Sunday, September 21, 2008

Buffett may have $3.5 billion two-day financials profit

Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N), which has avoided major acquisitions in the financial sector in recent months, may have had a $3.5 billion two-day paper profit on six major banking and financial services investments.

The two-day rally in financial shares, which drove the broad S&P Financials Index (.GSPF) up 24 percent, came as the government announced sweeping measures to rescue the financial system and restore confidence in shaky markets.

Shares of Wells Fargo & Co (WFC.N), the fifth-largest U.S. bank and Berkshire's second-largest investment as of June 30, rose 19 percent over the last two days and touched a record high. That would have given Berkshire a $1.85 billion paper profit on its reported 290.7 million share stake.

Berkshire would also have had a $1.12 billion profit on its reported 151.6 million share stake in American Express Co (AXP.N), the credit card and travel services company. Stakes in Bank of America Corp (BAC.N), M&T Bank Corp (MTB.N), SunTrust Banks Inc (STI.N) and US Bancorp (USB.N) also gained value.

Buffett has long favored investments in undervalued businesses with strong earnings and management. That has helped him transform Berkshire since 1965 from a failing textile maker into a conglomerate with at least 76 companies.

"He's always felt Wells was very well-managed," said Frank Betz, who oversees more than $800 million at Carret/Zane Capital Management LLP in Warren, New Jersey. "Why does he like banks? Like Willie Sutton said, it's where the money is."

Banks and financial services companies accounted for about one-third of Berkshire's $57.9 billion of U.S.-listed equity holdings as of June 30. Berkshire generally discloses these holdings only in the middle of each calendar quarter.

At Berkshire's annual shareholder meeting on May 3 in Omaha, Nebraska, Buffett said that in banking, "you need someone at the top whose DNA is very very much programmed against risk."

Buffett didn't agree this week to help bail out the insurer American International Group Inc (AIG.N), which agreed to an $85 billion government rescue after being felled by exposure to complex debt known as credit default swaps. Buffett has called derivatives "financial weapons of mass destruction."

DIVERSIFICATION

Berkshire generates about half its business from insurance, but is diversifying through acquisitions in other sectors.

On Thursday, it announced a tentative agreement for its MidAmerican Energy Holdings Co affiliate to buy Constellation Energy Group Inc (CEG.N) for $4.7 billion in cash, after worries about trading bets caused the power supplier's shares to fall by more than half this week.

Earlier this year, it paid Chicago's Pritzker family $4.5 billion for 60 percent of Marmon Holdings Inc, which makes such things as railroad tank cars, pipes, fasteners and wiring.

Berkshire also committed $6.5 billion to help Mars Inc buy chewing gum maker Wm Wrigley Jr Co (WWY.N), and agreed to invest $3 billion as part of Dow Chemical Co's (DOW.N) purchase of specialty chemicals maker Rohm and Haas Co (ROH.N).

Forbes magazine this week said Buffett is worth $50 billion, making him the second-richest American, trailing Microsoft Corp (MSFT.O) co-founder Bill Gates.

Berkshire Class A shares rose more than 8 percent Friday on the New York Stock Exchange, until a late trade boosted the gain to 14.8 percent, or $18,990, for a close at $147,000. The Class B shares closed up $345 at $4,595.

A Big Board spokeswoman did not immediately return a call seeking comment.

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