Buffett’s timebomb

 

 

 

 

 

http://www.bloomberg.com/apps/news?pid=20601109&sid=a_XX1k9rMDnQ&refer=home

April 28 (Bloomberg) — Berkshire Hathaway Inc. shareholders have a chance this year to do something that’s rare among the Sage of Omaha’s followers: count their losses.

Despite Berkshire’s reputation as a bear market bulwark, its stock has been walloped. The Class A shares are down 31 percent since September, to $90,000 as of yesterday, exceeding the 26 percent drop in the Standard & Poor’s 500 Index.

One reason: Chief Executive Officer Warren Buffett’s increasing use of derivatives — contracts whose value is based on the performance of stocks or bonds or the outcome of a specific event. That Buffett once called derivatives “time bombs” doesn’t calm investors.

Berkshire held contracts with a combined notional value of $67.3 billion at year-end. While this figure is used mostly for reporting purposes and isn’t indicative of potential losses, it dwarfs the company’s $25.5 billion in cash.

Buffett himself has warned of an increasing possibility he might have a loss from one type of contract on Berkshire’s books. Fitch Ratings and Moody’s Investors Service have lowered their credit ratings on Berkshire, partly because of the derivatives.

Berkshire has sold contracts that require it to pay when credit losses occur at companies that are included in certain unnamed high-yield-bond indexes. The notional value is $7.9 billion.

Berkshire took in $3.4 billion in premiums on these contracts and has paid losses of $542 million. The company has also recognized a noncash, $3 billion mark-to-market loss. With these contracts, payments are made when a credit event occurs. They expire from September of this year to December 2013.

Losses on these contracts are accelerating as bankruptcies grow, Buffett said in his shareholder letter in February. “Now with the recession deepening at a rapid rate, the possibility of an eventual loss has increased,” he wrote.

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warren warned us about the “economic timebombs” that are derivatives(CDO,CDS)..yet he went in and played the game as well..and he may get burned..if the wrong companies fall over they will take him with it..big time

401

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~ by seeker401 on April 29, 2009.