Signs Of Stress: Warren Buffett's Downgrade, China's Treasury Jitters

Two long-held beliefs about the American financial system got taken down a peg today, namely that Warren Buffett can do no wrong, and that China will always buy our debt.

From Reuters:

Warren Buffett's Berkshire Hathaway was stripped of its 'AAA' credit rating by Fitch, barely hours after S&P cut General Electric Co's top-tier rating, as the global financial crisis pummels America's corporate titans.

Citing concerns about Berkshire's equity and derivatives investments, as well as Buffett's tight grip on the company, ratings agency Fitch cut the insurance and investment company's issuer default rating by one notch to 'AA+'.

The downgrade is another setback to Buffett, 78, coming a day after the billionaire lost his position as the world's richest man to Microsoft Inc founder Bill Gates, according to Forbes' annual list. Buffett's net worth plunged to $37 billion from $62 billion last year, the list said.

"Fitch views the company's potential earnings and capital volatility derived from its large, unhedged market exposures as inconsistent with the stability required at the 'AAA' level," the ratings agency said in its statement on Berkshire.

Berkshire had its worst year ever in 2008, and Fitch also cited the firm's "key man" risk in its downgrade due to Buffett's large ownership and vital role in running the company.

Meanwhile, China's Premier Wen Jiabao says he's "worried" about the health of China's $1 trillion worth of U.S. Treasury bonds. The consequence of a slowing U.S. economy, weakening stock market and massive government spending are threatening to send the dollar lower over time, devaluing holdings like Treasuries. That doesn't, however, mean China will sell its massive bond holdings, since there are so few places for such huge pools of capital to go these days (that of course, is not a good thing). Quoted in the Financial Times, Luo Ping, a director-general at the China Banking Regulatory Commission, put it more bluntly:

“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

Neither bit of news spells immediate doom for Berkshire, China or America. But as the long slog through this recession continues, expect to see more cracks in Wall Street's articles of faith.