Tags: buffett | derivatives

Buffett: I Will Stay in Derivatives

By Dan Weil   |   Friday, 13 Mar 2009 02:33 PM

Sure, Warren Buffett once called derivatives “financial weapons of mass destruction.”

And his company, Berkshire Hathaway, took a hit in book value thanks to derivatives it holds.

But Buffett says unapologetically that he will stay in the derivatives game, selling contracts.

“Oh, we’ll continue,” he told Bloomberg TV. “We do anything that I think I understand and where I think that the odds strongly favor making money, which doesn’t mean you make money every time.”

Berkshire’s stock has taken a dive this year amid fear that Buffett’s derivative plays will curb the company’s profits.

Berkshire sold derivatives tied to junk bonds, municipal bonds, and stock market indices on three continents, creating a liability of more than $14 billion as of Dec. 31.

The company’s liability could grow or disappear by the time the contracts expire on dates as far as 19 years away.

A combination of larger liabilities on the 251 derivatives and declining prices of shares held by Berkshire sent the company’s book value per share last year to the steepest plunge in its 44 years of existence.

The maximum loss on the derivatives positions totaled $63.4 billion as of Dec. 31. Of course, Berkshire would have to pay that amount only if all the markets it bet on fall to zero and all states and municipalities fail to pay their obligations.

Some agree with Buffett’s stance.

“It's part of a portfolio of risk assumption that people appreciate in capital markets,” Bill Bergman of Morningstar tells Reuters.

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Sure, Warren Buffett once called derivatives “financial weapons of mass destruction.” And his company, Berkshire Hathaway, took a hit in book value thanks to derivatives it holds.But Buffett says unapologetically that he will stay in the derivatives game, selling contracts....
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