By Erik Holm
Nov. 24 (Bloomberg) -- Billionaire investor Warren Buffett will provide more information to investors on how he calculates losses on his Berkshire Hathaway Inc.�s derivative bets in the firm�s annual report early next year.
The report will disclose �all aspects of valuation� and cover �deficiencies in the formula� for pricing the derivatives, �which we nevertheless use,� Buffett said in an e- mail sent by his assistant, Debbie Bosanek.
The information may calm investors concerned about losses and potential ratings downgrades tied to Berkshire�s sale of derivative contracts. Buyers of the derivatives would be entitled to billions of dollars from Omaha, Nebraska-based Berkshire if four stock indexes drop below agreed-upon levels on dates beginning in 2019. Berkshire shares have fallen about 18 percent since Nov. 7, when the insurer said writedowns on the contracts totaled $6.73 billion at the end of the third quarter.
Buffett�s e-mail said the four stock indexes, including the Standard & Poor�s 500, would all have to fall to zero for Berkshire to be liable for the entire $35.5 billion that�s at risk. The sum was last estimated at $37 billion in a Sept. 30 filing and shrank because of fluctuations in currency exchange rates, he said.
Berkshire gained $3,300, or 3.7 percent, to $93,300 at 9:41 a.m. in New York Stock Exchange composite trading.
Speculation about the insurer�s liability drove up prices last week on credit-default swaps tied to Berkshire debt. Fixed- income investors buy credit-default swaps to protect themselves against the possibility that a company won�t meet its obligations and prices rose last week to levels typical of a company rated one level above junk.
No Questions
�The market is so panicked that even the most respected investor in the world can see the stock in his company fall more than 30 percent on no news, other than on rumors that are clearly false based on the disclosures he�s made,� said Whitney Tilson, managing director of T2 Partners LLC, a New York-based hedge fund with about $100 million under management. �We are in a sell first, ask questions later world.�
Tilson said his firm doubled its stake in Berkshire as the shares fell, increasing its holdings to 20 percent of assets under management from 10 percent, and buying some below $75,000 a share. The stock fell as low as $74,100 on Nov. 20, before rising to $90,000 the next day.
Investors also were concerned that Berkshire might have to put up collateral, draining cash and setting off a chain of events like those that brought American International Group Inc. to the brink of failure this year.
In his e-mail, Buffett said the collateral requirements are �under any circumstances, very minor.� Berkshire had $33.4 billion in cash at the end of the third quarter.
Terms of Contract
Buffett sold the derivative contracts to undisclosed buyers for $4.85 billion. Under the agreements, Berkshire must pay out if, on specific dates starting in 2019, the market indexes are below the point where they were when he made the agreements. In the meantime, Berkshire can use the cash to buy stock or make acquisitions.
The writedowns taken on the derivatives are accounting losses that reflect the falling value of the stock indexes, not cash that Berkshire has paid out. Chief Financial Officer Marc Hamburg told the U.S. Securities and Exchange Commission in July that the firm values the derivative contracts using a model that includes equity prices, interest rates, the dollar�s performance against other currencies and market volatility.
The SEC had asked for �more robust disclosure� on how Berkshire values the contracts.
Related Links
Political Animal - New Zealand Politics
Share Investor Blog - Stockmarket & Business commentary
Share Investor New Zealand Business News- Get more business news
Shareinvestorforum.com - Discuss this topic further
From Amazon
The Snowball: Warren Buffett and the Business of Life by Alice SchroederBuy new: $21.00 / Used from: $16.99
Usually ships in 24 hours
 | The Warren Buffett Way, Second Edition by Robert G. Hagstrom Buy new: $10.17 / Used from: $6.92 Usually ships in 24 hours |
 | The Tao of Warren Buffett: Warren Buffett"s Words of Wisdom: Quotations and Interpretations to Help Guide You to Billionaire Wealth and Enlightened Business Management by Mary Buffett Buy new: $15.61 / Used from: $5.95 Usually ships in 24 hours |
No comments:
Post a Comment