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Berkshire Hathaway Back in the Black On $1.5 Billion In Derivatives Gains During Second Quarter

Friday, 7 Aug 2009 | 5:28 PM ET

Warren Buffett's Berkshire Hathaway reports $1.532 billion in after-tax derivatives gains during its second quarter, helping to bring the company's net back into the black.

Most of the "paper" gains for Berkshire's derivatives are the result of rallies by the quartet of stock indexes covered by its "long duration equity index put options contracts."

The contracts are essentially insurance policies against long-term stock market drops. Their current value rises and falls along with the stock indexes they cover, and has to be included in net earnings, according to accounting rules.

Berkshire points out that the mark-to-market accounting produces "extreme volatility in our periodic reported earnings." While Buffett has consistently remained optimistic the contracts will make Berkshire a lot of money years from now, the market hasn't been so sure, and that's helped put pressure on BRK shares, and Buffett's reputation. (It was only a few days ago that Berkshire shares went back above $100,000 for the first time since January.)

This quarter's derivatives gains contributed to an overall net after-tax profit of $3.295 billion dollars for the quarter ($2123 per class A share.) That's up 14.4 percent from $2.880 billion in the second quarter of 2008.

It's also a return to profitability for Berkshire, after it reported a net loss of $1.5 billion in this year's first quarter.

In its second quarter news release, Berkshire says its book value (assets minus liabilities) increased 11.4 percent over three months to reach $73,806 per share at the end of the quarter on June 30. That works out to a total of $114.5 billion, an increase of $11.7 billion dollars since March 31. Book value had fallen in each of the two previous quarters.

Buffett puts an emphasis on book value in Berkshire's annual reports, saying its the best way to estimate the company's "intrinsic value."

Operating earnings came in at $1,147 per share, down 21.7 percent from last year's second quarter, and below the average forecast of $1,238 from the handful of analysts who cover the stock.

Profits from Berkshire's non-insurance businesses, many of which depend on consumer spending, fell by 47 percent to $574 million. Buffett has said in recent months that he's seeing no signs of an economic rebound, based on constantly updated data coming to him from Berkshire's consumer-oriented companies.

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