Berkshire Hathaway needs to name a Buffett successor
Fitch just stripped Berkshire Hathaway (BRK.A) of its "AAA" rating and dropped it one notch to "AA+" because of its "earnings and capital volatility derived from its large, unhedged market exposures." But that's not all. Fitch is also uncomfortable with Berkshire's future, saying Berkshire is too closely linked to Buffett to merit an "AAA" rating.
In referring to Buffett, Fitch said it "views this risk as unrelated to Mr. Buffett's age, but rather Fitch's belief that BRK's record of outstanding long-term investment results and the company's ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffet."
Warren Buffett, too, realizes it's time to pick a successor. He even said so in his 2007 letter to shareholders, where he mentioned he was looking for a new candidate to become chief investment officer when he steps down. His second in line, Louis Simpson, who is chief executive of Geico, is now in his seventies as well. Buffett said he wants someone who can take the job for a long period of time.
In the same letter Buffett made it clear that he's not leaving. He wrote: "At 76, I feel terrific and, according to all measurable indicators, am in excellent health. It's amazing what Cherry Coke and hamburgers will do for a fellow." All joking aside, it is time for him to look at who will be running Berkshire Hathaway after he's gone.
Indian newspapers think they know who Buffett's choice of successor is. They believe it is Ajit Jain, who received high praises in Buffett's recent letter to shareholders, where he said, "Ajit came to Berkshire in 1986. Very quickly, I realized that we had acquired an extraordinary talent. So I did the logical thing: I wrote to his parents in New Delhi and asked if they had another one like him at home. Of course, I knew the answer before writing There isn't anyone like Ajit."
He also wrote, "From year to year, Ajit's business is never the same. It features very large transactions, incredible speed of execution and a willingness to quote on policies that leave others scratching their heads. When there is a huge and unusual risk to be insured. Ajit is almost certain to be called."
Right now, Ajit Jain leads the reinsurance division at Berkshire Hathaway. He has just 31 employees and brings in billions of dollars for the company. Ajit got his MBA from Harvard University and worked with McKinsey before joining Berkshire in 1986.
While Buffett hasn't named the next in line for the CEO post at Berkshire, he has stated that his son Howard, 51, would become the next chairman. When asked by the Indian Syndicate if Ajit would be named as his successor, however, Buffett answered, "I still do talk to him every day. That's how I get smarter."
Clearly, it's time for Buffett to stop hinting around at who his successor is and make his choice known in order to calm the markets about Berkshire's future. Fitch made that sentiment known loud and clear with its warning. Will the cut to "AA+" be the last if Buffett doesn't heed that warning?
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and Trading for Dummies.