Thats right. Berkshire Hathaway has had its debt rating cut by Fitch. Are you kidding! I predicate that there is hardly an institution more culpable for the “economic crisis” than the rating companies. They essentially gave the green light for the whole thing to take place by rating sub-prime mortgages as “AAA.”  Only companies with strong balance sheets and solid cash flow deserve such a rank, not pieces of junk sliced up and repackaged. Now I’ve gotten myself sidetracked. Berkshire had $25 billion in cash at the end of the quarter. Buffett has stated multiple times that he would feel uncomfortable with less than $10 billion incase of any ‘acts of god’ (it is an insurance and reinsurance company after all). Does this sound like a company in trouble? The largest concerns about Berkshire relate to its use of derivatives. As I will explain, while they do add a bit of risk, there is always a trade off between risk and reward and Buffett has found a win-win for Berkshire over the long term. 

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As was widely reported today GE’s credit rating was downgraded to AA+ by S&P.  For the sake of argument (heavily sarcastic tone) we will assume that the ratings agencies are not criminals that deserve to be thrown in jail, but are actually highly trained professionals in the science of risk management.  GE’s credit ratings had been rated with a “negative” outlook for the better part of the credit crisis with S&P probably the first of the three ratings agencies to downgrade the company to one notch below the highest possible.  This change of ratings is actually a relief for me as a shareholder and here is why.  There has been some speculation, and I agree, that the ratings agencies have over corrected to being too conservative after being almost criminally negligent for the better part of the middle years of this decade.  So if in this environment GE’s stock has been pummeled because of their perceived exposure to further credit risk, and an overly conservative ratings agency gives it a rating of AA+ with a stable outlook, how can you not love the company!?  In the worst credit market in the past 70 years GE is still rated only one notch below the debt of the United States government, not bad GE.

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Here is a scary statistic that Bryce pointed out to me this past week from Yahoo finance, GE’s tangible book value is $7.9 billion and their total liabilities are $693 billion giving a 88x multiple.  For comparison Fannie Mae as of December 31st has a comparable multiple of 96x.  It is pretty much accepted that FNM has no common shareholder value even though it is trading around $0.36 per share.  So why is GE also not trading in the penny range if it has leveraged its balance sheet to a similar degree?

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One of the problems with many companies today is that their business model has been broken.  No one is quite sure how the Goldman Sachs’s of the world are going to return to their previous sky high profit (and bonus pool…) with the new era of increased regulation and oversight.  And I have frankly still not heard a convincing argument for the viability of the large car manufacturers or their suppliers.  Even the proverbial king of American capitalism, General Electric, appears to only be able to come up with half-hearted responses where their business model of the modern conglomerate is called into question.  All of this could make even the most confident CEO question his or her own business model, unless of course you see no end in sight for the demand of a product you sell.  This is exactly the situation that Portfolio Recovery Associates finds itself in.  Yahoo finance summarizes their business as follows,

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