Okay I am making it official, I am predicting
that Warren Buffet will soon lose his legendary status
Has anyone
noticed that Berkshire Hathaway has lost half its value, since October? .
Since September 2008, BRK/A has dropped form $145,000 to a low of $75,000. It
rallied along with the banks on more bailout promises this week. Warren has gone from being a critic of
Credit Default Swaps CDS to an owner to a rescuer of those dealing in such
contracts.
Credit
default swaps are insurance contracts without the bother of insurance
regulation. An insurance contract requires an insurable interest, something to
lose, on the part of the purchaser.
Insurance originally grew out of the desire to protect the receipt of
cargo in then risky ocean voyages in the 1700s. Parties that had no interest in
the cargo were barred from buying such contracts. They were gambling on a disaster not protecting an
insurable interest.
J P Morgan
Chase re invented the concept of betting on default in 1997 with CDS. Our own Phil Gramm exempted such
contracts from regulation with the Commodity Futures Act of 2000. So the stage
was set for unlimited betting on whether XYZ firm would default on a payment.
Unlike an insurance contract there is no supervisory or regulatory agency, no requirement
of insurable interest, and no regulated exchange for such instruments. If this sounds like off track betting,
you are getting the right idea. Berkshire Hathaway (Warren Buffet) has admitted
to owning some $4.5 B in CDS.
Hmm, just
how many of these is BRK/A involved in? Apparently the market thinks
quite a few, no wonder Warren likes the bailout idea. Historically BRK/A has
maintained it would not invest in
‘turnarounds.’ Rather it wanted
sound companies with good track records.
Yet, that is not the recent track record. BRK/A put $5 billion into
Goldman Sachs after it fell form $200 to $50 a share. Buffet came to the rescue of a Swiss Reinsurance to
the tune of $2.6 B. The stock price of Swiss Re is down 49% in 2009.
Interestingly Swiss RE bought the GE Reinsurance unit in 2005. General Electric stock has fallen in the
same pattern as CITI and other banks, and for the same reason. When will
someone ask Jack Welch what he really did transforming this once proud
industrial company to a financial shipwreck?
In each
instance Buffet got preferred stock with a hefty 10% dividend, so the firms
just took on more debt.
The
backbone of BRK is actually the re insurance business. Ambac ABK and MBIA
MIA are re insurers, and
trade for less than a five dollars.
Buffet is an financial advisor to President Obama. Buffet is also an
advocate of the Federal Bailout. Can we connect these dots now?
,
I suspect
these are not investments by Berkshire but attempts to plug the dike. The dike so to speak ,is
holding back a flood of CDS without the ability to pay off their obligation.
And those obligations may well lead to BRK/A. Is BRK/A a counterparty ( to use Warren’s phrase) to more
CDS than it can cover? Why else
would he be making investments in firms apparently in such difficulty?
Berkshire Hathaway has legions of
hero worshipping shareholders who make the annual trek for a shareholder
meeting to Omaha, NB. Could their
faith be headed for the ultimate
test?
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