Berkshire Hathaway's Credit Rating Downgraded by Fitch

"Weep over Saul, Who clothed you luxuriously in scarlet, who put ornaments of gold on your apparel." 2 Samuel 1:24


Berkshire has sustained heavy losses in US equities as the value investing approach which Warren Buffett follows has fallen prey to this most vicious of bear markets.

The company still retains exposure to derivatives contracts that concerns Fitch.

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Fitch downgrades billionaire's Berkshire Hathaway to lowly AA because of possible stock and credit market losses.

For decades, one of the brightest banners to fly above Warren Buffett's castle was his company's AAA credit rating, one of a handful in the United States. In his annual letter to shareholders he bragged that Berkshire Hathaway's credit was "pristine." But the financial crisis is laying siege to even the mightiest balance sheets.

In the past year, shares of Berkshire Hathaway the insurance and electricity conglomerate that Buffett controls, have lost 35%. Buffett saw his personal wealth decline by $25 billion. Now Fitch Ratings has snatched away his top-notch rating, downgrading Berkshire to AA.

The full extent of the damage to Berkshire won't be clear until the other two ratings agencies--Standard and Poor's and Moody's (of which Berkshire owns more than 20%)--decide whether to follow with their own downgrades. But conservative lenders often consider the lower of a company's split ratings as the one that counts. A lower rating could hurt Berkshire's business if lenders demand higher interest rates from the company to compensate for increased risk.

Fitch said it downgraded Berkshire because of its large stakes in publicly traded companies, such as Coca-Cola and American Express, as well as huge derivatives contracts that expose it to possible losses in the credit and stock markets. Berkshire's bondholders are also behind insurance policyholders to get paid back if the company runs into trouble. Nothing about that is new; Berkshire has long had major insurance interests. But Fitch said that the financial crisis had led it to reassess the risks to financial firms across the board.

Buffett himself seems to have played a role. Fitch said that the company's success is so dependent on the Oracle of Omaha's ability to choose wise investments that it constitutes a credit risk not "consistent with an AAA rating." The agency also complained that Berkshire management has declined to meet regularly with Fitch analysts in contrast to General Reinsurance, a Berkshire subsidiary. Fitch threatened to drop the AA rating further if stock market declines and earnings shortfalls hurt the firm's capitalization.

Despite the crisis, Buffett has pursued a number of big deals designed to take advantage of lower stock prices and a lack of available capital for struggling firms. Berskhire has plowed billions into Goldman Sachs (nyse: GS - news - people ), General Electric and Swiss Re and opened a municipal bond insurance company.

While Berkshire's net profit last year fell 62.1% to $5.0 billion, Buffett has said that Berkshire will make money in the long run. (See "Buffett Bloodied But Not Bowed") "Our economic system has worked extraordinarily well over time" he wrote in his annual letter to shareholders. "It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."