Ratings vs. reality

Risk & Insurance, July, 2005 by Roger Crombie

Fitch downgraded its outlook on Berkshire Hathaway earlier this year to negative, despite the company having $40 billion in cash. Yup, $40 billion. Fitch cited the auteur theory of insurance: because Warren Buffett is an older man, it's negativity from here on out. Buffett didn't turn 75 or 100 or any round age; it just sort of came up after Hank Greenberg left AIG a little rudderless in the short term.

At first, the ratings actions against Berkshire Hathaway just seemed laughable. If you've got $40 billion of spare cash lying around, how bad can things look? If this keeps up and Buffett reaches 100 at the helm, Berkshire Hathaway will become a strange animal indeed. By then, it will have a trillion dollars in cash and a rating of F.

"Although the 74-year-old Mr. Buffett is reportedly in good health and has expressed no intention of retiring," Fitch said, the future is grim since the second-greatest Buffett in history (the first being Jimmy, since you ask) cannot easily be replaced.

Now, I've got a word for my friends at the ratings agencies. If Buffett is punished for being 74, why aren't other chief executive officers similarly rated? I know some who fly all the time, despite the odds. I saw a CEO jump into a fish tank in a public aquarium once, for charity. He could have drowned. Every CEO, I'd guess, is stressed beyond the max. It's a dangerous occupation. So why not downgrades all around? Oh, I forgot. We don't get those until the third quarter.

Buffett's no fool, as the numbers show. He has one of the best track records since track records were invented. He's the Sage of Omaha, for goodness' sake, and they don't come any sager. Does anyone imagine that Buffett hasn't given this some thought? They must think his plan is: Well, when I get fed up with this, or whatever, I'll just go home and the hell with all of them. Let them blow it all on the good life in Omaha's ritzy nightclub district. See if I care.

BUFFETT HAS A PLAN

No. Buffett owns shares, lots of shares in Berkshire Hathaway, so he's going to want them to do as well as is humanly possible after he's gone.

He has a plan all right. Maybe he just forgot to tell the agencies. Or maybe he's still as sharp as a whip and no older at 74 than some people are at 54, and has no plan beyond having his stooges hire whoever is the next sagest guy in the world on the day he hangs up his eyeshade.

Whatever the ease, the downgrade sounds like the most ridiculous thing I've ever heard. If the guy with $40 billion in cash doesn't have a positive outlook, who does? Mice, who have never made a loss and have no debt? My parents' dining table, around for 60 years and never turned down a claim?

Each Berkshire Hathaway share already costs more than minimum wage for a week. Few countries, if any, have ever run a $40 billion surplus. Buffett's got $40 billion he's not using and his outlook's negative. The rest of us have a buck or two; our outlook must be worse than catastrophic.

We live in a world of infinite disappointment, a harsh and cold environment in which winning is everything. Buffett wins. It's over. Everyone go home and think of something else to do.

ROGER CROMBIE, a writer, editor and former accountant, is a regular columnist for Risk & Insurance. He also covers issues on alternative risk for this magazine. He can be reached at riskletters@lrp.com.