Berkshire's Buffett Praises AIG's Greenberg, Keeps Dollar Bet
Berkshire's Buffett Praises AIG's Greenberg, Keeps Dollar Bet
May 1 (Bloomberg) -- Berkshire Hathaway Inc. Chairman Warren Buffett praised Maurice ``Hank'' Greenberg, the ousted chief executive of American International Group Inc., and defended the proper use of a type of reinsurance that has come under regulatory scrutiny.
Greenberg ``developed an extraordinary company in his lifetime,'' Buffett said yesterday at Berkshire's annual meeting of shareholders in Omaha, Nebraska. Greenberg, who was head of the world's largest insurer, was ``the number one man in insurance,'' he said.
The support follows Greenberg's resignation from AIG in March amid an accounting investigation sparked by a reinsurance transaction with Berkshire's General Re unit. Buffett, considered a witness in the probe, declined to comment on the contract and said his insurance and investment company faces liability for a client's misdeeds only if it participated in them.
Buffett, admired around the world for his investing prowess, also said Berkshire maintained a bet against the U.S. dollar of more than $21 billion even after it cost the company about $310 million in the first quarter.
Berkshire is set on May 6 to report a $400 million increase in first-quarter pretax profit, excluding gains and losses on currencies and other investments, Buffett said. He also said he plans to announce an insurance acquisition of almost $1 billion in the next few weeks. The annual meeting continues through today, with a press conference scheduled this afternoon.
Dollar Bet
Berkshire kept slightly more than $21 billion in foreign currency forward contracts through the first quarter as the dollar rose 4 percent against a basket of six currencies. Buffett said he would buy more contracts if it weren't for the skepticism of Vice Chairman Charles Munger.
Buffett, the world's second richest-man after Microsoft Corp. founder Bill Gates, has been betting against the dollar since 2002 on concern that widening U.S. trade and budget deficits will erode its value.
Berkshire made $1.63 billion on his forward contracts in the fourth quarter when the dollar slumped. The contracts are agreements to purchase foreign currencies on a future date at the current price.
Berkshire hasn't been accused of wrongdoing in the four-year- old AIG transaction and said in a statement on March 29 that Buffett wasn't briefed on any improper use. New York Attorney General Eliot Spitzer, who had investigators interview Buffett on April 11, has contrasted Buffett with Greenberg, calling the Berkshire chairman a ``cooperative witness.''
Retroactive Reinsurance
``It really gets down to whether there is knowing participation,'' Buffett, 74, said of the company's potential liability for a client's misdeeds. Berkshire is the biggest U.S. reinsurance company, in addition to owning dozens of businesses selling paint, carpets and candy.
Spitzer and the Securities and Exchange Commission are investigating instances where a type of reinsurance known as ``finite'' really amounts to loans, allowing companies to mask losses even though little or no risk is transferred.
Greenberg, 79, invoked his Fifth Amendment right to avoid self-incrimination during a deposition with investigators April 12, and shares of New York-based AIG have tumbled 30 percent since the company disclosed subpoenas on Feb. 14. His lawyer, David Boies, said in April that Greenberg wouldn't have done the deal had he deemed it improper.
Some finite reinsurance contracts are retroactive in that they insure other insurers who already know there will be claims, just not when they will be paid out. Berkshire is among the world's biggest sellers of retroactive policies, and they accounted for about 22 percent of the company's insurance reserves at year's end.
`Possibly Misused'
``There is nothing wrong at all in my view with retroactive contracts,'' Buffett said. ``The authorities are looking at contracts that had no purpose and were possibly misused.''
Retroactive reinsurance has ``value to both parties,'' Buffett said. ``Reducing volatility per se is not bad at all, but you can also get into abuses of that.''
Insurance regulators in Virginia and Tennessee have sued General Re for contracts with a failed medical malpractice insurer, and the liquidator of a collapsed Australian insurer said it may assert claims against General Re. General Re said in March that it was cooperating with probes in Australia and denied the allegations in the Virginia and Tennessee suits.
``I am not concerned,'' Berkshire investor Chad Kane said yesterday at the meeting. ``There's been a lot of hype. Buffett has handled it well because he's kept quiet and dealt directly with regulators.''
Limited Acquisition Opportunities
Kane, who manages $725 million as president of Woodtrust Asset Management in Wisconsin Rapids, Wisconsin, including Berkshire shares, has attended seven meetings.
Buffett, renowned for investing in out-of-favor companies, is searching for ways to deploy Berkshire's more than $44 billion of cash. Yesterday he said buy-out funds and hedge funds are driving up asset prices and making acquisitions more difficult, he said.
``Right now we are positioned very badly in terms of buying businesses,'' he said. ``Your Berkshire stock will not do as well under these conditions as it did five years ago or 20 years ago. And I don't have the magic solution for it.''
Berkshire's stock has fallen 9.7 percent in the past 12 months. The shares gained $749.90 to $84,350 in New York Stock Exchange composite trading two days ago.
Buffett said he may entertain the idea of issuing a dividend should he continue to find few opportunities to use Berkshire's cash.
Dividend?
``The test is whether the money can be used very successfully within the business,'' he said. ``If we sit here a few years from now and we have not successfully deployed more cash, I think the burden of proof will have shifted dramatically.''
Berkshire reported about $1.66 billion in pretax operating profit in the first quarter of 2004, meaning an increase of $400 million is a 24 percent gain.
The company's $310 million in currency losses, along with gains on other investments, resulted in about $120 million in overall investment losses in the first quarter, Buffett said, without specifying whether his figures are before or after taxes.
A year ago, the company had $636 million in pretax investment gains, meaning Berkshire will report a decline in first-quarter net income.
Underwriting profit from insurance was higher than Berkshire expected, rising by about $200 million to $500 million, Buffett said. That kind of gain won't continue for the rest of the year, he said.
Social Security
Buffett and Munger also told shareholders they oppose U.S. President George W. Bush's plan to allow privatization of Social Security because the government has a duty to take care of the country's elderly.
``The Republicans are out of their cotton-picking minds on this issue,'' said Munger, a self-described right-wing Republican. Social Security is ``one of the most successful things that the government has ever done.''
As for AIG and Greenberg, Munger said, ``Whatever comes along, people are going to find a lot was done right at AIG over the years.''
To contact the reporter on the story: David Plumb in Omaha, Nebraska at dplumb@bloomberg.net; Jesse Westbrook in Omaha, Nebraska at jwestbrook1@bloomberg.net
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