... why the hell did he do that? does not sound at all like the person i used to see in him. but i have never been a devotee in the first place ... http://www.bloomberg.com/apps/news?pid=20601087&sid=aD0w4TPcxWrE&refer=home
And whatâs the probability S&P500 will be far below todayâs value after 10 years in an inflationary environment? The risk he took is small. Even at the great depression Market Cap to GDP ratios was around 30%. So suppose the recession extent through 2019 (very unlikely) and we have zero inflation (extremely unlikely) we are talking about a worst case scenario of S&P around 300 â 400 level at 2019 and the puts worth 20 billion. Meanwhile he has 4.85 billion today capable of lending at rates as high as 10% a year. 2019 value of these, around 12 billion.
the puts had apparently a strike of around 13k for the dow. they were at the money, at the time...i.e. several months ago. allegedly they are very long dated (15+ years). this is obviously a great trade if you believe dow will be > 13k in 15+ years or whatever the expiration date is. what is insane, is the fact that he did not put collateral against it. he also used gs as the broker. a reason gs is weak could be because of that. apparently the reason he bought the stake in gs was for that reason. i do not have any inside take on this. i am just repeating what john mauldin heard in the grapevine. i struggle to understand what sort of entity would be buying those long-dated puts though......
He collected nearly $5B in premiums. There has to be something in the terms of that bet that create significant risk for Berkshire.
The other posters are right. Considering how these options are also European options (can only exercise at expiration), the buyers for these options are basically betting that we'll still be where are today close to a decade from now. As the other posters have said, factoring in inflation and the opportunity cost, the people who bought these options are probably on the wrong side of the trade.
The billions in premium is one of the few actual facts we have on this deal. So we can come to one of two conclusions - either the people on the other side of Buffet's bet are morons, or the limited information available to outsiders does not accurately portray the risks involved.
Where do you gather that from? From what I understand there is a explicit "off the counter" contract between the seller (BRK) and the buyer (whatever institution).
Makloda - there are at least two versions of the story circulating. In one GS acted as a one-stop intermediary between Berkshire and the multiple institutions on the other side of the bet. In the other, GS actually took the other side of the bet (and did G-d knows what with it afterwards). There is also a rumor that the reason Buffet "lent" Goldman the $5B a couple months back is because Goldman had Berkshire over a barrel due to something in the Put deal, which is currently massively underwater - but that is strictly rumor for now.
sorry my dumb question, what does "off the counter" exactly mean? we are not talking "over" the counter here? where GS could easily be the other side?