Wednesday, March 4, 2009

Now Berkshire Hathaway Credit Default Swaps Climb

The price of Berkshire Hathaway credit default swaps hit a record high on Wednesday, going as high as 535 basis points, before retreating to 515 basis points in the late afternoon, CNBC reports. Berkshire Hathaway is, of course, Warren Buffett's operating vehicle. The higher the CDS price, the more risky the market considers the debt to be.

This is nowhere near the climb on GE credit default swaps where the up front money is near 2000 basis points. But it still puts Berkshire at levels "more typical of junk-rated companies" even though Berkshire retains its triple-A rating, Bloomberg reports.

What has investors spooked is a series of sloppy trades by Warren Buffett. The most recent being the $3 billion investment in GE, which may be going over a cliff, real soon. Further, he has huge bank exposure with big positions in Wells Fargo and US Bancorp. So far these banks have held up, but bank stocks are simply spooking investors right now.

But, what is also spooking the market is that after calling derivatives, weapons of financial destruction, it turns out that Buffett has been a big plunger in the derivatives market. Janet Tavakoli in her book, Dear Mr. Buffett, reports that Buffett has been taking on first risk derivatives, which means if the debt underlying the derivative goes bad, Buffett (i.e.Berkshire) will be the first at risk.

Judging from what Tavakoli wrote, Buffett also has written some derivatives that are puts on the market, meaning that as the markets go down it is more likely that Berkshire will be called upon to buy huge baskets of stocks.

Buffett seems to think his derivative plays will work out, but I'm sure many of the early Berkshire bond buyers are in shock that Buffett has been making such a huge derivatives plunge. And, no one can, today, be impressed with Buffett's judgement with his recently purchased stake in GE. Overall, Buffett tends to run a fairly conservative balance sheet for Berkshire, but no one on the outside can possibly understand what exposures are put on the balance sheet by the derivative plays.

Put simply, anyone playing in the derivatives market, even Warren Buffett, is considered toxic right now.

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