November 19, 2008
Betting on Buffett’s Big Bet Backfiring
Berkshire’s Credit Risk Soars on $37 Billion Bet
“Buffett has taken a series of bets on four stock indexes across the globe, including the Standard & Poor’s 500 Index, selling contracts to undisclosed buyers for $4.85 billion that protect the buyers against declines in those markets.
Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the market indexes are below the point where they were when he made the agreements. Berkshire hasn’t disclosed which stock indexes besides the S&P are covered under the contracts or how they’re structured.”
I’d love to know what the strike price is for any of the four indexes on which he wrote the puts. And what are the other three indexes? Any guesses?
Looking out to 2019, you’d think Buffett would be safe, though the five-year CDS chart below shows a lot of (irratonal?) fear.
November 19th, 2008 at 11:02 am
CM: this chart reminds me of the PTR chart that you presented awhile back when Warren sold his holding that some of your readers disagreed. In fact, his timing on PTR and this CDS chart looks very SIMILAR–selling before the last big climax upswing before having a huge drop. Its tough to bet against him on this one.
November 19th, 2008 at 11:22 am
@brandon: You mean this post from October 2007? I’m not sure how you’re interpreting / comparing things here, but I’m pretty sure Buffett wouldn’t be a buyer of these CDS here. :)
November 19th, 2008 at 11:47 am
Warren’s fine. I believe these were written in early 07 if I remember correctly. I think the strikes are around these levels. I remember thinking -”that’s practically the 02 lows…” Also - their European as far as the exercise goes. I’m sure Uncle Warren isn’t losing much sleep. Remember, He knows how to write himself several “outs” and this deal is no different.
Also, I remember reading that the majority of the indexes were based in europe.
November 19th, 2008 at 12:10 pm
CM: You are right about the chart, it’s not PTR. I guess I was strongly disagree with Brian’s statement at the time. :-)
November 19th, 2008 at 1:36 pm
Around 2007, I think Buffett probably sold puts that were 30% from 2007 highs.
I doubt anyone would buy insurance for more than 50% from all time highs that far out to 2019.
And you never know. Buffett could have thought, in 10 years with 6 to 8% appreciation annually over the long-term, he’d get at least a 50% total return buffer. But if we go into a Japan-style stagnant market for the next 10 years in the US and Europe, he could presumably lose.
But for the sake of argument, let’s say someone bought those put options at the 2002 lows without actually hedging any stock. That genius could buy the stock now, and essentially have a free trade. That is if Berkshire can pay up in 2019.
November 19th, 2008 at 8:35 pm
Such a long duration for his bet. Truly, he is the king of long term investing or speculating..lol
Not sure whether he will still be around to see whether he won/lose his bet. So not accountability here if he loses. And no medal if he won.
Maybe this move his last legacy on the importance of long term strategic investing.
November 20th, 2008 at 9:16 am
Hell, he doesnt care,he’ll be in the ground by then. I guess it is sorta of humorous that the party he supports created the socialist housing scheme,fair housing act and looted Fannie and Freddie to cause this financial disaster.
I remember reading a BRK quarterly report about 7 years ago. Buffet and Munger had gotten a look at Fannies books. I dont know if this was before or after Fast Franky Raines cooked them,but he said they couldnt make head or tail of them. He said the derivatives were a black hole that could cause a nuclear financial disaster. I dont know if this was before Fannie traders started doing bad deals to pay back democratic contributors but they sure didnt listen to Buffett back then and Barrack wont now.
The US is giving Banana republics a bad name.
November 20th, 2008 at 1:39 pm
Might be interesting to add BRK to your trends spreadsheet. Not an ETF but of plenty of interest to the ‘public’.
November 20th, 2008 at 2:29 pm
eyal: Berk is another behemoth, probably very strongly correlated to the S&P, and people are already begging me to shrink the sheet … which I will do with the establishment of a core portfolio, which will be a real money fund. I’ll always keep the master list which will be 200 or so strong, but narrowly focused folks should watch the core.