I can not blow it up. That means I know of no reason whatsoever that it could wind up insolvent in five years.
That does not mean it can not happen. If 9.11 had been nuclear they might have had problems - but as my "Risk Aversion Berkshire Style" post makes clear fat tail risk is not part of the formula.
So why is the five year credit default swap spread on Berkshire over 200bps? I have no idea and it makes no sense to me.
Maybe it is just irrational bearishness about everthing (ie BUY HARD) or maybe there is something I do not know.
So if anyone wants to post/reply a case for Berkshire CDS please...
John Hempton
Maybe the ultra risk averse equity players are piling in and still buying some protection on top of that?
ReplyDeletecoming metldown of most of the insurance players. berkshire does have lot of risky insurance underwriting, doesn't it ?
ReplyDeleteDoesn't Berkshire sit on an enormous amount of cash? I doubt they have their cash just sitting there doing nothing, I'm sure it's stashed in some sort of 'no risk, low yield' fund.
ReplyDeleteWhat if (some of) these funds are frozen and Berkshere can't readily access its stashes as freely as it would like to?
Marc
Could it be due to their CDS exposure? From the DTCC CDS database, here are notional exposures:
ReplyDeleteBERKSHIRE HATHAWAY INC.
$18,193,816,545 (gross)
$5,091,122,493 (net)
AIG, INC.
$49,763,405,860 (gross)
$4,606,640,647 (net)
This only captures a fraction of the total CDS exposure.
http://www.dtcc.com/products/derivserv/data_table_i.php?id=table6
Buffett alive + global depression = chance of Berkshire failing = 0%
ReplyDeleteIf Buffett died + global depression = chance of Berkshire failing = ?%
He's 78...
Volume, volume, volume.
ReplyDeleteI have no idea how many of these CD's have been traded/written. How can you judge what it says without this?
I would on instinct say that it is along the lines of insuring US government debt. If the US defaults, is there a financial system left? Could you really expect anyone to make good on the promise to repay that protection under those circumstances?
I'll sell you protection against a meteor hitting earth and taking every living thing out. Cheap. Call it 300 bps, it is quite a loss.
Say Berkshire is an insurance company with a small casino attached.
ReplyDeleteInsurance companies are facing pressure on their capital ratios, that could explain it.
More entertaining to consider, Mr Buffet has been playing with weapons of mass distraction himself. Some of them are undoubtedly resulting in margin calls as I write.
BK is short a large notional amount of long dated S&P european style puts. Maybe the owners of these bought cds to make sure they get paid if their bet is right. FWIW
ReplyDeleteJohn, maybe I can clear this one up for you. Wise Warren, the Wonderful, has no holding company debt. When he acquires companies, he does not guarantee the debt. Why give suckers (corporate bondholders, banks) an even break?
ReplyDeleteThis gives Warren the option of defaulting on any subsidiary debt without risking the holding company. A valuable option I say.
So what do the CDSs reference? Berkshire Hathaway Finance. What are the odds of Warren walking away from that if financial crisis deepens? Decidedly non-zero. Would that affect Berky the holding company?
Not much.
The CDS market is reacting to the possibility that Warren will send the finance subsidiary into insolvency in a crisis. That's all. No need to worry about Berky itself.
Does that help?
Hi John,
ReplyDeleteI assume you saw the results today?
Credit protection over junk bonds accounted for the large part of the disappointment.
--Q
This was probably the best post on the long dated play:
ReplyDeletehttp://crookery.blogspot.com/2008/05/warren-buffetts-vega-games.html
Keep up the good work!
Cheers, JL