Some very interesting news about Warren Buffett was barely noticed yesterday, due to theannouncement of Todd Combs as an investment officer at Berkshire Hathaway. Yesterday, the SEC questioned Berkshire Hathaway regarding its loss accounting practices.
According to Reuters:
In an April letter, the SEC asked Berkshire why it was not recording write-downs on shares with $1.86 billion in unrealized losses, all of which had been in that position for at least a year.
Given the duration of those losses, the SEC said they appeared to be more than temporary and as such should have been written down.
In a detailed response, Berkshire Chief Financial Officer Marc Hamburg said most of the losses with more than 12 months' duration as of December 31 were concentrated in Kraft and U.S. Bancorp, shares it had acquired in 2006 and 2007.
"We believe it is reasonably possible that the market prices of Kraft Foods and U.S. Bancorp will recover to our cost within the next one to two years assuming that there are no material adverse events affecting these companies or the industries in which they operate," Hamburg said.
What does this mean?
Let us take banks as an example.
Until Sarbanes–Oxley this was a common practice of banks: The banks would assume that real estate has dropped temporarily and housing prices would come back. Therefore, if someone was current they would not write down the value of the mortgage because the value would eventually go up.
So banks would leave the mortgages at cost and not mark down to market value. In their trading portfolio which are securities that are trading for less than a year. These securities are highly liquid. After the passage of Sarbanes–Oxley this all changed. The banks would be forced to treat the mortgages like securities and had to mark to market like they did for short term investments like T-bills.
Even loans that were likely to be paid back like prime loans had to be marked to market.
This sounds similar to what Buffett is doing with Kraft and USB. Even though Buffett is down for these investments he believes the price of the shares will increase and therefore he does not have to mark them down, and wants to keep them at their original cost.
I am not familiar with the rest of the picture as the news just hit the wire yesterday. However, Buffett is an ethical CEO and I doubt he would play accounting gimmicks just to boost earnings by a bit. Many people (although not the SEC) accused Buffett of playing down its exposure to derivatives. However, it seems clearer today that most people simply misunderstood the derivatives held in Berkshire Hathaway’s portfolio. This new story with the SEC is interesting but only time will tell whether I am correct in my assumption.
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According to Reuters:
In an April letter, the SEC asked Berkshire why it was not recording write-downs on shares with $1.86 billion in unrealized losses, all of which had been in that position for at least a year.
Given the duration of those losses, the SEC said they appeared to be more than temporary and as such should have been written down.
In a detailed response, Berkshire Chief Financial Officer Marc Hamburg said most of the losses with more than 12 months' duration as of December 31 were concentrated in Kraft and U.S. Bancorp, shares it had acquired in 2006 and 2007.
"We believe it is reasonably possible that the market prices of Kraft Foods and U.S. Bancorp will recover to our cost within the next one to two years assuming that there are no material adverse events affecting these companies or the industries in which they operate," Hamburg said.
What does this mean?
Let us take banks as an example.
Until Sarbanes–Oxley this was a common practice of banks: The banks would assume that real estate has dropped temporarily and housing prices would come back. Therefore, if someone was current they would not write down the value of the mortgage because the value would eventually go up.
So banks would leave the mortgages at cost and not mark down to market value. In their trading portfolio which are securities that are trading for less than a year. These securities are highly liquid. After the passage of Sarbanes–Oxley this all changed. The banks would be forced to treat the mortgages like securities and had to mark to market like they did for short term investments like T-bills.
Even loans that were likely to be paid back like prime loans had to be marked to market.
This sounds similar to what Buffett is doing with Kraft and USB. Even though Buffett is down for these investments he believes the price of the shares will increase and therefore he does not have to mark them down, and wants to keep them at their original cost.
I am not familiar with the rest of the picture as the news just hit the wire yesterday. However, Buffett is an ethical CEO and I doubt he would play accounting gimmicks just to boost earnings by a bit. Many people (although not the SEC) accused Buffett of playing down its exposure to derivatives. However, it seems clearer today that most people simply misunderstood the derivatives held in Berkshire Hathaway’s portfolio. This new story with the SEC is interesting but only time will tell whether I am correct in my assumption.
http://www.valuewalk.com/
[url=http://www.valuewalk.com/]Long USB
[/url]
