Business Analysis: Sage of Omaha's reputation on the line as insurance investigation grows

But, with new documents showing the regulatory investigation into Mr Buffett's own insurance business has increased, it could be the reputation of the legendary billionaire from Omaha which is now on the line.

Berkshire Hathaway, the company Mr Buffett controls, said in a filing late on Friday that US regulators were continuing to investigate a controversial reinsurance contract agreed between General Re, which is owned by Berkshire, and American International Group.

Berkshire said "governmental authorities are also inquiring about the accounting by certain of Berkshire's insurance subsidiaries". The filing, which related primarily to Berkshire's second quarter results, added that the Financial Services Authority in the UK had requested information relating to General Re's operations in the UK.

Finally it said that Milan Vukelic, the chief executive of Faraday - a subsidiary of General Re with links to a syndicate at Lloyd's of London - had been fired.

The opaque statements may not be much help in piecing together the jigsaw of what is really at the centre of the ongoing investigations on both sides of the Atlantic into complex insurance contracts known as "finite reinsurance".

But the market believes the message is clear: General Re, which Berkshire bought in 1998, is in the full glare of a regulatory investigation which could take months to settle and could even lead to legal charges of malpractice.

Shares in Berkshire - which most investors hold for the very long term - lost $496 (£277) on Friday, closing at $83,500. By mid-day yesterday they had fallen a further $100. Altogether, they have dropped 5 per cent this year.

This time last year, to suggest that Mr Buffett would join the long list of powerful and rich American business moguls accused of breaking the rules and engaging in fraud would have seemed ridiculous.

Then early this year it emerged that Eliot Spitzer, the crusading Attorney General in New York, was focusing on a $500m transaction between AIG, the world's largest insurer, and General Re that took place in 2000. The deal - a member of "finite reinsurance" category - caught Mr Spitzer's attention because it did not seem to qualify as insurance at all, on the grounds that it did not transfer any risk that policies could really be claimed on to General Re.

Instead, Mr Spitzer said, it was illegal financial engineering, by which AIG was being lent the money to bolster its balance sheet, but was not declaring the money as a loan.

Mr Spitzer's investigation has so far brought down Hank Greenberg, the domineering former chief executive and chairman of AIG, who resigned in March. While Mr Greenberg has vigorously denied he entered into this and a handful of other reinsurance contracts to inflate the earnings of his mighty company, a series of AIG executives have pleaded guilty, and are helping Mr Spitzer with his investigation.

At General Re, which is the largest reinsurer in the US and fourth biggest in the world, there are executives who have pioneered complicated new forms of insurance which mix the basic concept of transferring risk with financing facilities that allow companies to smooth their earnings. Chief among the architects of such deals is Ajit Jain, who Mr Buffett has said is one of his most prized employees.

While such deals are legal, the issue with regard to AIG will be whether General Re's executives knew that what the insurer was intending to do with the money, and how it was intending to account for it, breached regulations.

Two General Re senior employees have pleaded guilty to criminal charges. They are John Houldsworth, who was head of Cologne Re, a subsidiary of General Re in Ireland, and Richard Napier, the former senior vice president at General Re. In addition to Mr Spitzer, the Securities and Exchange Commission, America's overarching financial watchdog, is also investigating AIG. It said in court papers that Messrs Houldsworth and Napier and with Ronald Ferguson, General Re's former chief executive, were aware of what AIG was doing.

According to a telephone transcript released by the SEC, Mr Houldsworth said to Elizabeth Monrad, General Re's chief financial officer at the time: "They'll find ways to cook the books, won't they? It's up to them. We won't help them to do that too much. We'll do nothing illegal."

The question on the lips of most of America's financial community is whether the inquiry will go all the way up to Mr Buffett. The 74-year-old, who is worth about $44bn personally, has himself said that his company will be judged by regulators on the basis of whether there was "knowing participation" with AIG.

Berkshire has answered that question with regard to its chairman. "Mr Buffett was not briefed on how the transactions were to be structured or on any improper use or purpose of the transactions," it has said in a statement. At his annual shareholder meeting in May, Mr Buffett added that he could not comment on the ongoing investigation into AIG. But he seemed to make a pointed criticism about the potential for wrong-doing at companies run by authoritarian chief executives - a category Mr Greenberg falls into.

Saying the thing he feared most was fraud being committed at his own company, Mr Buffett observed he had encountered situations at other companies where there was an "ego" on the board. He said in such situations, everyone knew the chief executive would be "mad" if earnings targets were not met. "That can lead to a lot of bad things," Mr Buffett said.

Mr Spitzer, who has said he will run in the 2006 elections to be governor of New York, has made it clear that the highly popular Mr Buffett is not a target in his investigation. The straight-talking billionaire Nebraskan was a "co-operative witness" when he was interviewed on the subject of AIG in April.

However, the picture seems to be different with the SEC, to the point that some observers wonder whether the inquiry might be partly motivated by the fact that Mr Buffett is one of the Democrats' most high profile supporters in the business community.

One person close to the Washington lobby circuit said of the Berkshire filing on Friday: "This is very bad news for Buffett. The level of inquiry has increased and there is a strong feeling some of it is politically motivated".

To put his own case on Capitol Hill, Mr Buffett is understood to be using the high-profile lobbying firm Alston & Bird, which counts the Democrats' former leader in the Senate, Tom Daschle, as an advisor. While almost no one believes Mr Buffett's fate will be remotely similar to that of Mr Greenberg, his attempts to keep his company completely without taint look increasingly unlikely.