Wednesday, November 18, 2009

Buffet Makes the Right Credit Bets

What a difference a year made for Warren Buffet's Berkshire Hathaway. The man who called derivatives "weapons of mass financial destruction" made a yatchload on those explosive instruments. Bloomberg reported:

Berkshire reported $US1.73 billion in profit on derivatives, compared with a loss of $US1.26 billion a year earlier. Contracts tied to stock markets gained $US220 million, compared with an $US880 million loss. Credit-default swap contracts, in which Berkshire protects clients from bond losses, posted a $US1.44 billion profit compared with a loss of $US342 million.

Buffett's firm was required to post about $US50 million in collateral to trading partners on derivatives as of Sept. 30, compared with $US650 million three months earlier.
But Berkshire isn't out of the water. The company may be downgraded under the huge debt burden of a Burlington Northern acquisition.

The firm may have to post as much as $US1.1 billion more if its ratings are cut, ``depending on the degree of the downgrade.''

Derivatives are a two edged sword. Warren Buffet had the blade facing away in 2009. When will it turn? How might the Oracle of Omaha profit? He plans to buy Capmark's North American servicing and mortgage-banking operations. Capmark, a huge commercial real estate CRE) lender, declared bankruptcy in late October. Did Warren have any credit bets on Capmark's or another CRE lender's failure?