Warren Buffett, who's made his billions guessing the future of the market, is offering a much scarier kind of forecast these days. The "Oracle of Omaha" has been using recent public appearances to predict new terrorist attacks on the United States. At Berkshire Hathaway's annual meeting in May, typically a confab of cone-head value investors terrorized by lofty price-to-earnings ratios, Buffett declared that detonation of a nuclear device in an American city—"$1 trillion nuclear event" in Manhattan, for example—was inevitable. "We're going to have something in the way of a major nuclear event in this country. It will happen. Whether it will happen in 10 years or 10 minutes, or 50 years ... it's virtually a certainty."
And on CNBC last week, Buffett gave short odds for a dirty bomb, bioterrorism, or some other "act of war" against America. "I don't know anything [about potential threats to U.S. security] but I know basic probabilities. ... I understand how things that seem very unlikely happen when time passes. … There's just plenty of people out there who hate us … more psychotics, more megalomaniacs, more religious fanatics today than 50 years ago." (Although taped, the interview was broadcast just hours after the government announced the arrest of alleged dirty-bomber Jose Padilla.)
The subtext of Buffett's dire warnings? Money, specifically the profitability of his mammoth insurance holdings. Berkshire Hathaway's insurance properties—notably General Re and GEICO—supply 55 percent of the company's $25 billion annual revenue.
No one argues with Buffett's acumen for long-term forecasting. He's still the world's second-richest person, and the gain in book value of his Berkshire Hathaway shares last year outpaced the S&P 500. His portfolio is weighted unapologetically toward bland blue chips such as Coke and Gillette. ("We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement," he quipped once in an interview.)
But Wall Street junkies know that, in his heart of bottom-line hearts, Buffett is an insurance salesman, and insurance is a complex business in this terror-anxious era. Though businesses across the nation are paying higher insurance premiums in the wake of Sept. 11, General Re and GEICO are widely expected to act as a drag on future earnings. Berkshire's insurers—particularly General Re—took a $2.4 billion underwriting loss because of the attacks in New York and Washington. Berkshire's companies are still writing policies on terrorism, but limiting their liability in any nuclear, biological, or chemical attack.
U.S. insurers—like Buffett's—have been forced to treat terrorism like a business problem, and it is causing great uncertainty for them. Insurers do not customarily cover "acts of war," but the industry declared that whatever the attacks were called, it would pay the losses. Insurers know, however, that they don't have the resources to cope with repeated acts of large-scale terrorism, so they have urgently sought legislation that would make the government the principal insurer for any future assaults. A "close-to-worst-case" scenario could conceivably cost $1 trillion of damage, Buffett estimates, and he contends the insurance industry would be destroyed unless it managed in some manner to limit its assumption of terrorism risks. "Only the U.S. government has the resources to absorb such a blow."
Buffett and other insurance giants are clamoring for a congressionally mandated backstop on terrorism insurance. But Congress has bogged down on this issue, failing to agree on what the law should provide.
Buffett has no more insight about coming nuclear terrorism than you do. But he does have $33.2 billion more to lose. Every time Buffett raises the alarm, he may be trying to remind Congress it has to protect the insurance industry. This is not terrorism analysis. It is lobbying. Buffett should stick to buy low, sell high and leave pontificating on terrorism to the professionals. If President Bush ever decides to turn the Office of Homeland Security into the Office of Homeland Securities, then we'll listen to him.
Erin Arvedlund is a columnist for Barron's magazine covering Wall Street, mutual funds, and hedge funds.
Photograph of Warren Buffet by Larry Downing/Reuters.