Tom Jacobs

Berkshire's Huge Exposure? Nonsense

Recognize the similarities between what Berkshire has done here and what AIG did selling protection on AAA rated CDO tranches. Sell large amounts of "insurance" via derivatives and rely on not having to post collateral to argue the unlikely situation that any payoff will occur or call into question mark to market accounting. Argue it is free money as the author here is doing by showing how unlikely a loss is or how little it costs over time. It is unclear if Berkshire has "paid out nothing" because they are AAA or because their contracts are free of collateral requirements. Fitch downgraded it to AA+ on March 12 so we will soon see.

I still cannot get over the hypocrisy in all of Buffet's "derivatives are weapons of mass destruction" hysteria. He can't have it both ways. If anyone can justify selling these large option positions from a speculative position (there is no hedge here) then how are derivatives such evil contracts?