Buffett's 2010 Letter To Shareholders

Tyler Durden's picture

For those who care what the man whose corporate existence is intimately tied to the government's bailout of the financial system, has to say, below we present Buffett's 2010 letter to shareholders. 

The only section that is relevant to us, and which continues to demonstrate why Berkshire is a walking moral hazard (contrary to his conedmnation of financial weapons of mass destruction), is the disclosure on derivatives.


Two years ago, in the 2008 Annual Report, I told you that Berkshire was a party to 251 derivatives contracts (other than those used for operations at our subsidiaries, such as MidAmerican, and the few left over at Gen Re). Today, the comparable number is 203, a figure reflecting both a few additions to our portfolio and the unwinding or expiration of some contracts.

Our continuing positions, all of which I am personally responsible for, fall largely into two categories. We view both categories as engaging us in insurance-like activities in which we receive premiums for assuming risks that others wish to shed. Indeed, the thought processes we employ in these derivatives transactions are identical to those we use in our insurance business. You should also understand that we get paid up-front when we enter into the contracts and therefore run no counterparty risk. That’s important.

Our first category of derivatives consists of a number of contracts, written in 2004-2008, that required payments by us if there were bond defaults by companies included in certain high-yield indices. With minor exceptions, we were exposed to these risks for five years, with each contract covering 100 companies. In aggregate, we received premiums of $3.4 billion for these contracts. When I originally told you in our 2007 Annual Report about them, I said that I expected the contracts would deliver us an “underwriting profit,” meaning that our losses would be less than the premiums we received. In addition, I said we would benefit from the use of float.

Subsequently, as you know too well, we encountered both a financial panic and a severe recession. A number of the companies in the high-yield indices failed, which required us to pay losses of $2.5 billion. Today, however, our exposure is largely behind us because most of our higher-risk contracts have expired. Consequently, it appears almost certain that we will earn an underwriting profit as we originally anticipated. In addition, we have had the use of interest-free float that averaged about $2 billion over the life of the contracts. In short, we charged the right premium, and that protected us when business conditions turned terrible three years ago.

Our other large derivatives position – whose contracts go by the name of “equity puts” – involves insurance we wrote for parties wishing to protect themselves against a possible decline in equity prices in the U.S., U.K., Europe and Japan. These contracts are tied to various equity indices, such as the S&P 500 in the U.S. and the FTSE 100 in the U.K. In the 2004-2008 period, we received $4.8 billion of premiums for 47 of these contracts, most of which ran for 15 years. On these contracts, only the price of the indices on the termination date counts: No payments can be required before then.

As a first step in updating you about these contracts, I can report that late in 2010, at the instigation of our counterparty, we unwound eight contracts, all of them due between 2021 and 2028. We had originally received $647 million in premiums for these contracts, and the unwinding required us to pay $425 million. Consequently, we realized a gain of $222 million and also had the interest-free and unrestricted use of that $647 million for about three years.

Those 2010 transactions left us with 39 equity put contracts remaining on our books at yearend. On these, at their initiation, we received premiums of $4.2 billion.

The future of these contracts is, of course, uncertain. But here is one perspective on them. If the prices of the relevant indices are the same at the contract expiration dates as these prices were on December 31, 2010 – and foreign exchange rates are unchanged – we would owe $3.8 billion on expirations occurring from 2018 to 2026. You can call this amount “settlement value.”

On our yearend balance sheet, however, we carry the liability for those remaining equity puts at $6.7 billion. In other words, if the prices of the relevant indices remain unchanged from that date, we will record a $2.9 billion gain in the years to come, that being the difference between the liability figure of $6.7 billion and the settlement value of $3.8 billion. I believe that equity prices will very likely increase and that our liability will fall significantly between now and settlement date. If so, our gain from this point will be even greater. But that, of course, is far from a sure thing.

What is sure is that we will have the use of our remaining “float” of $4.2 billion for an average of about 10 more years. (Neither this float nor that arising from the high-yield contracts is included in the insurance float figure of $66 billion.) Since money is fungible, think of a portion of these funds as contributing to the purchase of BNSF.

As I have told you before, almost all of our derivatives contracts are free of any obligation to post collateral – a fact that cut the premiums we could otherwise have charged. But that fact also left us feeling comfortable during the financial crisis, allowing us in those days to commit to some advantageous purchases. Foregoing some additional derivatives premiums proved to be well worth it.

Some other soundbites via the Wall Street Journal:

Discussing why Berkshire keeps so much cash on hand:
Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed.


“Money will always flow toward opportunity, and there is an abundance of that in America.”


John Kenneth Galbraith once slyly observed that economists were most economical with ideas: They made the ones learned in graduate school last a lifetime. University finance departments often behave similarly. Witness the tenacity with which almost all clung to the theory of efficient markets throughout the 1970s and 1980s, dismissively calling powerful facts that refuted it “anomalies.” (I always love explanations of that kind: The Flat Earth Society probably views a ship’s circling of the globe as an annoying, but inconsequential, anomaly.)


One footnote: When we issued a press release about Todd [Comb's] joining us, a number of commentators pointed out that he was “little-known” and expressed puzzlement that we didn’t seek a “big-name.” I wonder how many of them would have known of Lou in 1979, Ajit in 1985, or, for that matter, Charlie in 1959. Our goal was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit. (Whoops–that may not be the smartest metaphor for an 80-year-old CEO to use.)


On hedge funds:
The hedge-fund world has witnessed some terrible behavior by general partners who have
received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains. Sometimes these same general partners thereafter quickly started another fund so that they could immediately participate in future profits without having to overcome their past losses. Investors who put money with such managers should be labeled patsies, not partners.


Berkshire and the housing/mortgage crisis:
Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind. If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did.
(Emphasis added)

On the worst of the global financial crisis:
As one investor said in 2009: “This is worse than divorce. I’ve lost half my net worth–and I still have my wife.”
In discussing the bazaar that is the coming annual meeting:

Remember: Anyone who says money can’t buy happiness simply hasn’t learned where to shop.

Full letter.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
6 String's picture

....Normalcy bias at its finest.

slewie the pi-rat's picture

Slewie's 2.26.11 Letter to Eric Holder

cc:  We The People


To:  Mr. Eric Holder, Esq.  TopDog; Dept. of Justice
From:  CSp5 (ret.) slewie the pi-rat, Chaplain of The Militia Of The People Of The United States Of America

Dear Sir or Madam:

when i googled you to find out why you goobermint doucebags are screwing everything ala pooch, i very much liked what is saw.

are you married?

and, i'm startin to like yer boss a bit more, too.

he certainly has the happiest family on the planet, and if he be free-rollin for the rest, screw it, I'm IN!

#2:  "A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed."

The "State" = USA.  REALly!


This is to report to you that, under the 2nd Amendment, AKA:   THE FREAKING LAW, sir, We The People are in defensive mode, stack arms.

And, i have also been asked to remind you:  you work for US.
This militia is not here to serve the goobermint.
Or, the 'States' unless, of course, prior arrangements have been made, in which case the arrangements will be honored.

That is, why we're here;  because we are needed in this capacity and the law demands that we muster and step forward. 

you figure out what part of "we" applies to you, sir.  and we shall do the same.

hava day, friend.

slewie out.

props2009's picture

He also says that he is itchy to put in money into American housing markets....

do we take that as a signal for QE3 which means more money into US economy esp construction?


Long-John-Silver's picture

It's a liquidity trap. The rats are running circles in the cage until they starve to death. In this case the rats are printing money and eating it but they still starve to death because there is no nutritional value. Once a country starts printing counterfeit money (QE to ), the game has been lost.

Rodent Freikorps's picture

An experiment showed rats, given a choice between food and cocaine will push the coke button all the way to starving to death. Stimulus will do that.

Clint Liquor's picture

I wouldn't piss in Warren Buffet's ear if his brains were on fire.

Thomas's picture

..but it would be tempting.

Long-John-Silver's picture

I would piss on him, just not where he's on fire.

Judge Judy Scheinlok's picture

Mar 9,2009 $73,195
Feb 18,2011 $127,550

Too heavily weighted in financials for me.

props2009's picture

Warren Buffett says he has turned around NetJets...well read this...


Judge Judy Scheinlok's picture

Even Judge Jewdy had her NetJet card suspended by "The Accountants(Jews)".

Nihilarian's picture

I don't like Warren Buffet.

Judge Judy Scheinlok's picture

I don't like Creggie Milton from Busted Blog goes Boom. I'd take WB 100x over Creggie the sell out vanity man.

silvertrain's picture

Kingworldnews has a MUST HEAR with Jim Rickards this morning along with a great Mike Pento also..

Judge Judy Scheinlok's picture

Someone told me KWN has more ass pirates per square inch than Goldman Sachlets. Can someone provide confirmation?

Life of Illusion's picture



Derivatives should be called


Sudden Debt's picture

anything that can be traded is as good as money.

In jails, they even trade sigarets and stuff so even that is money.

philgramm's picture

Agree 100%!!! competing currencies keeps everyone honest.  To those who will reply "that's what we have now", No it's not.  It's akin to blaming free markets for the collapse.

Crumbles's picture

NOT - cigs are outlawed, current trade items are postage stamps and plastic pouches of fish - which do you prefer?

Spalding_Smailes's picture

In other news .... China.


...... " Let’s face it – most Chinese growth is the result of overheated investment, and removing the sources of overheating without eliminating growth is going to prove impossible.  I have been making the same argument for at least two or three years, and so far we have seen how Beijing veers between stomping on the gas when the economy slows precipitously and stomping on the brakes when it then grows too quickly.  I don’t believe anything has changed.


And deposits were down

The most interesting number in the NBS release, perhaps, was January the level of bank deposits.  They were down.  Dong Tao at Credit Suisse says that this is the first time this has happened since January 2002:

What was more concerning was that it was corporate deposits that went backwards, not household deposits, as may have been expected around Chinese New Year. This gives us reason to believe that the fall in deposits is not seasonal.

One of my clients asked me two weeks ago about continued tightness in the interbank market and this was my response:

My interpretation of the liquidity tightness is also maybe a littledifferent.  If you check the latest NBS numbers you will see thatdeposits were actually down, and it was not household deposits that dropped, which could be explained by the holiday, but rather corporate deposits.  One month does not make a trend, but this is pretty consistent with the argument that highly negative real deposit rates will cause depositors to take their money out of the banking system.

In that case there may just be a mismatch between the lending and deposit side.  Loan officers are always encouraged to lend like crazy, and the funding side assumes the deposits are there, but perhaps they were caught off guard by the decline in deposits.  I am just guessing, as are we all, but we are trying to keep an eye on the topic to figure it out.

So why did corporate deposits drop?  My guess is that large businesses may be finding it much more profitable to lend money to other businesses, especially those who don’t have easy access to bank credit, than to deposit cash in the bank at such negative real rates.  Both the Credit Suisse report and an email I got last month from a friend of mine at Bank of China suggests that there may be an increase in intercompany lending, and to me this would be a very plausible consequence of negative real deposit rates.  And of course for those worried about systemic risks this would be very worrying news.  As Japan showed us in the days of zaiteku, when corporations turn to speculative financial transactions as a source of earnings they tend to increase systemic risk.

By the way, and as an aside, in my newsletter I discuss an important recent PBoC release Thursday on the true amount of new lending in China, including off-balance sheet items.  According to the PBoC, not only is new lending far greater than the official new loans number, but it actually increased from 2009 to 2010 – contrary to what the official new loans numbers imply.  This was not unexpected but nonetheless a little shocking. " .................




Judge Judy Scheinlok's picture

Good grief haven't you guys been calling for a crash in China for at least 2 years?

This is what happens when the investors have skin in the game.
;) Nothing.

Spalding_Smailes's picture


To make this point even clearer, I am providing an updated graph, illustrating a phenomenon often discussed in these times, which is the utterly hypocritical statements made by Chinese officials, who only recently renewed their accusation that the Fed was following an overly easy monetary policy. Let's not forget that China, via its systematic manipulation of the dollar/yuan exchange rate when it requires Chinese businesses to sell it back dollars earned via exports in exchange for fresh new yuan, is indeed the one that is engaging in money creation via the printing of new money. It is perfectly understandable that China might be frustrated by the fact that the United States, via its 0% monetary policy, is not compensating its investments "correctly," but if you check out the changes in M2 money supply in the U.S., the eurozone and China, you will immediately see who is carrying out an easy money policy with its ensuing upward effect on commodity prices in the world. M2 in the USA, the eurozone and China. In 15 years, M2 has grown five-fold in China.
As you can see in this graph, China literally allowed its money supply to skyrocket, compared to that of the U.S. or the eurozone, with annual growth averaging +17.4% between 1996 and 2008, which compares to +7.1% in the eurozone and +6.3% in the United States. Above all, since the beginning of 2009, this divergence has actually widened, despite the Fed's QEs and 0% interest rates, since Chinese M2 has been growing at 26.6% per annum (!), versus +3.5% in the U.S. and +2.3% in the eurozone. So, I wonder, is Bernanke truly responsible for the hike in world commodity prices and the ensuing popular upheavals? http://seekingalpha.com/article/252124-enough-with-the-bernanke-bashing-...


Printfaster's picture

Another of plunderers of the TBTFs talking from Mt Olympus. 

TBTF:  business, government, labor, banks

All of them shaking down the entrepreneur for loose change.  When will Atlas shrug?

What is with this babble of the number of derivative contracts?  That is a totally irrelevant figure.  It is not the number but the number of dollars at risk.  He could have 251 derivative contracts, 250 risking a dollar, the last one risking 10 trillion.  Egad.

Judge Judy Scheinlok's picture

If I had two subsidiarity companies under my parent company and one sold a S&P big, while the other bought one S&P big, what is the net notional?

Thank you,
Judge Jewdy

tradewithdave's picture

Todd Combs will not be needed.  We can rebuild him.  We can rebuild Warren.  Yes, it will cost $500 million, but we have the technology.  Conceptually, here's what Warren will look like outrunning Seabiscuit as played by Lindsay Wagner... http://tradewithdave.com/?p=5513

Dave Harrison


in-Credible Banker's picture

OMG who gives a rats ass what this dinosaur thinks.  I want to puke at the sight of him and his stupid shrill voice, with Becky Quick blowing him on CNBC....

Judge Judy Scheinlok's picture

I think I saw Creggie doing the reach around while Becky was blowing. Immelt sent a memo out that morning. "All hand on deck for Warren".

JW n FL's picture

what a lil sore losing stalker you are... thats all you have to offer???? bitching about how your ass hurts. you are a lil no nothing fag insect... go shoot yourself.

quo vadis's picture

"Remember: Anyone who says money can’t buy happiness simply hasn’t learned where to shop"

...So this is what it's all about, Alfie?

You mean to tell me that over and against the wisdom of the ancients, conveyed in good will upon us poor devils, our Oracle confers this upon his minions?  That success boils down to the particular way one stuffs his bottomless gullet with novelties? 

The vast esteen enjoyed by Mr. Buffet is a ghastly certain sign that...  

Man, can't you just feel the times getting a bit biblical? 

Ps 130:1

Seymour Butt's picture

Is this old fossil dead yet?

Rodent Freikorps's picture

I think he has moved on to Undead.

Judge Judy Scheinlok's picture

Making a new AUM class. Zombie Capital Management.

TruthInSunshine's picture

This is the letter the big, fat, bloviating socialist Warren Buffett should have sent:

Dear Uncle Sucker
Judge Judy Scheinlok's picture

Wasn't Ritholtz arrested for attempting to sell pre-teen girls on Craigslist? Yuck!

Trimmed Hedge's picture

Although I'm not much of a Buffett fan anymore (and I'm especially not a fan of his partner-in-crime Charlie Munger due to his comments the past year or so), you have to admit that those are some *crazy* numbers... billions in bets, with hundreds of millions in profit.


Must be nice! LOL  : )

Judge Judy Scheinlok's picture

4Q profit up 43% to $4.4 billion.

Nebraska (Presbyterian) vs. Wall St(Jew York City).

falak pema's picture

I didn't know US capitalism was about religious war...

Moe Howard's picture

Speaking of Jew York City, didn't Chi-town just become Jew-town?

Hedgetard55's picture

BH will be BK by 2013.

FunkyMonkeyBoy's picture

The only reason Buffett has made any money is because he is an insider. Same applies for all the other crooks on wall street. They are not clever, they are not smart or 'gifted', they win because they already know what is coming around the corner, because they have been told in advance.

They are crooks, that is all. They have one of the easiest jobs in the world.

Judge Judy Scheinlok's picture

Hey FMB,
Whatif ZH was a Wall St based offshore entity with the easiest job in the world?? Herd the ZH-Sheeple.

Have they shown any reason to be afraid of the .gov sensors? Nooooo! They are soft core, easy and gentle.

Why hide your identity?

~Judge Jewdy.

Phineas Gage's picture

From famed investor and American hero to hypocritical, socio-capitalist, book-talking fraud to senile, rambling imbecile - all in the span of three years.  Poetic.

Judge Judy Scheinlok's picture

Just wait for the realz poetry bitchez!

Where the fuck is Marla? Why can we not have some trance with our Zero?

Rip off!