Warren Buffett’s Berkshire Hathaway saw 4th quarter profit jump sharply, thanks to derivatives tied to the rise and fall of major stockmarkets.
But in the real world of his empire, operating profit fell 40% as the weak economy hit businesses in finance, home buying and selling, manufacturing and investments.
Overall profit after investment gains on the derivatives rose for the third successive quarter to be up 61% over all of 2009.
In his annual letter to Berkshire shareholders, Buffett was more optimistic than he was a year ago.
He said in last year’s letter that the US economy would be in "shambles" in 2009 (he wasn’t far wrong with unemployment high, weak demand and the recovery still being driven by the stocks cycle).
In this year’s letter he was more optimistic saying "residential housing problems should largely be behind us" within about a year as supply falls into line with demand, though "prices will remain far below ‘bubble’ levels".
He also used the letter to criticise financial industry CEOs and boards for bad risk management,
"A board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control," he said.
"If he fails at it — with the government thereupon required to step in with funds or guarantees — the financial consequences for him and his board should be severe."
"It is the behavior of these CEOs and directors that needs to be changed," he wrote.
He said shareholders hadn’t caused those meltdowns, but "they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure.
"The CEOs and directors of the failed companies, however, have largely gone unscathed.
"They have long benefitted from oversized financial carrots; some meaningful sticks now need to be employed as well."
Fourth-quarter net earnings were $US3.06 billion, from $US117 million in 2008 (after impairments and write-downs).
Revenue rose 23% to $US30.2 billion.
Excluding $US1.03 billion of investment and derivative gains, operating profit declined to $US2.03 billion, from $US3.37 billion in the final quarter of 2008.
The 2008 results included $US3.25 billion of investment and derivative losses, and a one-time fee related to an aborted takeover of Constellation Energy Group Inc.
For all of 2009, profit rose to $US8.06 billion, from $US4.99 billion. Revenue rose 4% to $US112.49 billion.
Berkshire has about 80 businesses that sell such things as Geico car insurance, Dairy Queen ice cream, and Fruit of the Loom underwear.
It is a big reinsurer through General Re, has water and gas utility investments and extensive manufacturing activities in the US and Israel.
Like other insurers, Buffett’s operations in this area benefited from the absence of any big disasters, but low interest rates affected returns on statutory funds.
The stockmarket gains boosted returns from the derivatives tied to the movement of markets over coming years.
Two weeks ago it paid $US26.5 billion for Burlington Northern Santa Fe Corp, America’s second-largest railroad.
In its annual report, Berkshire said operating results for its main business lines, insurance and utilities "have not been negatively impacted in any significant way by the recession".
In contrast, earnings fell at most manufacturing, service and retailing units in 2009, as the recession led to "lower sales volume, revenues and profit margins as consumers have significantly curtailed spending, particularly for discretionary items".
Berkshire ended the year with $US30.56 billion of cash, up 20%. Berkshire sold stocks such as oil company ConocoPhillips.
About $US8 billion cash was reserved for the huge Burlington Northern takeover.
That was Buffett’s biggest takeover so far.
