If it's trading north of 95, perhaps he should do a Lenny Dykstra and just keep doubling down until he's proven right. Seriously, I still do not understand the timing. Not that anyone knew the cash S&P would be trading at the Antichrist level, but if most stocks are in his view "overpriced", which has been his view for most of the last, what, twenty years, then why make a bullish bet then (and not even hedge)? Better to have done it when "Mr Market",as he likes to call it, is in a bad mood, like right now.
Eyeballing it, $4.6 billion in ES would be only around 140,000 contracts. That does sound like a lot--about 1/20 the average daily volume. Still, I have seen tens of thousands trade within a second. He could have hedged. He didn't have to ride the bet down.
Buffett states his liabilities in his shareholder letter and his view of the flaws inherhent in the Black Scholes model especially when pricing long dated options. Again Pp. 18-22. http://www.berkshirehathaway.com/letters/2008ltr.pdf Regarding the fact that Berkshire Hathaway does not have to post collateral under any circumstances (including a downgrade--but to be clear the AAA rating on Berkshire is in no way in peril) on almost all of its derivatives contracts, Felix Salmon was apparently unaware of that, too. Capvandal explains it here: http://capitalvandalism.blogspot.com/2008/11/felix-salmons-musings-on-berkshire.html
If the counterparty were a former investment bank named, say, SilverGuy Socks, it might notice that although it had an accounting gain, it didn't have cash to show for it, because it was not due any collateral. It might ask its AAA rated counterparty if it would consider investing in, oh let's say, preferred stock with warrants as a sweetener so that it could get a cash injection. Just musing.
wow I didn't know that Buffet did the trade so long ago. I thought it was done after the market had fallen quite a bit. It seems really uncharacteristic of him to make a bullish move when stocks were overpriced. Are you sure about the timing date?
You guys are spinning your wheels. You can crunch numbers all you want, and pretend you can get to an answer. But the fact remains, even though BRKA has capital , at least we think they do, they're getting hammered by forces they didn't give credence to. And, as any unknown threat is to any victim, they are scared to death. Do I know that? No. But it's basic human nature. I was speaking with Patrick when he was writing this this morning. Read it about four times. He has insight none of us do. But he is explaining to us how Warren got his ass handed to him. You will never read a more telling piece. Remember, Buffett bought Geico from Jack, PB's father, who chose to bring that dog back to life for stock only - no salary. I think he cleared a 1.5 bill for that. http://www.deepcapture.com/why-the-apparatchiki-of-finance-didnt-see-it-coming/ my fave highlight (remember, I lived this): A couple of years ago I visited a United States Senator who walked me through the arguments which the hedge fundâs lobbyists had recently rehearsed to him, arguments holding that, in effect, everything I claimed was going on in the market was theoretically impossible. I said to him, âSir, they can line up finance professors from here to MIT who say this is impossible. I can line up tough Italian guys from here to Staten Island that say they do it every day.â
his puts are not MTM, and do not need collateral. he market can recover in next 4 years, he is allright.
Altough I'm not so sure anymore this is a great thing. He says he gets to invest the money, but if he continues to average down lots of US companies and keeps betting in a recovery, in the case US goes japanese then he loses both on his puts and also on the money he 'invested' by being the US perma bull that he is. So there is a correlation between his puts and the premium he got.
http://www.berkshirehathaway.com/letters/2008ltr.pdf See Pp. 18-22. Berkshire Hathaway does mark-to-market. That is why operating earnings were relatively decent, but net income was down. That did not imply an interenal reduced cash position, however, because Berkshire Hathaway does not have to post collateral under any circumstances on most of its derivatives contracts.
Sounds as if you are the one who is scared to death. The fact of the matter is that the entire economy is getting the stuffing kicked out of it, and even sound businesses are constantly reassessing their position. As a matter of fact, however, BRKA does have a lot of capital, and you can read the financials yourself, since they are posted on the web site.