Is Buffett getting margin calls?

Greg Richards · Mar 7, 2009

http://www.berkshirehathaway.com/letters/2008ltr.pdf

Only a small percentage of Berkshire Hathawayâs contracts require it to post collateral to counterparties when the value of the contract moves against Berkshire Hathaway. According to his 2008 shareholder letter (Pp. 18-22 if you follow the link), Berkshire Hathaway posted less than 1% of its securities portfolio as collateral.

atticus · Mar 7, 2009

Quote from atticus:

VIX traded 10-30 in 2007. They're Euro-convention, so while they can't be exercised, they are marked to market.

Binaries are defined risk, so he essentially sold a "50/100" put. One would have to assume it's trading North of 95/100.

His risk should be limited to something approaching the $4.6B liability per the AR. So he's lost nearly $4.6B based on a "50/100" assumption.

The ATM bet gets cheaper [for the buyer] with duration, but the variance on price is typically within the bid-ask. It's best seen as a synthetic-strike increase for the put transaction as expiration is extended. It would definitely be sold <50. Bad for Buffett, but nowhere near the risk involved in selling a vanilla put.

atticus · Mar 7, 2009

Quote from Greg Richards:

http://www.berkshirehathaway.com/letters/2008ltr.pdf

Only a small percentage of Berkshire Hathawayâs contracts require it to post collateral to counterparties when the value of the contract moves against Berkshire Hathaway. According to his 2008 shareholder letter (Pp. 18-22 if you follow the link), Berkshire Hathaway posted less than 1% of its securities portfolio as collateral.

All that infers is that he's receiving haircut. This trade is defined-risk from the outset.

Greg Richards · Mar 7, 2009

My point is different. Unlike AIG, most of his contracts require zero collateral to be posted. Only a handful of contracts have a collateral agreement.

atticus · Mar 7, 2009

Quote from Greg Richards:

My point is different. Unlike AIG, most of his contracts require zero collateral to be posted. Only a handful of contracts have a collateral agreement.

AIG wrote CDS for pennies on the dollar, the absurd payout would force a large haircut, but the CDS is also defined risk, even though it didn't seem to be accounted for at AIG.

I find it hard to believe that BRK put up less than $1.7B in collateral, based-upon their peak market cap.

Greg Richards · Mar 7, 2009

Quote from atticus:

I find it hard to believe that BRK put up less than $1.7B in collateral, based-upon their peak market cap.

http://www.berkshirehathaway.com/letters/2008ltr.pdf

It is true nonetheless. AIG did not negotiate its contracts well to put it mildly, but Berkshire Hathaway used its AAA rating and negotiating clout upfront.

atticus · Mar 7, 2009

Quote from Greg Richards:

http://www.berkshirehathaway.com/letters/2008ltr.pdf

It is true nonetheless. AIG did not negotiate its contracts well to put it mildly, but Berkshire Hathaway used its AAA rating and negotiating clout upfront.

Regardless of initial haircut, they can't be indemnified from putting up capital on adverse marks. Think LTCM.

hughb · Mar 7, 2009

Specifically whom did Buffet collect $4.5B in put premiums from? Whoever it, (or they), was has a M2M profit right now. However, all I've heard coming from insurance and other finance companies is losses, losses, losses.

makloda · Mar 7, 2009

Could be a pension fund or sovereign wealth fund. Berkshire didn't disclose the identity of the counterparty/-ies on these contracts.

Greg Richards · Mar 7, 2009

Quote from atticus:

Regardless of initial haircut, they can't be indemnified from putting up capital on adverse marks. Think LTCM.

http://www.berkshirehathaway.com/letters/2008ltr.pdf

Read page 18. To your point, high rated counterparties can negotiate contracts that do not require them to put up collateral, even when the mark is against them. Berkshire negotiated its contracts so that it does not have to post interim collateral on most of its contracts. Of course if they owe a large payment at expiration of teh equity options (these are long dated options), it is obliged to pay it. Likewise, for the credit derivatives, it is obliged to pay if a default occurs.