Warren Buffett's Berkshire Hathaway said on Friday that first-quarter profit tumbled 64 percent, hurt by $1.6 billion of pre-tax losses tied to derivatives contracts.
CNBC.com
Warren Buffett
Net income fell to $940 million, or $607 per Class A share, from $2.6 billion, or $1,682, a year earlier.
Operating profit fell 13 percent to $1.93 billion, or $1,247 per share, from $2.21 billion, or $1,434.
Omaha, Nebraska-based Berkshire is a holding company with more than 70 operating units and a wide array of stock investments.
It typically generates about half its business from insurance and reinsurance.
The derivative losses stemmed from Berkshire's exposure to contracts designed to make money if junk bond stay out of default and stock indexes rise.
In February, Buffett revealed that Berkshire ended 2007 with $40 billion of exposure to 94 of these contracts.
Berkshire said it had a $1.2 billion unrealized loss on put options it wrote on the Standard & Poor's 500 and three foreign stock indexes.
It also reported a $490 million unrealized loss on contracts that require payouts if some high-yield bonds default between now and 2013.
Other contracts brought the net loss derivatives down to $1.6 billion.
Accounting rules require the company to regularly report unrealized gains and losses in earnings, Berkshire said.
The exposure may at first seem odd given that, in his shareholder letter in 2003, Buffett called derivatives "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." But in his letter this year, Buffett said Berkshire had already been paid for its derivatives contracts, giving it cash to invest, and that "there is no counterparty risk," He also said shareholders should be prepared for gains and losses that could "easily" top $1 billion in a given quarter.
In Friday trading, Berkshire's Class A shares fell $300 to $133,600, while its Class B shares fell $12 to $4,448.