Is Berkshire Hathaway Too Dependent On Its AAA Rating?

The price of Berkshire Hathaway credit default swaps have spiked, and all of the sudden investors are thinking the unthinkable. The unmentionable, even.

Warren Buffett’s conglomerate is supposed to be the pinnacle of sober security, and although finance is a big part of its business, it’s clearly avoided the “toxic” stuff. Felix Salmon explains how a ratings downgrade would hurt the company, before concluding with this meta point:

On the other hand, I’m not comfortable with any company — not even Berkshire Hathaway — having a business model which requires a triple-A rating. Triple-A ratings should be the consequence of a company’s profitability, not a cause of it. If Berkshire lost its triple-A and started playing on a level playing field with everybody else, that might be more sustainable, in the long term, than an attempt to shore up the triple-A at all costs. Certainly there’s something very weird going on when CDSs are at 450bp and the credit is still triple-A: one or the other has to be wrong.

Certainly, the disagreement between the CDS market and S&P will have to give. Not that it needs calling into question, but it calls into question the usefulness of these man-made ratings, when the market (in the form of CDS prices) accomplishes the same thing impartially and in real-time.

But beyond that, we’re not sure what’s wrong with the idea of a company building a business model around their AAA rating. In finance, what’s more important than trusworthiness? And — when S&P had a reputation worth a damn — what better way to establish that than have a trusted third party vouch for you. If you can prove that you’re trusty, that’s a hell of a selling point for anyone, especially a financial firm.

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