Warren Buffett ate some crow over his investment in TXU Corp., something the Oracle of Omaha rarely has to do.

In his annual letter to investors, Buffett said he made a “big mistake” investing $2 billion in 2007 on bonds offered by TXU, now called Energy Future Holdings. The bonds, now worth around $878 million, have lost more than half their value. And unless natural gas prices rise (something unlikely given the drilling boom), Berkshire Hathaway’s investment could be wiped out completely, Buffett wrote.
“I totally miscalculated the gain/loss probabilities [of natural gas prices] when I purchased the bonds. In tennis parlance, this was a major unforced error by your chairman,” Buffett wrote.

The Dallas Observer‘s Brantley Hargrove bestows a new nickname on Buffett (“the inimitable Jesus of Investing”) in his post that unpacks the background of the deal at Unfair Park:

Moody’s never liked the deal to begin with. Private equity and the single biggest purveyor of electricity in Texas — which is a “commodity” we can’t do without — made for extremely awkward bedfellows, the investors service pointed out. Not to mention the fact that they bet on the high price of an historically volatile commodity in natural gas. In Texas’s deregulated market, it happens to set the marginal price of electricity.

When it was soaring high at $13 per million British Thermal Units, TXU’s fleet of coal-fired power plants could generate electricity at a cost that was a fraction of the wholesale price. A honey of an investment, for sure, until gas prices tanked shortly after the purchase, and the renamed generation (Luminant), transmission (Oncor) and retail (TXU Energy) arms of Energy Future Holdings struggled to service a mountain of merger debt.

The Associated Press also lists some of the other mistakes Buffett admits in his letter, including the fact that he was “dead wrong” about his predicted housing recovery and that his large investment in ConocoPhillips cost him several billion dollars when the bottom fell out of the energy market.