March 3 (Bloomberg) -- Billionaire investor Warren Buffett rebuked critics of sovereign wealth funds, saying their owners overseas are buying up stakes in American companies because of U.S. trade policy, not sinister political motives.

``This is our doing, not some nefarious plot by foreign governments,'' Buffett, the chairman of Berkshire Hathaway Inc., said Feb. 29 in his annual letter to shareholders. ``Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here.''

Countries including China and Russia have directed record central bank reserves into funds wielding as much as $2.9 trillion. Firms from Singapore, Korea, Kuwait and Abu Dhabi bought stakes during the past four months in Citigroup Inc., the biggest U.S. bank by assets, and Merrill Lynch & Co., the world's biggest brokerage. U.S. Treasury Department and Securities and Exchange Commission officials have said there's a risk that government-owned funds may invest for political, rather than commercial, ends.

``He's right that we're the ones that created the problem in the first place,'' said Mohnish Pabrai, who manages $600 million at Pabrai Investment Funds in Irvine, California. ``The U.S. is better off if foreign governments buy Treasuries, because we have a printing press for them, but if I were running China's money, I'd be buying U.S. companies, oil reserves, hard assets too.''

Pabrai and a friend paid $650,100 last year in an annual charity auction to have lunch with Buffett.

Warren's World

``Both the growth in size and number of these funds is such now that vigilance is required,'' Deputy U.S. Treasury Secretary Robert Kimmitt said in a Feb. 27 interview on Bloomberg Television. SEC Chairman Christopher Cox said in December that the state-run investment firms don't adequately disclose why they're buying stocks and other assets.

Buffett, 77, said U.S. hostility could backfire.

``Why should we complain when they choose stocks over bonds?'' Buffett wrote, referring to the foreign funds. ``Our country's weakening currency is not the fault of OPEC, China, etc.,'' he said. ``In defending a sensible trade policy, the U.S. should not single out countries to punish or industries to protect. Nor should we take actions likely to evoke retaliatory behavior.''

Stock Price

Buffett's analysis carries weight with shareholders and investors, who regard him as a sage. Over four decades, he built Berkshire Hathaway from a failing textile manufacturer into a $215 billion investment and holding company.

Berkshire fell $3,500, or 2.5 percent, to $136,500 at 4:03 p.m. in New York Stock Exchange composite trading, the biggest decline in eight weeks. The stock rose 29 percent in 2007 and about 4,700 percent in the 20 years through Dec. 31, six times more than the Standard & Poor's 500 Index, dividends included.

In his annual letters, Buffett offers his view of market conditions, potential investments, corporate governance and economic policy, as well as his plans for Omaha, Nebraska-based Berkshire.

Along with insurance operations and a stock portfolio valued at $75 billion at year-end, Berkshire owns businesses ranging from candy making and residential real estate brokerage to utilities and corporate jet leasing, giving Buffett an insider's perspective on many facets of the economy and finance.

Buffett released the shareholder letter with Berkshire's 2007 full-year and fourth-quarter financial results. Net income in the quarter fell 18 percent to $2.95 billion, or $1,904 a share, as profit from insurance units declined. The company dropped $250, or 0.2 percent, to $140,000 Feb. 29 in New York Stock Exchange composite trading.

Party's Over

Berkshire said it owned a 1.3 percent stake in Sanofi- Aventis SA, France's largest pharmaceuticals company, at year- end. The 17.2 million shares cost $1.47 billion and had appreciated by $109 million, Berkshire said.

In last year's letter, Buffett said his method was to ``be fearful when others are greedy, and be greedy when others are fearful.''

He said Berkshire followed that maxim by rushing to insure coastal properties after 2005's Hurricane Katrina caused prices to double and triple. Berkshire, which gets about half its profit from insurance, sold less of the coverage in 2007 as prices dropped.

``That party is over,'' Buffett said in last week's letter. ``It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down.''

Insurance Underwriting

Fourth-quarter underwriting profit from Berkshire's insurance business dropped 46 percent to $465 million, led by declines at auto insurer Geico Corp. and reinsurance units. Reinsurance is coverage for insurance companies.

The worst housing recession in a quarter century hurt Berkshire's building-related companies. Profit fell 17 percent to $109 million at Shaw Industries, the world's largest carpet maker. Earnings also dropped at Acme Brick and Johns Manville.

Buffett applied the strategy of greed in the face of fear when defaults on mortgage-related securities surged during the past year.

The losses threatened the credit ratings of bond insurers including MBIA Inc. and Ambac Financial Group Inc. Berkshire formed a company in December to compete with the firms, charging more to guarantee payment on municipal debt while avoiding the mortgage-related securities that jeopardized their credit ratings.

Offer Withdrawn

As defaults on mortgage-related securities climbed, Buffett offered to assume $800 billion of municipal bond obligations from MBIA, Ambac and FGIC Corp. in exchange for more than $9 billion in premiums. The offer was withdrawn after none of the companies accepted it, Buffett told CNBC today.

``We tossed our hat in the ring and they tossed the hat back,'' Buffett told the cable news network.

``He was just seeing if they were desperate enough to have to take the deal,'' said Charles Hamilton, an analyst at FTN Midwest Securities Corp. in Nashville, Tennessee. Hamilton rates the Berkshire stock ``neutral.''

Buffett said Berkshire took on more risk of losses from derivatives as global credit markets tightened, by selling financial contracts that pay buyers if high-yield bonds default. Berkshire has 94 of the contracts, up from 62 last year, he said.

The company collected $3.2 billion in premiums from the derivatives by the end of December, and paid $472 million in losses. In the ``worst case,'' Berkshire could be required to pay out as much as $4.7 billion more if bonds ``in various high- yield indexes'' default, Buffett said.

Derivative Contracts

``These contracts will prove profitable,'' he predicted. High-yield, or junk, debt is rated below Baa3 by Moody's Investors Service or less than BBB- by Standard & Poor's.

The billionaire returned in this year's letter to one of his recurring themes: questionable corporate accounting. He took ``America's CEOs'' to task for understating pension liabilities by using unrealistically optimistic estimates when forecasting their investment returns.

The 363 companies in the S&P 500 with pension plans in 2006 assumed an annual overall return of 8 percent on average, after expenses, meaning the 72 percent of assets not held in fixed income securities would have to generate about 9.2 percent annually, Buffett said.

The Dow Jones Industrial Average, which has declined 7.6 percent this year, would have to reach 2,000,000 by the end of 2099 just to match the 5.3 percent compound annual market value gain of the 20th century, Buffett said.

Pension Plans

``Does anyone really believe this is the most likely outcome?'' he said.

Companies with pension plans in the U.S. and Europe almost always assume the American plan managers will produce higher returns, he noted.

``I've never seen this puzzle explained,'' he said. ``But the auditors and actuaries who are charged with vetting the return assumptions seem to have no problem with it.''

Buffett revealed in last year's letter his decision to split the roles of chief executive officer and chief investment officer when he steps down. He previously said the CEO spot will go to one of three Berkshire managers, whom he hasn't identified. He has said his health is good and he has no plans to retire.

Four ``young to middle-aged'' candidates have been selected for the investing post, Buffett wrote in this year's letter.

``All manage substantial sums currently,'' he said. ``The board knows the strengths of the four and would expect to hire one or more if the need arises.'' They range from ``well-to-do to rich,'' and ``all wish to work for Berkshire for reasons that go beyond compensation,'' Buffett said.

To contact the reporter on this story: Josh P. Hamilton in New York at jphamilton@bloomberg.net.

Last Updated: March 3, 2008 16:20 EST