Following Monday's decline to 12-year lows, markets have staged an impressive rally, whose longevity will be closely watched for any signs of the formation of a market bottom. Today's overseas markets were promising, as they turned in sharp gains, with advances in the Nikkei of 5.2%, the Hang Seng 4.4%, the FTSE 1.8%, the CAC 1.8% and the Dax 1.3%. After yesterday's report that China's industrial production sank to record lows, the Shanghai Composite bucked the positive trends elsewhere, ignoring its Premier's comments regarding the possibility of additional stimulus funds, and fell 0.2%. Premarket futures in the US point to follow-through strength today in advance of a key report on consumer confidence and the G-20 and OPEC meetings this weekend.

Bank of America's (NYSE:BAC) CEO Ken Lewis added to the comments made by Citigroup's (NYSE:C) Pandit and JP Morgan's (NYSE:JPM) Dimon, refuting concerns of ticking time bombs on their balance sheets necessitating nationalization, averring the firm was profitable in the first two months of the year, should earn nearly $50 billion pretax and pre-provisions in 2009, and should survive the recession without heading back to the government trough. Financial sector shares rose 9.0%, with shares of Bank of America (NYSE:BAC) up 18.7%, Wells Fargo (NYSE:WFC) up 17.4%, and JP Morgan (NYSE:JPM) up 13.7%. All ten S&P sectors rallied during the session with gains of 5.1% in health care, following heightened deal activity in the group, 4.3% in industrials, and 3.9% in consumer services and telecommunications stocks. On the DJIA, only a 0.6% decline in Microsoft (NASDAQ:MSFT) shares sullied the component gains. Pfizer (NYSE:PFE) shares jumped 9.6% on the success of its promising pancreatic cancer drug. General Motors (NYSE:GM) shares rallied 17.2% after the firm noted that recent cost-saving measures would permit the company to survive through March without the $2 billion in emergency funds previously sought. General Electric (NYSE:GE) shares gained 12.7% after S&P, as widely anticipated, lowered the firm's rating from AAA, as the cut of only one notch was less than feared with positive mention made that, "We believe that GE's cash generation capabilities remain fundamentally strong- - even in the face of enormous global economic headwinds." Shares of Buffett's Berkshire Hathaway (NYSE:BRK.A) also took a ratings downgrade in stride Thursday, gaining 2.4%, despite Fitch's downgrade from AAA to AA+, which resulted from concerns over volatility from its equity investments and holdings of derivative contracts tied to equity and credit markets, as well as the importance of Buffett on the firm's prospects.

MILAN -(Dow Jones)- Mediobanca SpA (MB.MI) is better placed than other niche European investment banks to grab a bigger share of the diminishing M&A advisory market in Italy and Europe, taking up space left by major banks that have been weakened or forced out by the financial crisis, analysts and observers say.
Mediobanca has itself suffered fallout from current market difficulties and is expected to fall into the red in 2009, but observers say veteran Chairman Cesare Geronzi's impressive address book and Chief Executive Alberto Nagel's tight rein on expenses have turned the advisory side of the business into a powerhouse.
In the first half of fiscal 2009, Mediobanca's wholesale banking net interest income rose 18% to EUR141.2 million compared with EUR119.2 million a year earlier. In the same period, Mediobanca earned over EUR123 million from fees and commission income.

Geronzi has helped the bank to become a key player in Italian finance, where it leads Banca Leonardo and the Italian branch of investment bank Rothschild in advisory business.
Although the financial crisis has drastically reduced the volume of M&A activity worldwide, Mediobanca has generated advisory fees from deals in Italy, Spain, the U.K. and Germany, taking advantage of problems at formerly dominant banks such as Morgan Stanley (MS) and Credit Suisse (CS), that were badly weakened by the financial crisis.

To the Shareholders of Berkshire Hathaway Inc.:

Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over)book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.*

The table on the preceding page, recording both the 44-year performance of Berkshire’s book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By year end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.

As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”

I told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

I made some other already-recognizable errors as well. They were smaller, but unfortunately not that small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At year end we wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes “unforced errors.”

Derivatives contracts, in contrast, often go unsettled for years, or even decades, with counter parties building up huge claims against each other. “Paper” assets and liabilities – often hard to quantify – become important parts of financial statements though these items will not be validated for many years. Additionally, a frightening web of mutual dependence develops among huge financial institutions. Receivables and payables by the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.

Sleeping around, to continue our metaphor, can actually be useful for large derivatives dealers because it assures them government aid if trouble hits. In other words, only companies having problems that can infect the entire neighborhood – I won’t mention names – are certain to become a concern of the state (an outcome, I’m sad to say, that is proper). From this irritating reality comes The First Law of Corporate Survival for ambitious

CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mind boggling screw-ups that are required.

Considering the ruin I’ve pictured, you may wonder why Berkshire is a party to 251 derivatives

contracts (other than those used for operational purposes at Mid American and the few left over at Gen Re). The answer is simple: I believe each contract we own was mispriced at inception, sometimes dramatically so. I both initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the Chief Risk Officer as well. If we lose money on our derivatives, it will be my fault.

The Black-Scholes formula has approached the status of holy writ in finance, and we use it when valuing our equity put options for financial statement purposes. Key inputs to the calculation include a contract’s maturity and strike price, as well as the analyst’s expectations for volatility, interest rates and dividends.

If the formula is applied to extended time periods, however, it can produce absurd results. In fairness, Black and Scholes almost certainly understood this point well. But their devoted followers may be ignoring whatever caveats the two men attached when they first unveiled the formula.

It’s often useful in testing a theory to push it to extremes. So let’s postulate that we sell a 100- year $1 billion put option on the S&P 500 at a strike price of 903 (the index’s level on 12/31/08). Using the implied volatility assumption for long-dated contracts that we do, and combining that with appropriate interest and dividend assumptions, we would find the “proper” Black-Scholes premium for this contract to be $2.5 million.

In our first change, several financial journalists from organizations representing newspapers,

magazines and television will participate in the question-and-answer period, asking Charlie and me questions that shareholders have submitted by e-mail. The journalists and their e-mail addresses are: Carol Loomis, of Fortune, who may be emailed at This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; Becky Quick, of CNBC, at This e-mail address is being protected from spambots. You need JavaScript enabled to view it , and Andrew Ross Sorkin, of The New York Times, at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . From the questions submitted, each journalist will choose the dozen or so he or she decides are the most interesting and important. (In your e-mail, let the journalist know if you would like your name mentioned if your question is selected.)

Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the

journalists will pick some tough ones and that’s the way we like it.

In our second change, we will have a drawing at 8:15 at each microphone for those shareholders hoping to ask questions themselves. At the meeting, I will alternate the questions asked by the journalists with those from the winning shareholders. At least half the questions – those selected by the panel from your submissions – are therefore certain to be Berkshire-related. We will meanwhile continue to get some good – and perhaps entertaining – questions from the audience as well. So join us at our Woodstock for Capitalists and let us know how you like the new format. Charlie and I look forward to seeing you.

February 27, 2009 Warren E. Buffett

Chairman of the Board