HSBC links to Berkshire Hathaway; Citigroup tops concerns as stocks, CDS spreads worsen, adviser says

By Kenneth Lim

Boston, Nov. 20 - HSBC USA Inc. is offering a way for investors to piggyback on the fortunes of billionaire Warren Buffett with a series of reverse convertibles linked to Berkshire Hathaway stock, an investment adviser said.

Meanwhile, Citigroup, Inc. was on the top of investors' minds after its stock plummeted, although the concern was more on the risk of default than on breaking barriers, the adviser said.

HSBC links to Berkshire Hathaway

HSBC plans to price 14% reverse convertible notes due March 2, 2009 linked to Berkshire Hathaway Inc. Class B common stock.

The payout at maturity will be par in cash unless the underlying shares fall below 70% of the initial price during the life of the notes and finish below the initial price, in which case the payout will be a number of Berkshire Hathaway shares equal to $1,000 divided by the initial price.

Piggyback strategy

The notes offer investors an unique way to "borrow" the expertise of Buffett without having to actually own shares of his investment company, the adviser said.

"In a way it's a little like buying a reverse convertible that's linked to a mutual fund," the adviser said. "Only in this case the fund manager is a little more famous than most fund managers."

Investors who are interested in the product are probably seeking a way to make money even in a down market, the adviser said.

"I can see some retail investors being interested in this," the adviser said. "They're probably thinking, 'I'm not an expert at stock picking, but Warren Buffett's great at it, I can just get something that mirrors whatever he's invested in.' You're putting your hope in the fund manager's ability to outperform the market."

But it is not obvious that the strategy would work, the adviser said.

"If you understand Buffett's investment philosophy, then you know he's not looking for quick gains, so I'm not sure that you're necessarily going to see a three-month product benefit from a fund that's really looking at a longer horizon," the adviser said. "And of course the man's not infallible. He makes mistakes...Although, yeah, I guess if you had to go with one fund manager, Warren Buffett's not a bad choice."

Citigroup concerns rise

Concerns about Citigroup's health increased on Thursday as the company's stock fell and its credit derivative swap spreads widened, the adviser said.

"I think the concern has been there for some time, but today the concerns got a little bigger," said the adviser, who has "minimal" exposure to Citigroup.

"Of all the major banks, Citigroup's probably the one we're most worried about," the adviser added. "After what happened with Bear Stearns and Lehman, I think the understanding is that nobody's too big to fail, although in this case there's some hope that it's not as bad as it looks and at the end of the day the government's probably going to be supportive. It's honestly a very uncertain subject. What you see today could very easily be speculation. You see that everywhere. Investors pile into something one day and they flee the next day."

CDS swap spreads widened by more than 100 basis points to around 360 bps on Thursday, the adviser said. A Citigroup statement on Thursday said the company was well capitalized and liquid.

Beyond exposure to a Citigroup default, investors were also worried about any fallout if Citigroup should have troubles.

"Even if you don't own any Citigroup debt, you're worried about what problems at Citigroup will do to the rest of the capital markets," the adviser said. "I can't even imagine what's going to happen."

But Thursday's stock downturn for Citigroup - the stock lost 26.41% or $1.69 to close at $4.71 - is unlikely to affect many investors who hold products linked to the stock, the adviser said.

"I don't recall seeing any products recently that are linked to Citigroup," the adviser said. "I think some may have been offered but they probably didn't get priced. I think it's too risky. There may have been some products from before October or September, but those probably breached their barriers already, so it probably doesn't mean much to investors now. If you have a reverse convertible linked to Citigroup, then maybe you're still hoping that it will go above the starting price before maturity, then what happened today would be bad for you. But I think most people are beyond that."

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