Warren
Buffet’s holding company, Berkshire-Hathaway, finally
released its numbers on Saturday (February 28, 2009) which
showed that it had the largest decline in its book value
in its history. But even before this bad news was announced,
hedge funds were massively shorting not Berkshire Hathaway
itself but the publicly-traded companies in its $50 billion
portfolio. Their bet is that Buffet will be forced to dump
the stock of these companies because his holding company
is vulnerable to massive losses on its derivative contracts,
including credit default swaps. It turns out that even while
Buffet was denouncing derivative contracts as “financial
weapons of mass destruction” and “ time bombs”,
he was amassing one of the world’s largest position
in them. For example, he sold derivative contracts
on four stock market indexes– the S&P 500 in America,
the FTSE 100 in the U.K., the Dow Jones Euro Stats 50 index
in Europe and the Nikkei 225 Stock Average in Japan–
for $4.9 billion that expose his company to over $35 billion
in losses. In 2008 alone these contracts had lost on paper
nearly $10 billion and with the market in free fall in 2009,
they lost another $3 billion. Indeed, each percent these
indexes decrease adds another $350 million to the loss Berkshire
Hathaway is liable for. He also sold more than $2/4 billion
worth of the infamous credit default swaps, not unlike the
ones that brought AIG down once it lost its triple A rating.
Such contracts insure that companies will not default on
their debt. In addition, Berkshire Hathaway subsidiaries
sold derivative contracts on energy for “operational
purposes.”
Although even the multi-billion dollar paper losses on these
derivatives don’t require Berkshire Hathaway to put
up money to guarantee payment to its counterparts, they
weaken its balance sheet. And since Buffet prides himself
on maintaining a “Gibraltar-like financial position,”
the hedge funds are gambling Buffet will protect Berkshire
Hathaway balance sheet– and its triple A rating–
by selling part of Berkshire Hathaway’s portfolio.
If that happens, they expect to profit in their short sales
from the plummeting prices. Whether or not their play succeeds
against Buffet, remains to be seen.
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