Immelt meets Buffett in market roiled by credit swaps

Warren Buffett and Jeffrey Immelt are among a handful of chief executive officers whose companies are rated AAA. Yet Buffett’s Berkshire Hathaway Inc and Immelt’s General Electric Co are being treated like junk in the market for credit-default swaps. Contracts that protect investors against a default on bonds of Omaha, Nebraska-based Berkshire, which has $25.5 billion in cash, cost as much as those of KB Home, the homebuilder that lost money for seven consecutive quarters.

Credit-default swaps on the finance arm of GE, which holds $45 billion of cash, are about as expensive as those for building materials-maker Louisiana-Pacific Corp, which posted nine straight quarterly losses.

Trading in credit derivatives is proving investors believe no borrower is immune from the seizure in credit markets that led to the US government’s takeover of insurer American International Group Inc and the collapse of investment bank Lehman Brothers Holdings Inc Like those companies, Berkshire and GE relied on high credit ratings to generate profit and win new business.

“The market is tarring them with a similar brush in that these guys likely used their AAA ratings to achieve a very low funding on bets that you and I may have not otherwise have taken,” said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.

Highest ratings
Traders are increasing bets against GE because the Fairfield, Connecticut-based company’s finance arm may need to post as much as $12 billion in collateral if long-term ratings are cut to the single-A level and short-term ratings fall below the top A1/P-1 category, CreditSights Inc analyst Richard Hofmann in London estimated in a research note this week. He based the analysis on a review of GE’s regulatory filings.

Berkshire and GE have the highest ratings from both Moody’s Investors Service and Standard & Poor’s. Berkshire said February 28 that fourth-quarter net income fell 96 per cent to $117 million from $2.95 billion in the same period a year earlier. GE just posted its third-highest annual profit and is the biggest maker of jet engines and power turbines.

Moody’s judges the debt obligations of companies with its Aaa rating to “be of the highest quality, with minimal risk.” S&P says its AAA credit rating means an “obligor’s capacity to meet its financial commitment on the obligation is extremely strong.