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Is Buffet to old to play with derivatives?


Nov. 4 (Bloomberg) -- Berkshire Hathaway Inc., the firm run by billionaire Chief Executive Officer Warren Buffett, said third-quarter profit fell 24 percent as derivative bets declined in value.

Net income declined to $2.28 billion, or $1,380 a share, from $2.99 billion, or $1,814, a year earlier, the Omaha, Nebraska-based company said today. Operating earnings, which exclude some investment results, were $2,309 a share, beating the $1,796 average estimate of three analysts surveyed by Bloomberg.

Buffett, 81, uses derivatives to speculate on long-term gains in stocks and the creditworthiness of corporate and municipal borrowers. Stock markets dropped in the three months ended Sept. 30, with the Standard & Poor’s 500 Index posting its biggest quarterly decline since 2008 and the Euro Stoxx 50 Index falling the most in nine years. The indexes advanced in October.

He was talking stocks but it could apply to a lot more...

Should you choose, however, to construct your own portfolio, there
are a few thoughts worth remembering. Intelligent investing is not
complex, though that is far from saying that it is easy. What an
investor needs is the ability to correctly evaluate selected businesses.
Note that word "selected": You don't have to be an expert on every
company, or even many. You only have to be able to evaluate companies
within your circle of competence. The size of that circle is not very
important; knowing its boundaries, however, is vital.

Your goal as an investor should simply be to purchase, at a rational
price, a part interest in an easily-understandable business whose
earnings are virtually certain to be materially higher five, ten and
twenty years from now. Over time, you will find only a few companies
that meet these standards - so when you see one that qualifies, you
should buy a meaningful amount of stock. You must also resist the
temptation to stray from your guidelines: If you aren't willing to own a
stock for ten years, don't even think about owning it for ten minutes.
Put together a portfolio of companies whose aggregate earnings march
upward over the years, and so also will the portfolio's market value.

This is not the first time he has lost money on derivative bets gone wrong. He has done so at least as far back as the 90s. This just makes it absurd for people like you to quote him as someone who says derivatives should be banned.

He's lost money on derivatives a number of times. So you're saying he's like....Jon Corzine?

Corzine was invested in straight bonds, dummy. With no hedges. He SHOULD have had CDS hedges. If he had used derivatives, his company would still be here.

The article states that Buffet uses derivatives to speculate and make bets, much like someone going to Vegas.
And the notional value of default swaps is several times bigger than the reference obligations they are built on, so they don't reduce risk , they magnify it on a systemic level creating huge counter-party risk. The comparison to Corzine was that he's lost money before same as Corzine, and in something that's not straightforward and easy to understand. European banks were hedged, but not really since they just hedged against each other.

I seem to recall Buffet saying years ago that he would never touch derivatives of any kind. So he has changed his tune I guess.

No, dummy. You said "He's lost money on derivatives a number of times. So you're saying he's like....Jon Corzine?"

MF Global bet on BONDS. Not derivatives.

From Berkshire's 2002 annual report(Dear Mr. Buffet do you still believe these words?)

Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with
them: We view them as time bombs, both for the parties that deal in them and the economic system.
Having delivered that thought,

When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie
and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and
are now terminating it.
But closing down a derivatives business is easier said than done. It will be a great many years before
we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and
derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit.

Another commonality of reinsurance and derivatives is that both generate reported earnings that are
often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates
whose inaccuracy may not be exposed for many years.

Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s
commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.
Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market
accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model”
is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving
multiple reference items and distant settlement dates increase the opportunities for counterparties to use
fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use
differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model
degenerates into what I would call mark-to-myth.

Many people argue that derivatives reduce systemic problems, in that participants who can’t bear
certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize
the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what
they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in
order to facilitate certain investment strategies.

Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large
amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives
dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.
On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these
counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a
problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in
the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic

Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our
owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and
that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives
contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,
however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are
potentially lethal.

Seems Buffet got bored around 2008 and decided he needed action....

Considering the ruin I’ve pictured, you may wonder why Berkshire is a party to 251 derivatives
contracts (other than those used for operational purposes at MidAmerican and the few left over at Gen Re). The
answer is simple: I believe each contract we own was mispriced at inception, sometimes dramatically so. I both
initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any
large financial organization must be the Chief Risk Officer as well. If we lose money on our derivatives, it will be
my fault.

Buffet and his various B-H owned firms had used derivatives all the time prior to general Re.

What he objected to at GenRe was there exactly-like-AIG naked writing of CDS and other such contracts. So his criticism was specific to this sort of activity, obviously.

As an insurance company that owns food companies, B-H clearly has used derivatives of one form or another for decades.

Jason - looks like you are the dummy. From huffington Post:

MF Global imploded this week due to proprietary "repo-to-maturity" transactions that are in substance total return swaps, a type of credit derivative. MF Global failed to meet margin calls on credit derivatives linked to risky fixed income debt. Regulators haven't learned much from American International Group's (AIG) and Long Term Capital Management's (LTCM) debacles. Like the "repo-to-maturity" transaction, a total return swap is an off balance sheet transaction treated as a sale, but the total return receiver, MF Global, is long both the price and credit default risk of the reference assets. The total return payer, not MF Global, is technically the legal owner of the reference assets. The attraction of this arrangement is financing and leverage. Naturally, ratings downgrades will trigger increased margin calls. This is all business as (un)usual.

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This is what derivatives permit. Allowing a firm to put on an explosive suit and blow up the place.
From MF'S last quarterly report(Dollars in thousands, except per share and share amounts)

Credit risk can arise from collateralized financing transactions when the collateral value falls below the value of the receivables and counterparties fail
to provide additional collateral. As of June 30, 2011 and 2010, no provision has been recorded against resale agreements or securities borrowed transactions,
as amounts were deemed collectible.

For repurchase transactions that are
accounted for as sales, the Company maintains the exposure to the risk of default of the issuer of the underlying collateral assets, such as U.S. government obligations or European
sovereign debt.

As of June 30, 2011, the market value of collateral received under resale agreements was $56,999,296, of which $516,646 was deposited as margin with
clearing organizations. As of March 31, 2011, the market value of collateral received under resale agreements was $48,665,649, of which $256,288 was
deposited as margin with clearing organizations. The collateral is valued daily and the Company may require counterparties to deposit additional collateral or
return collateral pledged, as appropriate. As of June 30 and March 31, 2011, the market value of collateral pledged under repurchase agreements was
$68,404,867 and $61,088,346, respectively. As of June 30 and March 31, 2011, there were no amounts at risk under repurchase agreements or resale
agreements that are accounted for as collateralized financing transactions with a counterparty greater than 10% of Equity.

The Company also enters into certain resale and repurchase transactions that mature on the same date as the underlying collateral ("reverse repo-tomaturity"
and "repo-to-maturity" transactions, respectively). These transactions are accounted for as sales and purchases and accordingly the Company derecognizes
the related assets and liabilities from the consolidated balance sheets, recognizes a gain or loss on the sale/purchase of the collateral assets, and
records a forward repurchase or forward resale commitment at fair value, in accordance with the accounting standard for transfers and servicing. For these
specific repurchase transactions that are accounted for as sales and are de-recognized from the consolidated balance sheets, the Company maintains the
exposure to the risk of default of the issuer of the underlying collateral assets, such as U.S. government securities or European sovereign debt. The forward
repurchase commitment represents the fair value of this exposure and is accounted for as a derivative. The value of the derivative is subject to mark to market
movements which may cause volatility in the Company's financial results until maturity of the underlying collateral at which point these instruments will be
redeemed at par. At June 30 and March 31, 2011, securities purchased under agreements to resell of $5,233,156 and $1,495,682, respectively, at contract
value, were de-recognized, of which 94.2% and 72.0%, respectively, were collateralized with European sovereign debt, consisting of Italy, Spain, Belgium,
Portugal and Ireland. At June 30 and March 31 2011, securities sold under agreements to repurchase of $16,548,450 and $14,520,341, respectively, at contract value, were de-recognized, of which 69.3% and 52.6%, respectively, were collateralized with
European sovereign debt, consisting of Italy, Spain, Belgium, Portugal and Ireland.

Total liabilities June 2011-- $44,409,546
Off balance sheet talked Euro debt $56,999,296(with 10% on margin)
Total Equity as of June 2011--- $ 1,389,580

I think what Buffet and Corzine are effectively saying is that the value of their core businesses are not that great, but they are both very smart gamblers who know when things are mis-priced or have the ability to see sure things so just trust them to make very leveraged bets with firm capital which makes up for low insurance premiums or weak net interest margin, commission etc volume. The only reason to use the derivatives market instead of taking a true position in the asset is to avoid regulation or take advantage of greater risk and leverage. When Buffet or Corzine enter into a total return swap or repo to maturity they get a very leveraged return but hold on to margin and default risk.

What I think happened to MF money was that despite Corzine's claim that financing was locked into maturity a counter-party claimed a MAC clause and called the financing. Somehow in that situation either through malfeasance or sloppy accounting client assets were appropriated.

I would not be so quick to dismiss an AIG or MF global or Madoff situation from occuring some time in the future at Berkshire. Berkshire is a large complex organization and Buffet is deemed uber-respectable and playing with instruments of financial mass destruction.

I don't think most would say a repo is a derivative. Its similar to a total return swap, yes, but it is NOT a total return swap. When the Bank of International Settlements or ISDA come out with the total notional amount of derivatives outstanding, they do not include repos. In fact the BIS lists them as SEPERATE from derivatives on their website.

I have not seen them mentioned as a type of derivative by these sources, or the Fed, Bank of England, ECB,or anyone else similar.

So when I check back in, I expect West34 to show me an ISDA or BIS or similar link showing that repos are commonly lumped in with derivatives, OTC or Exchange traded. I could be wrong. But I am pretty sure I am not, as I am one of the few people who actually reads those BIS quarterly reports cover to cover for my job. Depressing, I know.

And in his spare time Jason parses how many angels can dance on the head of a pin.

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he invited you there to punch you in the face.

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I am the head if IR for a wall street firm. I reAd BIS reports and explain the OTC and exhabge markets all day every day. So I take it you are wrong, and ISDA, BIS, etc don't consider repos derivatives. Ditto the FSA, SEC, CFTC etc.

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Notice the BIS does not mention repos, even though they discuss both exchange-traded and OTC derivatives.

Notice too that repos are not part of Dodd-Frank or the EU equivalent.

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The whole thing smakcs of hubris. They knew and identified the risks, but then failed to heed them acnowledging that the position had risk, yet removing it from a VAR that only looked back 3 years wiht 95% confidence. Mind you this bears similarity to the situation their risk buy dealt with in the blow-up of UBS and sounds like what hit LTCM.

Oh I agree RS. Regulators WILL clamp down on this particular behavior, for sure. Corzine had been lobbying against such a rule for FCMs very recently. Its very similar to what derivatives could do to a company, but a repo is still not a derivative, at least not in any sense I have seen. But what MF did should have not been allowed, and probably won't be by this time next year.

I thought one of the lessons of the financial crisis is that risk stays on the balance sheet.

"I thought one of the lessons of the financial crisis is that risk stays on the balance sheet."

Corzine convinced them to not make it so. Too bad for them. And him.

West34, this is PROOF you owe me an apology"

From ISDA's blog at

"Sad Proof
Posted on November 7, 2011 by media.comment

This Sunday’s New York Times Business Section carried an interesting column (“Sad Proof of Europe’s Fallout.”) It essentially claims that MF Global “was felled by over-the-top leverage and bad derivative bets on debt-weakened European countries.” It goes on to say that one of the lessons of MF Global’s failure was that when Euro-shocks “reach our shores, they usually ride in on a wave of derivatives.”

Pretty compelling stuff.

Except that it’s not true.

MF Global did not use derivatives to make its bets on European sovereign debt. As the company stated in its third-quarter earnings release on October 25th:

“As of September 30, 2011, MF Global maintained a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity), including Belgium, Italy, Spain, Portugal and Ireland.”

So it seems clear that MF’s European sovereign debt holdings were just that, bond positions financed via repo transactions. Repos, of course, are NOT OTC derivatives. (They’re also not listed derivatives.) They are basic tools of corporate finance commonly used to finance cash bond positions.

We would have thought that, with a little checking, this point would be pretty obvious to one and all. We would have also thought that reporters (and consultants who are used as expert sources on financial matters) would know that because MF Global was an SEC registered Broker-Dealer and CFTC registered Futures Commission Merchant, regulators at all times had full transparency into the nature and extent of MF Global’s trading and risk positions.

In short, there were no derivatives, no opaque financial instruments and no hidden risks in the story of MF Global’s downfall. There were, though, a lot of inaccuracies in the way that story was told.

Sad proof indeed."

repo predates the the use of the word "derivative" to describe financial instruments by decades--early on derivatives were a golden zone of profitablilty on the street, and futures exchanges began to refer to listed, exchanged traded, simple futures and options as derivatives, in the attempt to make their products seem more sophisticated and profitable--since lehman they have distanced and dont use the word so much in promo materials--kind of funny

jason you are quite right re all you say--what is yet to be understood, tho, is what the coindition of actual derivatives positions that may exist within MF--mf had several desks which made markets/took positions in OTC derivatives--mf mtm'ed these books itself--it will be interesting to see what happens when these books are liquidated

i think the leveraged sov trades will prove to be winners, and worried less re these positions than those of the deriv desks, while wf's troubles were evolving

if mf's derivatives desks prove to have been properly managed, and all seg funds end up accounted for, i will consider mf's failure more a run on the bank than a failure due to mismanagement

Well then I stand corrected. Does that mean that Riversider is in fact a dummy?

You and I are lovers again West34. This article correctly explains what MF did, BTW.

Yes RS is generally a dummy. But I love him like my idiot brother.

Not so fast....

The $593 million shortfall in client money at MF Global Holdings Ltd., the broker that filed for bankruptcy on Oct. 31, appears to result from a “massive hide- and-seek ploy,” Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission, said today.

The agency took the rare step of publicly announcing its investigation, which began on Oct. 31, saying it was in the public interest to confirm the enforcement action. Jill E. Sommers was named as the senior commissioner during the probe, after Gary Gensler, the agency’s chairman, recused himself.

See this also to explain what exactly they did.

The most likely explanation, and this has been speculated elsewhere that firm such as JP Morgan or similar via a MAC clause grabbed assets including client money. Funds were probably co-mingled contributing to a mess. It's also possible sensing a deal MF panicked and co-mingled funds toward the end.

lmost everyone wondering where the missing MF Global customer assets have gone thinks they will show up eventually.

I believe the assets are long gone.

Unlike the shell game, there is no bean under the MF Global dixie cup. The mixed bag of marketable securities taken from customer segregated accounts, used most likely to meet margin calls and satisfy “important” customers closing accounts during the last days, will, in my opinion, never be seen again.

Too much time has passed for anyone to still reasonably expect that the “discrepancy” is just a timing difference or a misallocation between accounts, according to several sources who prefer to remain anonymous because of the sensitivity of the situation. All of the statements made on the record by those in a position to know point to assets taken out of the firm and now gone for good.

CFTC in bankruptcy filing October 31 according to The Financial Times: The CFTC, in a court filing, revealed MF Global’s general counsel Laurie Ferber emailed the regulator at 7.18pm Monday – hours after the bankruptcy filing – to say that it had “discovered a significant shortfall in its segregated funds account”.

Joint statement of CFTC and SEC on November 1: “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.”

The CME Group on November 2: “CME completed its on-site review last week. [Reportedly Monday.] At that time, the results of our review indicated that MF Global was in compliance with its segregation requirements. It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday, October 31, 2011.”

When did MF Global exploit the customer segregated accounts and why? How were the proceeds used to stem the firm’s deepening insolvency?

Based on the sequence of events described above, I believe that MF Global transferred assets, not cash, from customer segregated accounts to a “house” account sometime late Wednesday or early Thursday.

I’ve given those who executed the “nuclear option” to save MF Global the benefit of the doubt. I believe those executives used all available legitimate means to raise cash first, including trying to sell proprietary assets, as CNBC reported, and exhausting existing credit lines. When margin calls on the repurchase agreements and account closure demands from strategically important clients – not the bread and butter individual traders and smaller investors and money managers who got rubber checks – kept coming, they hit the wall.

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Truth, It's no big deal. His language speaks volumes.

Keep in mind that Warren's derivatives are not set to pay off until 2018 so he has a lot of time to be right on them. In the meantime they are marked to market but the jury is still out as to whether he wins on them.

Personally, I think it was a good bet. The last secular bear market was from 1966 -1982 - 16 years - and the current bear started in 2000 so I think it's reasonable and probable that it will have ended by 2018.

You and I don't disagree on anything about MF, RS.

...other than that repos are not derivatives.

So Buffet announces he's acquired a 5.5% stake in IBM At an average price of $167. It's close to all time high having followed a good business plan and the market has priced much of this in. So how is Buffet a value investor?

Perhaps. if he wanted a large cap tech company, there are many better options on a PE basis. But the average large-cap tech company (globally) has a 20.4X forward PR versus IBMs 14.5X. So in that sense its cheaper than average. But Apple, MSFT, Intel, HP, Dell, and Xerox are all cheaper.

P.E. Is meaningless. You can't eat P.E.

Since DEc 2007 Buffet has been under-performing the s&p 500. His portfolio is too big, He's deviated from his original philosophy , plays with derivatives and spends his time talking to Maria Bartiromo, Liz Claiman on Fox and politicing for Obama.

"P.E. Is meaningless. You can't eat P.E."

Not to Buffet, who is a value investor steeped in Graham. Which you brought up by the way, not four posts up.

No, a true value investor would not look at a p.e. If they did consider earnings it was in the context of historical earnings and closer to the Shiller CAPE approach, Graham and Dodd also focused more on book value, dividends, tangible assets. They would role over in their grave if someone suggested buying a stock on current or projected or forward earnings.

Buffet is not a true value investor. the true rock stars today are John Hempton, Steve Einhorn, Jim Chanos, guys who are accounting sleuths, unlock what's real and not in the finanical statements, understand the difference between book value and market value of assets etc. Buffet may have started out that way, but it's been a long time since he looked at a 10k

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alter ego? I am Riversider.

Buffett is in Big Blue. Warren Buffett said today he’s bought about $10.7 billion worth of IBM stock, or more than a 5% stake, after building his holdings through much of the year.

But you wouldn’t have known about Buffett’s buying from checking out his quarterly snapshots of his stock holdings. IBM hasn’t appeared on any of those investment disclosures this year. How come?

Check out the footnote to Buffett’s latest disclosures of his investment holdings released by the SEC: “Confidential information has been omitted from the Form 13F and filed separately with the Commission.”

In other words, Buffett got permission from the SEC to keep some of his stock holdings secret. This isn’t unusual for Buffett. Most big investors have to publicly reveal their stock investments every three months.

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alter ego? I am Riversider.

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Janet Tavakoli seems to think MF GLOBAL'S repo to maturity was actually a total return swap. She ought to know she's an expert on these matters..

“Repo-to-Maturity” is a “Total Return Swap-to-Maturity,” A Type of Credit Derivative

If you call a total return swap-to-maturity a “repo-to-maturity,” you are much less likely to freak out regulators. Many regulators still remember that Long Term Capital Management (LTCM) used total return swaps (among other things). Jon Corzine should remember, too, since he was closely involved with LTCM when he headed Goldman Sachs. In September of 2011, FINRA seemed to catch on that MF Global’s transactions were riskier than it previously thought and asked for more capital against these trades.

Part of AIG’s acute distress in 2008 was due to credit default swaps, another type of credit derivative, linked to the risk of shady overrated collateralized debt obligations. The basic problem was risk on fixed income assets that could only go down in value combined with lots of leverage.

I’d like to interject a side note. I understand that some pundits tried to say that the New York Times’s Gretchen Morgenson was incorrect when she wrote MF Global was felled by derivative bets. She is correct. The pundits leaped to the conclusion that when she referred to credit derivatives and “swaps” that she meant credit default swaps, but she was referring to total return swaps, a type of credit derivative. (Later in the article she discussed a different topic, lack of transparency in credit default swaps, another type of credit derivative.)

MF Global’s problematic trades were different from AIG’s, but they were also derivatives, in fact, they were a form of credit derivative. The “repo-to-maturity” transaction was just a form over substance gimmick to disguise this fact. Specifically the transactions are total return swaps, a type of credit derivative, and the chief purpose of these transactions is leverage.

A total return swap-to-maturity includes a type of credit derivative. It allows you to sell a bond you own and get off-balance sheet financing in the form of a total return swap. Alternatively, you can get off-balance sheet financing on a bond with risk you want (but do not currently own so there is no need to sell anything) and take the risk of the default and price risk. (Price risk can be due both to credit risk and/or interest rate risk.) This is an off-balance sheet transaction in which the total return receiver (MF Global) has both the price risk and the default risk of the reference bonds. In this case, MF Global had the price risk and the default risk of $6.3 billion of the sovereign debt of Belgium, Italy, Spain, Portugal, and Ireland. As it happened, the price fluctuations of this debt in 2011 weren’t due to a general rise in interest rates, they were due to a general increase in the perceived credit risk of this debt.

Repo transactions are on balance sheet transactions, but they don’t draw as much scrutiny from regulators. There was just one little problem. MF Global wanted the off-balance sheet treatment of a derivative, a total return swap, but it didn’t want to call it a total return swap, so it used smoke and mirrors. Even if MF Global engaged in a wash trade at the end (if there is no default in the meantime) to buy back the bonds, MF Global would receive par on the bonds from the maturing bonds. The repurchase trade at maturity is a formality with no real (or material) economic consequence.

In other words, the “repo-to-maturity” exploits a form-over-substance trick to avoid calling this transaction a total return swap. Accountants paid by the form-over-substance seekers and asleep-at-the-switch regulators will sometimes, at least temporarily, go along with this sort of relabeling.

Sweet Jesus this again. Look, not one regulator in the UK, US, Canada, EU, or anywhere else I know calls repos "derivatives". None of the banks, none of their customers, not ISDA, no central bank, no textbook, no central clearing organization, exchange, or anyone else who would know.

Would you fucking call a pawn shop a "derivatives broker?" Because that what repos are, really. Just pawning bonds (sometimes stocks.) You sell a watch to a pawn shop, then buy it back for more. That is a derivative, according to riversider. Idiotic.

actually she's right, the advantage of the total return swap is avoiding putting the asset on the balance sheet. this particular total return swap did the same thing, so in reality--no difference

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I like that!

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Ich vil essen a pecan pie, a bissela

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a zaftik bubbeh?

no truth, never read it

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"actually she's right, the advantage of the total return swap is avoiding putting the asset on the balance sheet. this particular total return swap did the same thing, so in reality--no difference"

Shorting or buying a stock with leverage can mimic a put or a call. That does not make stocks derivatives.

A repo transaction is exactly like a pawn shop. Are pawned jewels and fur coats and TVs derivatives, riversider?

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Woohoo! nepotism!

OMAHA, Neb.—Berkshire Hathaway Inc. Chairman Warren Buffett would like his son Howard to succeed him at the helm of Berkshire Hathaway as non-executive chairman, the elder Mr. Buffett told CBS' “60 Minutes” in an interview slated to run Sunday.|306|76|78

Buffett, 75, plans to commit 10 million class B shares of his company, Berkshire Hathaway, to the Gates Foundation. They will be distributed at a rate of 5 percent of the balance annually. Based on the current value of the stock, Buffett's commitment is more $30 billion, which doubles the size of the funds available to the Gates Foundation.

The Gates Foundation will ultimately receive 85 percent of Buffett's personal wealth, rather than the investor's three children or the foundations that they run.

"My kids were elated when I told them (about the Gates Foundation donation). They knew my views on inherited wealth and shared them," Buffett said during a press conference on Monday. "I believe in equality of opportunity...They should not inherit my position in society, based on the womb that they were born from."

Dubner: He could just do what a lot of CEOs do, which is just pick one of his kids, right? But Buffett’s actually taken a very well-known stance against nepotism. Listen to his son Peter Buffett.

Peter Buffett: You know, my dad talks about the ovarian lottery.

Dubner: So Peter Buffett won that lottery, but he says his dad never pressured him or his siblings to go into the family business. So Peter Buffett got to focus on his music — he’s a composer — and on philanthropy. And as he tells it, that is probably a good thing.

Buffett: The odds of having a son or daughter that are as passionate and excited and driven as a founder of a business was, or even the person that took it over, I think are incredibly small.

Vigeland: But Stephen, I think a lot of business founders don’t think that way. The Buffetts are kind of a unique example. I mean, Warren Buffett has really made a point that he’s not giving his kids his $47 billion fortune or the keys to the corner office.

Dubner: You’re right. And you’re also right in that elsewhere, in most places, the Church of Scionology as I like to call it — which is handing out the family firm to the family scion — it’s booming. Roughly one-third of Fortune 500 companies are family controlled. But the important thing I wanted to know is this: Is handing down a business good for business? I asked Antoinette Schoar, a finance professor at MIT who’s studied family-firm succession.

Antoinette Schoar: We actually see drops in performance of these firms after they are transitioning from a founder to the heir, or the heirs. We see drops between 10 and 20 percent of profitability.

Vigeland: But there have to be other reasons. If I spend my whole life building a business, I might actually want my son or daughter to take over. It’s part of the legacy.

Dubner: Absolutely. There’s a lot of reasons why people do pass firms onto the family. But there are also some not-so-obvious reasons. I talked to Vikas Mehrotra, who’s a finance professor at the University of Alberta.

Vikas Mehrotra: Trust is in short supply in typically in countries where families are dominant.

Dubner: In countries where family firms are dominant, trust is in short supply. Now what that means is trust is kind of short-hand for having strong institutions, for having transparent markets. When you don’t have all that, you don’t have as many options for passing the company along and you’re more likely to protect your firm by simply handing it off to junior.

is it fair to say that you don't have any offspring?

This is really sad, My college education including required readings from Berkshire Hathway annual reports. We learned about Buffet's ideas about what made a company great while hearing about Cherry Coke, Washington Post, etc. Today his deals are all about government money and connections...

California’s monster electric utility, Pacific Gas & Electric (PGE), has entered into a 25 year PPA with Topaz. With PGE taking all of the power from Topaz, the risks in the deal fall sharply. The output of Topaz has already been successfully monetized. All that needs be done is complete the construction and then let the sun shine.

It’s important to understand that Uncle Warren has a seat at this table because the Department of Energy failed to approve a big loan to Topaz prior to 9/30/2011 (the deadline to get federal subsidies). The DOE did substantial work before nixing the deal. This PDF link to the DOE shows just how much had been accomplished prior to 9/30. (How much did this report cost the DOE/us? Many millions.) All of the necessary approvals and engineering work had been completed. Construction of these solar farms is not all that complicated once the approvals and site work has been signed off on. Buffet got a deal that was teed up and ready to go. Construction commenced a month ago. Warren bought into a deal in the 11th hour. He got a shovel ready investment. He has very little risk at this point.

When Topaz is completed, energy will be produced. Pursuant to the PPA Topaz/Buffet will receive checks monthly from PGE for the next 25 years. That stream of revenue is assured. PGE is a single A. Its long-term debt yields are in the mid 4% range. I’m certain that Buffet got a better yield than that. But the yield is not what brought Buffet into the deal. It was taxes and his desire to avoid them that got this deal inked. Again, that Bloomberg Headline:

Once completed, the owners of a solar farm get one of two massive incentive payments:

1) The owner gets a cash grant equal to 30% of the construction cost, or;

2) The owner gets a break on their federal taxes equal to (get this) 100% of the cost of the project. This “Bonus tax deduction” can be used to reduce federal taxes in the year that that the project is first completed.

Berkshire Hathaway paid 29% taxes in 2010. This would imply that it would opt for the cash payment of 30% ($600MM!). But BRK is actually faced with a statutory tax rate of 35%. Therefore the value of the tax reduction could be as high as $700mm. (Warren can engineer any income necessary to max out the tax deduction.)

Clearly senility has set in....

Berkshire Hathaway says 4Q net income down 30 percent as paper value of derivatives drops

OMAHA, Neb. — A drop in the paper value of the financial instruments known as derivatives hurt profits at Berkshire Hathaway Inc., the conglomerate run by billionaire investor Warren Buffett.

The biggest difference in the quarter was the change in estimated value of Berkshire’s investments and derivative contracts. That fell to $382 million this year from last year’s $1.4 billion.

Buffett reiterated Saturday that he believes Berkshire’s derivative contracts will ultimately prove profitable, but he said the company doesn’t plan to write any more major derivative contracts.

Looks Like Warren Buffett not so hot after all.

Even while counseling patience, Jim Tisch and his management team have outperformed the value investor and serial acquirer to whom they’re often compared: Warren Buffett. Since Tisch took over the top spot at Loews in December 1998, the firm’s shares have returned 8 percent annualized through the end of March, almost double the 4.3 percent return of the Class A stock of Buffett’s Berkshire Hathaway, a company more than 10 times the size of Loews.

Growth in Loews’s book value per share — a metric favored by Buffett — has averaged 10 percent annualized from 1998 through 2011, compared with 8.1 percent for its rival.

“That’s validation of Loews’s ability to allocate capital,” says Fred Fialco, a portfolio manager at Torray, a Bethesda-based investment firm that owns Loews shares. “They know how to compound earnings.”

“The market underestimates Jim Tisch’s skill as an allocator of capital,” says Michael Price, founder of MFP Investors. “If I owned Berkshire Hathaway, I’d sell it and buy Loews.”


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