SEC Joins Blumenthal in Hassling Buffett, Berkshire
The SEC seems to want to end the Chris Cox era with a bang, and have been poking around Berkshire Hathaway’s ill-timed derivative transactions:
Warren Buffett’s Berkshire Hathaway Inc (BRKA-NYSE) provided details to the U.S. Securities and Exchange Commission on how it values what has so far been a money-losing $37.04 billion derivatives bet, after the regulator asked for better disclosure.
The SEC completed its review on Oct. 7 without further comment, four days after Berkshire said it did not need to buy equities that underlie its derivative contracts. On June 4, the SEC had demanded “a more robust disclosure” of factors that Berkshire used to value the contracts.
The SEC released correspondence between Berkshire and the regulator on Friday, two weeks after Berkshire said more than $1 billion of losses on derivatives led to a 77 percent overall profit decline at the Omaha, Nebraska-based company.
Buffett’s derivatives bet has faced much scrutiny from analysts and investors this year. They have led to paper losses for Berkshire, and Buffett, perhaps the world’s most admired investor, has previously called derivatives “financial weapons of mass destruction.”
Berkshire’s derivatives could require the company to pay up to $37.04 billion between 2019 and 2027 if the Standard & Poor’s 500 index .SPX and three other stock indexes were lower than when Berkshire entered the contracts. Reuters
The attorney general of Connecticut has been questioning Buffett’s influence in Moody’s Corp (MCO-NYSE) but Berkshire is claiming its 20% stake is essentially passive, and they do not control any day to day decisions.
True dat, but too bad Warren did not pay closer attention to what was going on there. Their fat margins are probably a thing of the past, and you can add Moody’s stock to the long list of things that have gone wrong for Buffett over the past year.
The panic in Berkshire’s stock early this week turned into a meltup late Friday afternoon, but the Oracle does not seem to be immune from the carnage, and bad decisions are coming back to haunt him.
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Two Year Berkshire Hathaway chart
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His disciples, including the usual suspects in value-ville, have no place to hide now that this puppy has gone down. You can now add the SEC to his list of problems, although there is nothing to see here.
But his free pass has apparently been revoked.
Morningstar is constructive on the stock In the video below, and they are joined by Barron’s bigshot Andrew Bary, who makes a case for the stock in this weekend’s edition as well.
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10-Q
Subsequent to September 30, 2008, conditions in the public debt and equity markets have declined significantly resulting in exceptional volatility in debt and equity prices. Such volatility has impacted the fair value of Berkshire’s investments in equity securities and its derivative contract liabilities for equity index put option contracts. Based on equity and equity index prices as of October 31, 2008 applied to Berkshire’s investment holdings and its equity index put option contracts, Berkshire estimates that consolidated shareholders’ equity would decline by approximately $9 billion. The impact of actions taken recently by governmental bodies in response to the current economic crisis is difficult to predict, particularly over the short term. Berkshire management believes that these extraordinary conditions are temporary and that equity prices will ultimately rise over time. However, the fair values of Berkshire’s investment portfolios and its equity index put option contracts remain subject to considerable volatility, particularly over the short term.
Berkshire determines the estimated fair value of equity index put option contracts based on the widely used Black-Scholes option valuation model. Inputs to that model include the current index value, strike price, discount or interest rate, dividend rate, foreign currency exchange rate and contract expiration date. Berkshire believes the two most significant economic risks relate to changes in equity prices and foreign currency exchange rates. Reference is made to the equity price and foreign currency risks sections of Berkshire’s market risk disclosures in its Form 10-K for the year ended December 31, 2007 for information concerning these risks.
In addition, the Black-Scholes calculations incorporate volatility estimates which are generally not observable. At September 30, 2008, the estimated fair value of these contracts was $6,725 million and the weighted average volatility was approximately 22%. The impact on fair value from changes to volatility is summarized below. The values of contracts in an actual exchange are affected by market conditions and perceptions of the buyers and sellers. Actual values in an exchange may differ significantly from the values produced by any mathematical model. Dollars are in millions.
Hypothetical change in volatility (percentage points)
Hypothetical fair value
Increase 2 percentage points
$ 7,231
Increase 4 percentage points
7,733
Decrease 2 percentage points
6,217
Decrease 4 percentage points
5,709
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Investment and Derivative Gains/Losses
Berkshire 10-Q
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Morningstar breaks it down....and are pounding the table.
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SEC asked Buffett’s Berkshire for derivative data
Reuters
Finally, Berkshire Looks Undervalued
Barron’s
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The content contained in this blog represents the opinions of underthecounter. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
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