"(This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy)"
It's not just about the probability of winning (or odds in this case), but the payoff that one should care about. So 99:1 that I'll win a penny or lose $1,000,000 is a terrible proposition. 99:1 I'll win $1 or lose $2 is a much better bet. Payoff = probability*(reward/risk).
Sure, I was assuming, very broadly, that the rest of the parameters are given by the context of the discussion...
Not blind He has spoken of nuclear war and other mankind enders At the very, very end of the tails things may not matter The shorts may even theoretically win big, but the investors and traders may all be dead, etc
What Buffett did was not unreasonable given he was worth roughly 60 billion at the time. 1. He could sell stock or borrow against his stock at a low rate... and regulators are likely to see things "his way" in a close situation. 2. Re Fat Tails: Some (like total destruction of the country by nukes) may not matter as money as we know it may be worthless or everyone may be dead, etc. 3. Re Overbetting: Buffett does not like to bet on edges he would have to see with a microscope and I would bet he understands Kelly, as well as tail risk. _____ However, I would not be willing to bet every thing I have on all of this )) _____ Side Note: Dalio handles things by trying to have at least 15 uncorrelated/low correlated bets going and throwing at least 10% gold in the mix. He likes some gold... even if he sees higher edge bets... to insure against some of the tail risks.
That's incorrect because the contracts are/were OTC and setup in a way that a) premium was paid upfront, about $5 bln. Berkshire was free to invest this as they saw fit. b) they were only valued at expiration dates, 10 to 20 years into the future (!). There were no daily, quarterly or annual cash settlements. c) Notional value was around $37 bln. Hardly enough to cause a margin call to a then $200 bln company with an AA/AAA rating. d) Had Goldman went under then the long puts would have been an asset on their books that would have been up for sale to the highest bidder. There is no mechanism that would have put Berkshire out of business because Goldman went belly up.
You are forgetting that the trade on the books was a liability to GS and at the time they were literally minutes from going under. This trade in particular was not helping their balance sheet. It's not a matter of GS going under, it's a matter of could GS have f*cked Buffet to "prevent" themselves from going under. It's all a moot point now but this trade took GS to the razor's edge in 2008 and was down to their last hours of being a viable entity.
Maverick74, Do you have a good book/other reference that provides details about that week? I lived through it as a new B-school grad but wasn't in the industry, and at the time there was a lot of incomplete information and I never went back and put together the details afterward. I'd be interested in reading something that wasn't a "bankers are all evil" credo that provided an honest description of the things you described above, if you have any recommendations?
I disagree with this characterisation... @sle might have more specifics of how these were structured.