Berkshire May Be Required To Post Up To $8 Billion In Collateral

Tyler Durden's picture

Some bad news for Uncle Warren. In a note by Barclays' Jay Gelb, the insurance analyst evaluates the impact of FinReg on that "other" company and concludes that as a result of Berkshire having $62 billion in notional derivative exposure, the additional collateral requirement contemplated in the current version of Financial Reform (don't worry, the corrupt idiots in Congress will strip it before all is said and done), which amounts to 10% of notional, or 100% of option proceeds, would result in $6-8 billion in collateral posting requirements imposed on "America's Company." Even for Buffett, this is not purely chump change.

But before you start worrying that the principle of return and risk apply equally to Berkshire know this: Warren is confident all is good. And if a systemic company begins failing, he will just buy a 20% preferred stake and get all the name chasers rushing in to prop it up.

At the end of the day, none of this matters even remotely. We are positive no matter what, Buffett will find a way to exempt himself from situation which would imply there is risk to himself or his firm.

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The Rogue Trader's picture

I thought Warren said they were "Instruments of Mass Financial Destruction"? I don't understand....

knukles's picture

Yes he did.  Which reminds me of one of his buddies who famously said "Yes, we can."

Slash's picture

wait did gold/silver stop trading for a bit earlier?I know it's not related to this fread, but what's with the perfect horizontal line on the chart?



knukles's picture

Late in the day, there is a period where none of the exchanges upon which Kitco reports are open.  And during that period, they fill in the chart with a.....line.  Between the Globex close and silly as that sounds.  But true.  Deep breaths...

knukles's picture

Something to do...

Tell your buddy who's long of gold that you've got a new financial advisor whose demented.  And tell your other buddy who is really not a financial advisor that your other buddy is short of gold and that he's hard of hearing so he should speak really slow and loud to him. 
And have the supposed broker tell the supposed short that Obama just expropriated all the gold like FDR in the '30's. 

Great fucking fun on a slow day. 

tmosley's picture

Post a youtube of the results for maximum viewing pleasure.

economicmorphine's picture

Kitco uses Dell computers and they couldn't handle the calculations, so they just flatlined for awhile.  Seriously, good question.

Gordon_Gekko's picture

One word: Hypocrite.

That said, today's fraudulent paper money based financial system makes it almost impossible for large businesses to not get entangled with derivatives. The very system that Uncle Warren supports and is so fond of - the one that got him all his ill-gotten paper wealth - will be his undoing.

Turd Ferguson's picture

Warren: (on phone) "8 billion dollars!!!"

Voice: (on other end of call) "Yes, sir, that's what they're saying".

Becky: slobber, slobber

Warren: "But Moody's is a fine company with a clean balance sheet".

Voice: "Yes, sir, it is".

Becky: slobber, slobber, gulp, gulp

Warren: "Hold on a minute".

             To Becky: "That's not how I like it. Fondle my nuts, too! Don't forget about them!

                            And shove your thumb up my ass when I give you the signal."

Warren: (back on phone) "Get Barry and Ben on the phone. Let em know I'm pissed!"

Becky: slobber, slobber, fondle, fondle

AccreditedEYE's picture

The very system that Uncle Warren supports and is so fond of - the one that got him all his ill-gotten paper wealth - will be his undoing.

Seriously. He is on the wrong side of several trades with this exposure. I'm interested to see how he dodges this... If BRKA takes a massive beating, it's proof positive that at least he believed his own BS about buying America. If, however, they come out smelling like roses....

Arius's picture

it could not happen to a better guy...

traderjoe's picture

The laws of physics don't apply to Warren. I've heard him reference essentially that he believes there is no chance that the puts will expire in the money. But essentially he has a Texas hedge on - used put premium to buy stocks. It could work out ... or not. 

He's become part of the machine - not the folksy-contrarian he wants everyone to think he is. On the one hand, he's bullish on the long-term track record of Amerika, and on the other he thinks there will be a dollar and/or muni train wreck. And don't forget about the succession issue.

morph's picture

Yes, however look at the derivatives he holds. They are the least risk you can get. S&P500 Options. Hardly complex CDO's rated AAA but full of sub prime mortgages is it? Nor is it a bundle of naked CDS on TBTF's like BP.

What he said is taken slightly out of context. Derivatives are fine on easy to value liquid assets, but most derivatives are based on guesswork from places like Moodys!

mephisto's picture

BRKa doesnt have to post collateral. When they did these OTC trades, they made it explicit. The counterparties all have BRKa CDS positions to hedge.  

Now maybe thats called cheating, hypocrisy, etc. It's definitely using your reputation to get the banks to do what you want.

Unless the Finreg act can unwrite written contracts, the Barlays article is nonsense. AFAIK, Barclays were not an original counterparty for BRKA, so maybe they don't know the structure.

You Cant Handle the Truth's picture

You obviously didn't read FinReg subsection 12, paragraph 6, item e:

"(e) Just kidding folks."

knukles's picture

There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”         
                              -Warren Buffet



divide_by_zero's picture

Had to laugh when the dbag's name came up the other day at Blago's trial with 2 other well known dbags.


But Blagojevich held out hope Obama could convince “Bill Gates, Warren Buffett, George Soros and other big money Democratic donors” to endow the organization with up to $20 million.

“I want that organization up and running now,” he said. “I’d stay as governor…it’d be waiting for me (after I left office)–it’d be my little platform

Ripped Chunk's picture

Warren can pound sand

quintago's picture

his whole model is premised upon the notion that nobody should be able to hold a gun to his head.

unwashedmass's picture


oh please. let's all grow up. as the ramifications of the bill are sorted out over the next ten days, i'm sure -- absolutely 100% positive -- that certain "adaptations" in wording will be made to exempt any major player from anything that might constrict its current strategies to strip the middle class of everything down to its underwear.

please, grow up.

Cleanclog's picture

Exactamundo!  Just as mark-to-market became mark-to-model to enable bank profits and fewer set asides, the collateral required for derivatives may well be just a parking of a percent of the derivatives themselves.  Not much of a "secure" piece of collateral, but just you watch.  Can't really be hurting the profiteers now can they?

knukles's picture

Oh well shit, I feel better already.  No ONE player alone can strip me down to my underwear..... 
Gonna have to be more like Gangrape. 
(Huge Sigh of Relief)

Cheeky Bastard's picture

If they intend to use ANY equity as collateral we can be almost sure BRK will need to overcollateralize just to discount the volatility in the securities it would post. Even if it intends to post a cash-equity hybrid; it would still need to overcollateralize. Who the hell would agree to settle for equity/hybrid collateral with 0 allowable margin of error in the pricing. Thats right; only morons. I think you can safely add another 1B to that 8B; if not more.

FYI; FLA yesterday defaulted on 3B of "dirts"; the biggest muni default in the past 30 years; and today AZ was denied access to BAC short term funding at the same time it needs to roll over 700M in obligations. Yeah; he should really be "comfortable" holding any muni related product.

Cleanclog's picture

Cheeky, your FYI info is fascinating.  I just tried to quickly find via a few googles but failed. Will you help?  Would love more details.  Thanks!

Cheeky Bastard's picture

The above link is for FL "dirts" default.

This is for AZ.

I will need to post this article; since you dont hold the subscription to the site that wrote it:



DALLAS — After weathering one of the worst fiscal years in its history, Arizona starts the next one tomorrow without a short-term borrowing agreement.

In what has evolved into a political showdown, Treasurer Dean Martin is blaming Gov. Jan Brewer for allowing a $700 million line of credit agreement with Bank of America to lapse effective today. Also gone is the state’s ability to issue IOUs for state services, a form of internal borrowing.

“At this point right now, the state cannot borrow funds to meet cash flow needs,” Martin said. “There’s only sufficient cash for two months spending. Starting in September, the state is going to have serious cash-flow problems.”

Brewer, who faces Martin in the August Republican primary for governor, yesterday announced a new economic development strategy. No one from the governor’s office was available by press time to comment on the short-term borrowing issue.

The Republican governor failed to attend a meeting of the State Loan Commission earlier this month that was to have extended the lending agreement.

Brewer said she did not attend because she was in another meeting on SB 1070, a controversial new statute that requires local police and sheriff’s deputies to enforce immigration law.

The three-member Loan Commission includes Martin, Brewer and David Raber, director of the Department of Administration. Without Brewer, the commission could not vote on extending the agreement.

Martin wanted to end the lending agreement to force Brewer to cut spending rather than borrowing for operations.

“As a result of this meeting, I have essentially cut up the state’s credit cards,” Martin said. “The state will no longer be able to cover the checks the governor writes unless it has money in the bank. If she does, those checks will likely bounce.”

In the 2010 fiscal year ending today, the state has issued $86.5 million of Treasurer warrant notes to cover spending at an average interest rate of 0.93% and a total interest cost of $3.5 million, Martin said. The line of credit from Bank of America provided liquidity for the warrants, he said.

To cover a $1.5 billion deficit, Arizona mortgaged state buildings for $750 million through the issuance of certificates of participation in January and issued $490 million of revenue bonds backed by state lottery revenues last month.

But Martin said the proceeds of those deals will be gone when the state provides five months of payments to the public schools in a period of 60 days.

“That blows through all the cash the state raised through selling state buildings and issuing the lottery bonds,” he said.

This fiscal year was the first in Arizona’s history in which the state used outside lending to cover operating costs, Martin said.

It was also the first time since the Great Depression that the state has issued warrants.

Martin said that there is now no chance that the agreement with Bank of America or internal borrowing will be renewed.


From here:



Cleanclog's picture

Cheeky, thank you very much!  I really appreciate the information and you taking the time to post it.  Sorry I was called to a conference call and am just now getting back to you.

Thanks again!

Steve Garrison's picture

Tyler, donno if you read these comments directly, but don't know how else

to get to you. Please ask someone smarter than me to answer in a

blog how mechanically, the HVTs at GS can hold a market within .05%

for an entire day?


unionbroker's picture

They can do it because the market is just your imagination, take the red pill

unionbroker's picture

They can do it because the market is just your imagination, take the red pill

Young's picture

Moodys, Goldman, Railways, ReInsurers... It won't be so easy now that the interest rates can't be cut any lower... Shit hold on, my "stock goes up in the long term no matter what" father just saw me write that! "Noooo dad, don't hit me with the belt with the broken buckle again!!!! Aaarghg"... Shit, now I'm bleeding all over the keyboard here. Maybe the old man was just really smart, he knew how the politicans were gonna adopt Keynes and blow the bubble SKY-HIGH! Cudos.

Phil's picture

 Ben Nelson will clean this up for Warren or else he'll withhold his vote

KOZ's picture

The weighted average duration of his equity derivatives exposure is 11.25 years, and the new legislation offers a moratorium of 12 years.  I do not see this as a coincidence. 

trav7777's picture

I guess he better get busy scheduling more eBay auctions for lunch with him

Gimp's picture

Warren the "Ponzi master extraordinaire". Buy and hold, buy and hold, buy and hold.

He has had a hell of a run. 

"Becky get busy my knob needs polishing".

J.Caesar's picture

lil fat man, wid a note book in his hand (Randy Newman)

Dismal Scientist's picture

The fun part will be when Obama comes for him by taxing his main holdings. All those lovely branded franchises that just chuck off cash. Can't wait...

Grand Supercycle's picture


On May 4th I called the end of the March 2009 bear market rally.

The proprietary indicators I use in my technical analysis can identify trend changes before they occur.

csmith's picture

This is a positive for the derivatives dealers (JPM, GS, etc.) because once their customers are required to post collateral, the dealers can forego buying offsetting contracts to hedge. Also drives overall derivative volumes lower and might be profoundly deflationary. Judd Gregg may be onto something.

herry's picture

Certainly a lot of details like that to take into consideration. Thanks windows vps | cheap vps | cheap hosting | forex vps