Berkshire: A Bargain or a Bomb?


By Joe Weber It's not easy being Warren Buffett these days. Although he has cooperated fully with investigators and remains one of the most admired billionaires in the world, the Oracle of Omaha can't escape the probing of regulators from Australia to Washington, D.C. One result: Investors have been looking skittish on the near-term prospects for Berkshire Hathaway (BRK.A) -- one of the markets' most coveted stocks.

The shares are off about 9.5% from a 52-week high of $92,000 in February, with most of slide following disclosures of regulators questioning a Berkshire subsidiary's dealings with American International Group (AIG). Today a bargain-hunter can pick up the Berkshire's A class stock, the more commonly traded of the outfit's two classes, for a mere $83,200 a share. That's $12,500 a share cheaper than its all-time high, set in February, 2004.

Would buyers really get a bargain? Buffett's many fans have no doubt. Investors "definitely should be looking" at buying the stock now because "it is priced very reasonably today compared to many times in the past," argues Keith Trauner, an analyst with Fairholme Capital, a Short Hills (N.J.) fund, whose $2 billion in holdings includes some $350 million worth of Berkshire shares. His argument: Berkshire's travails, no matter what eventually comes out, won't make a dent in the outfit's $128 billion market capitalization and $43 billion cash hoard.

"HONEST AND FAIR." The bulls have a point. For one thing, General Re, the Buffett subsidiary that's under scrutiny for its dealings with AIG, is small, accounting for a mere $7.2 billion in premiums out of some $74 billion in Berkshire revenues overall last year. And it brought in a paltry $3 million out of $7.4 billion in pretax operating profits.

Buffett's legions say it would be foolish to compare Gen Re's problems with AIG's: The latter has admitted to questionable accounting under ousted Chief Executive Officer Maurice R. "Hank" Greenberg and is working with regulators to set itself aright. By contrast, there has been no hint of any accounting irregularities by Gen Re, and Buffett has been called a helpful witness by no less than New York Attorney General Eliot Spitzer. Buffett "is as honest and fair a person as there is anywhere," says longtime industry-watcher David Schiff, editor of Schiff's Insurance Observer.

And yet, there are lingering fears that more shoes may drop in the Gen Re-AIG investigations. "My feeling is that the Department of Justice and the SEC are not done," cautions Standard & Poor's Equity Research insurance analyst Catherine A. Seifert, who has had a sell rating on Berkshire's stock since March. It's still trading at a stiff premium of about 22 times expected 2005 earnings, which is about twice the price-earnings multiple its insurance peers command. "Berkshire's valuation may come under some contraction because of the uncertainties," she adds.

CUT LOOSE. In a sense, Berkshire may have indirectly contributed to the disquiet. It stirred the pot anew on Aug. 5, when it disclosed that it had dismissed the former head of Gen Re's international finite business unit, Milan Vukelic, after British regulators had begun probing his dealings with several insurers. Vukelic, who couldn't be reached for comment for this story, is the latest executive from whom Gen Re has distanced itself. Former Gen Re CEO Ronald Ferguson, who had invoked the Fifth Amendment against self-incrimination in Securities & Exchange Commission and Justice Dept. probes, has been cut loose as a company consultant.

Earlier, two former subsidiary executives pleaded guilty to federal criminal charges of conspiring to misstate AIG financial statements and are cooperating with investigators. They are John Houldsworth, who once headed a Dublin reinsurance subsidiary of Gen Re, and Richard Napier, a former Gen Re senior vice-president. And another high-ranking former executive, past Gen Re Chief Financial Officer Elizabeth Monrad, says the SEC has alerted her that she may face civil fraud charges in the ongoing inquiry. None of these executives could be reached for comment for this story.

Still unclear is how extensive Gen Re's dealings were with AIG. "There has been information that links General Re to more than one AIG transaction, and we've reached no conclusion, but are continuing our investigation," Connecticut Attorney General Richard Blumenthal, one of several probers looking closely at Gen Re, tells BusinessWeek Online. "There have been a number of transactions under scrutiny."

UP THE CHAIN? The curious regulators now include, by Berkshire's own reckoning, the U.S. Attorney for the Eastern District of Virginia, the Justice Dept. in Washington, D.C., the SEC, and national regulators in Australia, Britain, Ireland, and Germany.

Bershire, which declined comment for this story, issued a news release on Aug. 8 downplaying reports that any new investigations have been opened. Even so, "I think you're going to hear a lot more over the coming months about more allegations of wrongdoing. And the logical thing is that the investigators are going to try to find those higher and higher up in the organization who may have been responsible or knew what was happening," says Howard M. Schilit, chairman and founder of the Center for Financial Research & Analysis, a forensic accounting-analysis firm based in Rockville, Md.

S&P analyst Seifert calls it all a "headline risk" -- read that "bad press." And if investigators keep up the questioning, Berkshire shares might be in for more dampening.

Weber is BusinessWeek's Chicago bureau chief


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