Chapter 7 Part 2: Berkshire 2008-2009 Financial Crisis
The Complete Financial History of Berkshire Hathaway by Adam J. Mead (ISBN 978-0-85719-912-6)
These two years are why people study Berkshire. Book value fell 9.6% in 2008 while the S&P dropped 37%. Berkshire outperformed by 27 points. Then 2009 brought 19.8% book value growth while lining up the biggest acquisition in company history. Mead walks through how capital strength turned panic into paychecks.
2008: offense while others scrambled
Insurance held the fort
$2.8 billion insurance underwriting profit. Sixth straight year of negative cost float. Float: $58.5 billion.
Gen Re earned praise for a third consecutive profit year. Tad Montross led underwriting discipline that seemed impossible in 2001.
BHRG earned $1.3 billion. Ajit Jain launched Berkshire Hathaway Assurance for municipal bonds when monolines wobbled. $595 million written in 2008. Buffett: “The investment world has gone from underpricing risk to overpricing it.”
Swiss Re quota-share deal and foreign exchange moves on liabilities boosted multi-line profits.
GEICO: $916 million profit, 7.7% market share, cutting rates to pass savings to customers.
Operating businesses: recession damage
Manufacturing, service, and retailing took a Q4 cliff. Shaw earnings fell 53%. Building products, apparel, Forest River all down hard. Retail revenues fell 9%, earnings 41%.
Marmon joined for $4.5 billion (60% stake, $7.5 billion implied total). 130 businesses, conglomerate inside the conglomerate. Buffett bought quality at a reasonable price while credit markets froze.
Iscar’s Tungaloy acquisition ($1 billion) showed moat-building during downturn. Competitors cut heads. Berkshire subsidiaries made tuck-ins.
MidAmerican: speed as a weapon
Constellation Energy rescue: phone call at noon, firm bid in Baltimore that evening. Deal fell through but Berkshire kept $175 million breakup fee and $917 million gain on preferred stock liquidity injection.
Finance: Clayton’s lesson in incentives
Buffett spent pages on housing bubble mechanics. Brokers and lenders got paid at closing. Risk got packaged and sold. Clayton kept $12.6 billion of loans on its own books, required 10% down, verified income. Delinquency 3.6% vs 5% national average.
Paradox: strong companies paid more to borrow than weak banks getting government support. “Much better to be a financial cripple with a government guarantee than a Gibraltar without one.”
Investments: lender of last resort
October 2008, $14.5 billion in two weeks:
- Goldman Sachs: $5 billion preferred, 10% coupon, warrants
- Wrigley/Mars: $6.5 billion helper deal
- GE: $3 billion preferred, 10% coupon, warrants
Buffett sold J&J and other stocks he would rather keep to fund deals and preserve liquidity. Opportunity cost, not panic.
Also bought more BNSF stock (20.7% by year-end). ConocoPhillips near oil peak: $2.6 billion mistake, admitted openly.
Derivatives: wrote index puts and credit default swaps when pricing favored Berkshire. Controversial but sized so worst case looked like a cheap long-term loan.
“Buy American. I am.” Op-ed in the New York Times, October 2008.
2009: defense beats offense, BNSF loading
Book value +19.8%, but trailed S&P by 6.7 points. Buffett’s framing: Berkshire’s defense in down years beats its offense in up years. That pattern continued.
Insurance: $1.6 billion underwriting profit, seventh straight profitable year. Float $62 billion.
Swiss Re relationships layered: 2008 quota-share, 2009 convertible preferred ($2.7 billion at 12%), adverse development cover. Berkshire as partner, shareholder, and creditor at once.
BHRG wrote fifty-year life reinsurance deal and pulled back cat volume to preserve conservative premium-to-equity ratio ahead of BNSF.
BNSF acquisition agreed late 2009. Railroad held under National Indemnity to offset reinsurance earnings volatility. Only at Berkshire does that sentence make sense.
MSR earnings halved. NetJets: $711 million loss, fleet write-downs. Marmon and Shaw crushed. McLane grew earnings 25% (Grady Rosier praise, some tobacco inventory windfall).
GEICO credit card experiment failed ($50M+). Buffett overruled managers. He admitted the mistake.
Mead’s crisis takeaway
Berkshire did three things simultaneously:
- Absorbed shocks (mark-to-market hits, operating slowdown)
- Deployed capital on favored terms when others could not borrow
- Bought permanent assets (Marmon, BNSF path, Iscar expansion)
The crisis posts in business school case studies focus on Goldman and GE. Mead’s version is broader: municipal bond insurance, Swiss Re rescues, Clayton’s lending discipline, and subsidiaries investing through the recession.
Reputation plus liquidity plus patience. That is the whole chapter in six words.
Previous: Chapter 7 Part 1: Berkshire 2005-2007