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Warren Buffett’s Berkshire Hathaway posted a second-quarter profit that tumbled 40% from a year ago, as the company suffered a $1.4 billion paper loss on its derivatives bets.

The conglomerate reported quarterly net income of $1.97 billion, or $1,195 per Class A share compared with last year’s $3.3 billion, or $2,123 per share, during the same quarter.

Berkshire’s $1.4 billion decline in the market value of its derivatives bets on stock market indexes and other financial instruments followed a gain of $1.5 billion a year ago.

Excluding its investment and derivative business, the Omaha, Neb.-based company booked operating earnings per share of $1,866, a 63% rise from $1,147 in the same period last year.

Berkshire’s book value, which includes capital gains and losses whether they are realized or not, rose 2.6% to $86,661 per share.

While CEO Warren Buffett has famously criticized derivatives as "financial weapons of mass destruction," he has lately expressed opposition to Wall Street regulation designed to make derivative trading safer.

Under the federal government’s proposed derivatives rules, companies like Berkshire would likely be required to produce collateral for any new derivatives contracts, whereas Buffett has said Berkshire rarely engages in deals requiring collateral up front payday loan.

Led by investing legend Buffett, Berkshire owns companies ranging from insurance provider Geico to private jet operator NetJets to the railroad Burlington Northern Santa Fe Corp. Berkshire also has stakes in companies including Kraft Foods (KFT, Fortune 500), Coca-Cola (KO, Fortune 500) and American Express (AXP, Fortune 500).

Berkshire (BRKA, Fortune 500) made itself appealing to a wider investor audience by creating more affordable shares through its 50-for-1 stock split earlier this year. While its Class B shares (BRKB) once traded for more than $3,300 apiece, they now run at about $80 a pop and trade on the S&P 500 Index (SPX).

Year-to-date, Berkshire Hathaway’s class A and class B shares are up more than 20%, but shares were down modestly at the close of trading Friday. 

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Lending through Small Business Administration programs has plummeted since the end of May, when the SBA ran out of money for breaks that made those loans less risky for lenders and more affordable for borrowers.

The drop in SBA lending has occurred even as Congress explores new ways to expand small businesses’ access to credit.

The economic-stimulus bill increased the government guarantee on the SBA’s flagship 7(a) loans to 90 percent from the typical 75 percent. The legislation also reduced or waived fees on those loans as well as 504 loans, which are used primarily for real estate. As a result of those breaks, SBA lending rebounded after cratering during the credit crisis of late 2008.

Through June 25, the SBA had approved $10.5 billion in 7(a) loans this fiscal year, which began Oct. 1. That’s up 80 percent from the same period a year ago.

However, lending slowed dramatically in June due to the loss of the higher guarantee and fee waivers. In May, SBA lenders made about $272 million in 7(a) loans per week. That’s not counting the $732 million in 7(a) loans made during the final week of May, as lenders rushed to get their loans approved before the loan breaks expired. In the first four weeks of June, average weekly loan volume dropped to $86 million.

President Barack Obama has called for reviving and extending the higher loan guarantee and fee waivers through the end of the year, and the proposal has bipartisan support. But Congress left town for its weeklong Fourth of July break without acting on it. That lack of urgency frustrates SBA lenders.

Tony Wilkinson, president and chief executive of the National Association of Government Guaranteed Lenders, criticizes Congress for letting “the one stimulus program that was probably working the best” expire.

“Shame on them,” says Eddie Tuvin, vice president of SBA and commercial lending at Capital Bank in Rockville, Md. “Why isn’t it a priority?”

Restoring the 90 percent guarantee “would do as much to really juice the recovery as anything,” says Charles Green, a former SBA lender in Atlanta who now advises businesses on financial issues.

Tuvin says 7(a) loans “breezed through” his bank’s approval process when the 90 percent guarantee was in place. “It was a major factor in the decision of our loan committee to approve several loans that wouldn’t have been made without it low rates payday advance.”

Now it’s much a harder to get a 7(a) loan approved, he says.

Plus, many borrowers and lenders simply are holding off on SBA loans.

“We have borrowers waiting right now who are willing to create and retain jobs,” Wilkinson says.

The Senate is expected to vote soon on legislation that would restore those SBA loan breaks, as well as establish a $30 billion fund that community banks could tap for small-business lending. Chances for the Small Business Jobs Act are good; it cleared a procedural hurdle by a 66-33 vote before the Fourth of July recess.

But that doesn’t mean the SBA loan breaks will be restored right away. The Senate bill differs in many respects from the House’s version of the Small Business Jobs Act. That means the Senate and House would have to hash out their differences before sending the legislation to the president for his signature. That could take weeks, or even months.

Even though the Senate bill increases the size limits on SBA loans — something lenders have long pushed for — Wilkinson would rather see Congress first pass a simple extension of the higher guarantee and fee waivers, and then work out a more ambitious bill.

Financial regulatory reform also awaits a final vote in the Senate when Congress returns. The legislation aims to end “too big to fail” bank bailouts by imposing new capital and leverage requirements, and creating an orderly system to liquidate large financial firms that fail. It also regulates over-the-counter derivatives and creates a new consumer watchdog for financial products.

Critics fear the bill could hurt the availability of credit to small businesses. Tuvin expects banks may cut back their lending as a result of the additional costs and regulations they would face as a result of the legislation. Green fears the bill could lead to more bank consolidation, because it would make it harder for smaller banks to be profitable.

However, Green thinks small businesses could benefit from the bill’s new consumer protections, since many business owners rely on credit cards and revolving lines of credit.

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Johnnie Walkers Stores, the longtime Milwaukee men’s clothing store, is closing Saturday, Vice President David Kodner said.

Kodner blamed the closing on the recession but said he didn’t want to go into detail.

The store at 234 W payday advance. Wisconsin Ave. is the company’s last store, and there are no plans to reopen, he said.

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Milwaukee heavyweight motorcycle manufacturer Harley-Davidson Inc. has named Joanne Bischmann vice president of communications, effective immediately.

A 20-year company veteran, Bischmann reports directly to Harley-Davidson president and CEO Keith Wandell.

“Joanne has a wealth of professional and company knowledge and experience,” Wandell said. “I am extremely pleased that she has accepted this position and we are fortunate to have her bring her strong leadership capabilities to this critical role for the company.”

Bischmann replaced Susan Henderson, who recently resigned for what company management announced as “personal reasons.”

In her new role, Bischmann is responsible for overseeing all aspects of internal and external communications for the company. She will also retain responsibility for the meeting and travel functions.

Bischmann joined Harley-Davidson (NYSE: HOG) in 1990 and has served in a variety of positions, including vice president of marketing and most recently as vice president of licensing and special events.

Bischmann serves on the board of directors of the Betty Brinn Children’s Museum and is the vice president of the board’s development and strategic planning committee.

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Millions of Americans are not only upside down on their mortgage, they also appear to be shunning that monthly payment in favor of meeting their everyday expenses.

In the state of California, for example, more than 10% of credit card-carrying consumers were choosing to pay that bill rather than their mortgage as of last fall, according to a recent study published by the credit reporting agency TransUnion.

Borrowers across the country have also been just as anxious to pay down their home equity line of credit rather than their primary mortgage, based on recent figures from the FDIC, if for no other reason but to continue using their house like an ATM.

History has shown that when cash-strapped consumers are trying to make ends meet, the mortgage is often the first thing people stop paying, said Scott Hoyt, senior director of consumer economics at Moody’s Economy.com.

When the U.S. housing market bubble burst, it had that exact effect, shaking up consumers so-called "payment hierarchy."

In good economic times, consumers usually pay the mortgage first, car loan second, and their credit cards and everything else after that.

So with many economists declaring that the recession is likely over, you’d expect more consumers to go back to paying their mortgage first. That’s not happening.

The TransUnion study revealed that the number of consumers who were delinquent on their mortgage but current on their credit card stood at 6.6% in the second half of 2009, up from 4.3% at the start of 2008.

Elevated unemployment levels have helped fuel the change in consumer behavior. But other factors are also at work, according to experts.

For most borrowers, paying the credit card or home equity line of credit is simply more feasible than trying to tackle a significantly larger mortgage payment.

Others have gotten wise to the fact that even after they stop making payments on their mortgage, chances are they won’t be evicted from their home until much, much later. In states such as Florida, for example, foreclosure proceedings have been known to take as long as 18 months.

More often than not however, struggling homeowners simply want to maintain some access to credit in the event they need to take care of their day-to-day expenses such as groceries or to fix the broken muffler on their car.

Unlike in years past where it was relatively easy for questionable borrowers to secure a credit card or home equity loan, banks now make it much more difficult for borrowers to secure a line of credit, said Ezra Becker, director of consulting and strategy in TransUnion’s financial services unit.

Banks have also tried their own programs aimed at getting consumers back on track. Some have attempted modifications on borrowers’ primary mortgage and home equity loan.

The nation’s four largest banks - Citigroup (C, Fortune 500), Wells Fargo (WFC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500) - recently agreed to participate in the Obama administration’s Second Lien Modification Program, which aims to stem the rising tide of foreclosures by having banks modify a borrower’s second mortgage.

In instances where consumers have loans with two different financial institutions, banks have tried collaborating in order to minimize losses for both the lender and the borrower, said Shelley Leonard, senior vice-president of consumer lender strategy for Lender Processing Services, a provider of mortgage data to the banking industry.

"I think all the banks are interested in the best outcome for the borrower," she said. "In order for that to be achieved, they will have to address the first and second mortgage."

Others have adopted a proactive approach with customers believed to be at risk of faltering on their loan payments, in an effort to mitigate losses.

The Birmingham, Ala.-based Regions Financial (RF, Fortune 500), for example, implemented a financial check-up in late 2007 on some of its largest mortgage holders or those with adjustable-rate mortgages that were poised to reset.

That appeared to have some success as the percentage of loans in the company’s mortgage portfolio that were in foreclosure stood at 1.95% at the end of last year, less than half the national and regional average, said Barb Godin, an executive in Regions’ consumer credit division.

Consumers are unlikely to stick to such unorthodox financial behavior for good. Experts said that eventually, homeowners will once again start paying their mortgage before everything else.

But for that to happen though, notes Moody’s Hoyt, home prices will have to start improving first. 

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Stocks ended a choppy session barely higher Wednesday, with the Dow and Nasdaq eking out fresh 2009 highs as investors mulled a stronger dollar and opted to play it cautious at the end of a tumultuous year.

The Dow Jones industrial average (INDU) added a few points, ending at the highest point since Oct. 1, 2008. The S&P 500 index (SPX) ended just above the unchanged line, closing just shy of 15-month highs hit two days ago.

The Nasdaq composite (COMP) added a few points, ending at the highest point since Oct. 3, 2008.

Stocks ended a volatile session modestly lower Tuesday, with the three major indexes breaking a six-session winning streak that had left the market at 15-month highs. That weakness spread into Wednesday’s session, the second-to-last trading day of the year.

A stronger U.S. dollar put some pressure on the market as well, dragging on commodity prices and stocks, and pulling down shares of companies that do a lot of business overseas and therefore benefit from a weaker dollar. After sliding for most of the year versus the euro and yen, the dollar has gained over the last few weeks as investors have bet that the economy is improving.

Trading volume has been low this week, with many market pros and individual investors on vacation. Lighter trading volume can cause increased volatility. All financial markets are closed Friday for the New Year’s Day holiday.

Year-to-date, the Dow has risen 20%, the S&P 500 has climbed almost 25% and the Nasdaq has gained 45%, as of Tuesday’s close. All three indexes have posted more substantial gains since falling to multi-year lows on March 9 amid the height of the financial crisis.

"I think the market seems to have ended the year on a slightly positive note, with many investors happy to lock in their profits and look ahead to the new year," said Michael Sheldon, chief market strategist at RDM Financial Group.

Any stock market gains accrued next year are expected to be a lot milder, analysts say, as the government stimulus fades at the same time the slow-growing economy struggles to create jobs. Meanwhile, the consumer spending environment is expected to stay weak, the dollar could firm up and the Federal Reserve is expected to begin raising interest rates in the second half of 2010.

Sheldon said that 2010 could end up looking something like 2004, which proved to be a leveling year after the massive gains of 2003. 2003’s gains followed a three-year bear market.

The S&P 500 rose 26% in 2003, seesawed for the first nine months of 2004 and then managed a big run in the last quarter, ending the year up around 9%.

Sheldon said it wouldn’t be surprising to see the market churn or even selloff a bit in the first half of the year but eventually move back up to end the year with gains of 10% to 15%.

Other analysts are concerned that a bigger selloff could take hold, particularly if economists have been overly-optimistic about the economy’s ability to recharge once the fiscal and monetary stimulus starts to fade out.

"Right now the sentiment in the stock market is at bullish levels that haven’t been seen since 2007," said Matt Havens, wealth advisor at Global Vision Advisors. In October 2007, the S&P 500 and Dow industrials closed at all-time highs and the Nasdaq composite at the highest point since 2000.

"The underlying strength of the economy is uncertain going into the next year and the longer stocks keep moving higher, the greater the potential for a significant pullback," Havens said.

Economy: The Chicago PMI, a regional read on manufacturing, rose to 60 in December from 56.1 previously. The improvement was a surprise, with economists surveyed by Briefing.com expecting it to drop to 55.1.

Financials: Troubled auto and mortgage financing firm GMAC Financial Services is expected to receive a third round of bailout funds, according to a published report. GMAC is expected to get an additional $3.8 billion on top of the $13.5 billion it has already received since Dec. 2008.

World markets: Asian markets mostly ended lower. In Europe, London’s FTSE 100 lost 0.7%, Germany’s DAX lost 0.9% and France’s CAC 40 lost 0.6%.

Commodities and the dollar: COMEX gold for February delivery fell $5.60 to settle at $1,092.50 an ounce. Gold closed at an all-time high of $1,218.30 an ounce earlier this month.

U.S. light crude oil for February delivery rose 41 cents to settle at $79.28 a barrel on the New York Mercantile Exchange.

Bonds: Treasury prices rose, lowering the yield on the 10-year note to 3.79% from 3.80% late Tuesday. Treasury prices and yields move in opposite directions.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by eight to seven on volume of 645 million shares. On the Nasdaq, advancers topped decliners seven to six on volume of 1.31 billion shares. 

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Japanese Trade Minister Masayuki Naoshima apologized for speaking about third-quarter GDP data to oil industry executives on Monday ahead of its official release.

“I’m sorry. I honestly didn’t know it was due to be released at 8:50 a.m. (2350 GMT) so I thought it would be OK to talk about it,” Naoshima told reporters.

“I apologize for causing trouble and I’ll be careful from now on.”

Naoshima added that he told the industry officials about the GDP figures because people were concerned about the state of the economy.

(Reporting by Tetsushi Kajimoto; Writing by Chris Gallagher; Editing by Rodney Joyce)

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U.S. department store operator Macy’s Inc forecast earnings for the fourth quarter, which includes the crucial holiday shopping season, far below Wall Street expectations on Wednesday, sending shares down 8.1 percent.

“The falls in same-store sales were less dramatic than they could have been, and there are consumers shopping,” said Leah Hartman, an analyst with CRT Capital Group. “Expectations might have gotten a little ahead of themselves.”

Macy’s is the first major U.S. department store chain to report financial results this week. The others include: JC Penney Co, Nordstrom Inc and Kohl’s Corp.

On a call to analysts, Chief Financial Officer Karen Hoguet warned that the economy made forecasts more challenging.

“There is more uncertainty than usual in the environment,” she said.

Macy’s forecast same-store sales, or sales at stores open at least a year, to fall between 1 percent and 2 percent in the fourth quarter.

It also said it expects fourth-quarter earnings of $1 to $1.05 per share. Wall Street analysts had expected earnings of $1.17 per share, according Thomson Reuters I/B/E/S.

The company did improve its outlook for full-year same-store sales, forecasting a decline of 5.4 percent to 5.7 percent, compared to an earlier forecast for a decline of 6 percent to 8 percent payday cash advances.

Analysts said Macy’s efforts to keep inventories lean resulted in fewer markdowns, better sales and improved gross margins. Macy’s gross margin rose to 40.2 percent from 39.5 percent a year earlier.

3RD QUARTER BEAT

In the third quarter, Macy’s net loss narrowed to $35 million, or 8 cents a share, from $44 million, or 10 cents a share, a year earlier. Excluding one-time items such as $33 million in restructuring costs, its loss was 3 cents a share.

Last year, the retailer restructured itself under its “My Macy’s” program, designed to help the chain focus on local tastes and reduce head office expenses and duplications. So far in 2009, the company has spent $205 million on its restructuring.

Macy’s said sales fell 3.9 percent to $5.28 billion in the third quarter.

Analysts, on average, had been expecting a loss of 7 cents per share and sales of $5.25 billion, according to Thomson Reuters I/B/E/S.

The Cincinnati-based chain said losses had narrowed on the strength of its Bloomingdale’s stores and online sales, which rose 21.1 percent during the quarter. 

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NBC Universal looks to be in play, with minority shareholder Vivendi considering shedding its stake and Comcast, and now undoubtedly others, kicking the tires.

As the news broke, I just happened to be getting through the new book — The Curse of the Mogul: What’s Wrong with the Worlds Leading Media Companies, written by a trio of industry experts who teach a class at Columbia Business School. Nothing like a real live case study.

Essentially, the authors argue lucidly that the cadre of media moguls who dominated headlines for much of the past two or three decades have been deal junkies chasing rivals out of misguided notions about how to achieve long-term success.

Among other things, the writers — one of whom, Jonathan Knee, is actually a media investment banker — argue that such attributes as deep pockets, strong brands, and talent are "sham sources of competitive advantage", and that four key "media myths" have colored the mogul world-view: growth at all costs, globalization, the idea that "content is king" and "the cult of convergence."

It’s hard to argue with these folks — another author, Bruce Greenwald, is a respected economist at Columbia — but I will quibble with the book’s numerical set up: that many of the biggest and best-known media stocks have seriously underperformed the market.

The quibble is mainly existential in nature, rather than financial: if you measure only surviving companies in industries that have had enormous amounts of consolidation and deal-making, it stands to reason that they would under-perform.

As the authors point out, most mergers across all industries have been shown in academic studies to destroy value rather than create it — but they argue that this has taken place more egregiously in media mogul-land, as evidenced by some $200 billion in writedowns this decade.

My counter-point is simply that some investors have done quite well by investing in media companies, particularly if they were sellers into mergers, and took cash or sold their shares in the combined company around the time of its sale.

To wit, if you were a CBS (CBS, Fortune 500) shareholder when it was merged into Viacom (VIA) or an AOL shareholder around the time it combined with Time Warner (TWX, Fortune 500) (owner of Fortune and CNNMoney) or a Polygram shareholder when it sold to Seagram you could have done nicely. Ditto Pixar to Walt Disney (DIS, Fortune 500), and, if its deal with Disney proceeds as planned, Marvel Entertainment — and so forth.

Again, this is an existential (and maybe slightly cynical) point. Keeping in mind the book’s line that "only careful selection of dates can make any of the individual media conglomerates look good," yesterday I arbitrarily charted 10-year performance for Time Warner, News Corp. (NWS, Fortune 500), Comcast (CMCSA, Fortune 500), and Disney — the biggest of the survivors — against the S&P 500. With the index down 18% during that period, Disney was up 17% and News was down 3%. Comcast was off 28% and Time Warner sank 73%. One supposes "The Mixed Bag of the Mogul" is not such a compelling title.

Getting back to NBC and, its suitor Comcast: As it turns out, Comcast is one of the heroes of the book, with its CEO Brian Roberts praised for his well-conceived and deftly-executed acquisition of the former AT&T cable systems.

NBC, of course, is subsidiary of a giant conglomerate whose CEO, Jeff Immelt, has said he is committed to keeping the media business and shrinking GE’s (GE, Fortune 500) dependence on finance — though that was at a time before GE’s sinking market cap was in danger of being eclipsed by Apple’s.

Vivendi looks to be the catalyst. If the French telecom and music company wants to shed its 20% stake in NBC U, it has a put to do so which it can exercise in a few weeks’ time; this means GE either has to put up between $4 and $7 billion to buy the stake or consider an IPO of NBC U, which may not be an appealing option given some of the challenges at the company’s broadcast and movie divisions. People familiar with the talks say that Comcast would end up with 51% of the private joint venture being contemplated, by putting in some cash and content assets.

The authors of Curse of the Mogul do have one big caveat in their praise of Comcast’s acquisition of AT&T: that Comcast overpaid. Comcast shares have fallen amid the deal reports, just as they did when the company bid unsuccessfully for Disney a few years back.

Analyst Vijay Jiyant at Barclays Capital said in a report this morning that based on media reports valuing NBC at around $32 billion in the deal, Comcast would be overpaying again. And of course all this attention could smoke out other potential bidders, perhaps DirecTV but probably not (as I and others have speculated in the past) Time Warner.

As the latest dance gets underway, all involved might heed one of the book’s many cautions: "you can want a thing too much, and media moguls frequently do." 

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Sales of existing U.S. homes probably climbed in August to the highest level in two years, another sign the real-estate collapse that triggered the global recession is abating, economists said before a report today.

Purchases rose 2.1 percent to a 5.35 million annual rate, according to the median forecast of 74 economists in a Bloomberg News survey. It would be the fifth consecutive gain, capping the longest stretch of increases since 2004.

Government tax credits for first-time buyers and foreclosure-induced price declines are helping the housing market recover from the worst slump since the Great Depression. Federal Reserve policy makers yesterday committed to keeping interest rates low to ensure the pickup in growth is sustained.

“The housing recovery is under way,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York. “While the first-time homebuyer tax credit likely boosted sales, there has been a fundamental shift in home buying due to greater affordability and confidence.”

The National Association of Realtors’ report is due at 10 a.m. in Washington. Bloomberg survey estimates ranged from 5.1 million to 5.55 million after a 5.24 million rate in July. Resales reached a 4.49 million pace in January, their lowest level since comparable records began in 1999.

A report at 8:30 a.m. from the Labor Department is projected to show the number of Americans seeking jobless benefits rose last week to 550,000 from 545,000 a week earlier.

Leading Indicator

Purchases of existing homes, which make up more than 90 percent of the market, are tabulated when sales close and therefore reflect contracts signed a month or two earlier. Sales of newly built residences, which make up the rest, are considered a more leading indicator because they are counted when a contract is signed.

The Commerce Department may report tomorrow that purchases of new houses rose in August to the highest level in 12 months, according to a Bloomberg survey.

Fed policy makers yesterday maintained they will keep the benchmark lending rate near zero “for an extended period,” while noting that the economy and housing had strengthened. They also said they will slow central bank purchases of mortgage debt securities in order to extend the $1.45 trillion program through the first quarter of 2010 rather than completing it by the end of this year.

They extended the period to allow more time “to work out of the housing problems,” John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North, Carolina, said in a report to clients yesterday.

First-Time Buyers

The Obama administration’s $8,000 tax credit for first- time home buyers, which is due to expire at the end of November, combined with the plunge in prices as foreclosures climbed, have helped lift sales this year. The Realtors’ group and the National Association of Home Builders have lobbied to extend the credit on concern demand will wane after it lapses.

Treasury Secretary Timothy Geithner told reporters on Sept. 17 that the administration would take a “careful look” at extending the credit and called signs of stabilization in the U.S. housing market “very encouraging.”

Growing demand has prompted builders such as KB Home to get back to work. Housing starts rose to a nine-month high in August, the Commerce Department reported last week, indicating residential construction may soon add to growth after subtracting from gross domestic product since 2006.

Builder Shares

The Standard & Poor’s Homebuilder Supercomposite Index is up 32 percent so far this year, compared with a 17 percent gain for the broader S&P 500.

Prices, which most economists forecast would be the last component of the market to turn, have begun to improve. The Federal Housing Finance Agency’s home-price index for purchases was up 1.1 percent in the three months through July, the best performance since early 2006.

The recent increases may also be contributing to the rise in sales as buyers who had been waiting for prices to turn jump back into the market, economists said.

“We’re seeing a firming of prices in a number of markets, not all,” Eli Broad, founder of Los Angeles-based KB Home, said yesterday in an interview with Bloomberg Television. “I think we have bottomed out in many markets.”

KB Home on Sept. 16 announced it was resuming its building operations in the mid-Atlantic region, including the Washington, D.C., area.

Still, with unemployment forecast to reach 10 percent by the end of the year and record foreclosures adding to the 4.4 million houses on the market, any rebound in sales, construction or prices will take time to strengthen.

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