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Buffett says wealth funds not a 'nefarious plot'

Billionaire investor Warren Buffett stepped into a debate about the emergence of sovereign wealth funds, saying the government-controlled firms are fueled by US spending overseas, not political motives.

"This is our doing, not some nefarious plot by foreign governments," Buffett, the chairman of Berkshire Hathaway Inc, said on Friday in his annual letter to shareholders. "Our trade equation guarantees massive foreign investment in the US. When we force-feed US$2 billion daily to the rest of the world, they must invest in something here."

Countries such as China and Russia have deployed record central bank reserves to set up funds wielding as much as US$2.9 trillion. Firms from Singapore, Korea, Kuwait and Abu Dhabi bought stakes during the past four months in Citigroup Inc, the biggest US bank by assets, and Merrill Lynch & Co, the world's biggest brokerage. Officials from the US Treasury Department and the Securities and Exchange Commission (SEC) have said there's a risk government-controlled funds may invest to achieve political, rather than commercial, ends.

Warren's World

"Both the growth in size and number of these funds is such now that vigilance is required," Deputy US Treasury Secretary Robert Kimmitt said in an interview on Bloomberg Television last Wednesday.

SEC Chairman Christopher Cox said in December that the state-run investment firms don't adequately disclose why they're buying stocks and other assets.

Buffett, 77, built Berkshire Hathaway over four decades from a failing textile manufacturer into a US$215 billion investment and holding company. The stock rose 29 percent last year and about 4,700 percent in the 20 years through Dec. 31, six times more than the Standard & Poor's 500 Index, dividends included.

The feat made Buffett an icon to shareholders and investors.

In his annual letters, Buffett offers his view of market conditions, potential investments, corporate governance and economic policy, as well as his plans for Omaha, Nebraska-based Berkshire.

Fear and greed

Along with insurance operations and a stock portfolio valued at US$75 billion, Berkshire owns businesses ranging from candy making and residential real estate brokerage to utilities and corporate jet leasing -- giving Buffett an insider's perspective on many facets of the economy and finance.

Buffett released the shareholder letter with Berkshire's full-year and fourth-quarter financial results for last year. Net income in the quarter fell 18 percent to US$2.95 billion, or US$1,904 a share, as profit from insurance units fell. The company's shares dropped US$250, or 0.2 percent, to US$140,000 on Friday in New York Stock Exchange composite trading.

In last year's letter, Buffett said his method was to "be fearful when others are greedy and be greedy when others are fearful."

He said Berkshire followed that maxim by rushing to insure coastal properties after Hurricane Katrina caused prices to double and triple in 2005.

Berkshire, which gets about half its profit from insurance, sold less of the coverage last year as prices dropped.

"The party is over," Buffett said in his letter. "It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down."

Fourth-quarter underwriting profit from Berkshire's insurance business dropped 46 percent to US$465 million, led by declines at auto insurer Geico Corp and reinsurance units. Reinsurance is coverage for insurance companies.

The worst housing recession in 25 years hurt Berkshire's building-related companies. Profit fell 17 percent to US$109 million at Shaw Industries, the world's largest carpet maker. Earnings also dropped at Acme Brick and Johns Manville.

Buffett applied the strategy of greed in the face of fear when defaults on mortgage-related securities surged during the past year.
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