Even the Sage of Omaha has money problems

What? Warren Buffet? Derivatives? Say it aint so!

Berkshire Hathaway quarterly net income falls 77%
By Alistair Barr, MarketWatch
Last update: 5:49 p.m. EST Nov. 7, 2008

SAN FRANCISCO (MarketWatch) -- Berkshire Hathaway reported a 77% drop in third-quarter net income late Friday as the insurance-focused conglomerate recognized more than $1 billion of unrealized derivative losses and paid hurricane claims.
Net income came in at $1.06 billion, or $682 per Class A share, down $4.55 billion, or $2,942 per Class A share, a year earlier, Berkshire said.

Operating earnings, which exclude net realized investment gains and losses, were $2.07 billion, or $1,335 per Class A share, down 19% from the same period in 2007.

Berkshire's large insurance businesses generated an underwriting profit of $81 million in the latest third quarter, down from $486 million last year.

Hurricanes Gustav and Ike left Berkshire's insurance businesses with estimated losses of roughly $1.05 billion in the third quarter, the company said. Price competition, which has steadily increased in insurance markets in the past two years, also dented profit, it added.

Berkshire, run by Warren Buffett, incurred $296 million of net investment losses in the quarter, versus net investment gains of more than $3 billion a year earlier.

Net derivative losses reached $1.26 billion in the latest period. These are unrealized losses, reflecting a decline in the fair value of credit default swap and equity index put option contracts Berkshire entered into.

"The contracts were entered into with the expectation that amounts ultimately paid to counterparties for actual credit defaults or declines in equity index values [measured at the expiration date of the contract] will be less than the premiums received," Berkshire said.

"The contracts generally may not be terminated or fully settled before the expiration dates and therefore the ultimate amount of cash basis gains or losses may not be known for years," it added. End of Story

Alistair Barr is a reporter for MarketWatch in San Francisco.

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