Berkshire CDS

November 19th, 2008 1:49 pm | by John Jansen |

I am back in the trenches. While I was away, CDS on Uncle Warren’s baby traded in the mid 500s. Someone thought 560 but was not 100 percent certain. The last quote reflects alot of tightening as they are 450/500.

 IG 11 is now 237 1/2 /239 1/2 after opening 232/235.

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  1. 5 Responses to “Berkshire CDS”

  2. By joe on Nov 19, 2008 | Reply

    Just running through some quick math shows how ridiculous this whole thing has gotten.

    The notional value of the equity index puts is $37B. For that Buffett supposedly received $4.6B in premiums. Assume that BRK is able to generate returns of 10% a year, or half of what it has done for the last 40 years. Assume that all the puts expire in 2019, which is not true, but let’s assume that. At expiration, the premiums will have grown to ~$14.5B, or 39% of the notional contract value. So as long as the S&P and 3 European equity indexes aren’t down 39% or more, BRK makes money.

    Buffett has said that he would trade short term earnings volatility, which will result from the mark to market of these contracts, for long term value creation.

    One final idea: if CDS were exchange traded, I submit that BRK would be selling CDS on itself. He can’t practically do it today because the contracts are bilateral and what buyer of protection would buy it from the company which you are buying protection on? But otherwise I’m pretty sure he would think that getting 500bps a year is worth the risk that he wouldn’t default in 5 years.

  3. By John Jansen on Nov 19, 2008 | Reply

    that you for that informative comment.

  4. By David Merkel on Nov 19, 2008 | Reply

    I posted this at Alea: I am not as sure as Monish Pabrai that CDS levels on Berky are nonsensical. Berky has more operational risk and equity exposure relative to its net worth than any other P&C insurer/reinsurer. Also, their liabilities and debts are considerably larger as a fraction of net worth than at any previous time.

    Now, I’ll add on: it would not surprise me to find one of Buffett’s disciples begin to offer credit protection in size on Berky. Many of them are quite loyal, even cultlike. “If Warren goes down, we’re going with him.”

    In 1998 I remarked to another actuary that it would not be impossible for Berky to fail; its asset policy is more aggressive than almost any other P&C company.

    Very strange times.

  5. By John Jansen on Nov 19, 2008 | Reply


    The best of times and the worst of times.

  6. By Asset Protection Plan on Nov 12, 2009 | Reply

    Great post.This is so true. I’ll put you on my bookmark. And also, I’ll let my friends read this. This is an interesting fact that we all should know. Thanks.

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