Magazine as well as online at Fortune.com. At a time when regulation of derivatives is a major focus in Washington, it is useful to step back and take a deeper look at the events of the past several years to understand the depth of the problem and the complexities awaiting those who would try to reduce the overall level of systemic risk inherent in these complex instruments. This article provides a few excepts and comments from the article along with my views on how investors can manage risks associated with derivatives.
I made the trip to Omaha this weekend for the 2009 Berkshire Hathaway Annual Meeting. This was my first trip to Omaha since 2005 and attendance at the meeting has grown considerably over the past few years. I still remember my first Berkshire Annual Meeting in 2001 at the Omaha Civic Auditorium when attendance was quite a bit lower. If attendance grows much beyond the 35,000 who showed up this year, the meeting will soon outgrow the Qwest Center. Read this post for notes on the morning session.
So much for the conspiracy theories! Moody’s, which is 20% owned by Berkshire Hathaway, today downgraded the long term issuer rating of Berkshire two notches fromAaa to Aa2, and the Issuer Financial Strength (IFS) rating of most of the insurance subsidiaries one notch from Aaa to Aa1. After taking this action, Moody’s declared Berkshire Hathaway’s ratings outlook to be “stable”. For those who have signed up for a free account with Moody’s, the text of the action can be found here. Read this post for more details.