Buffett's global stock bet: $14 billion Bloomberg NewsTUESDAY,...

Buffett's global stock bet: $14 billion
Bloomberg News
TUESDAY, APRIL 4, 2006

WASHINGTON Warren Buffett, struggling to find acquisitions large enough to improve Berkshire Hathaway's returns, is making a $14 billion bet on the global stock market.

Berkshire sold a form of insurance to buyers who wanted protection from a drop in "four major equity indexes" over the next 15 to 20 years, according to a recent U.S. Securities and Exchange Commission filing. Instead of buying the individual shares, Buffett is wagering the indexes, three of which are outside the United States, will not fall and force Berkshire to pay a claim.

The "long-duration equity index put contracts" are among the largest transactions that Berkshire has disclosed, and they represent the kind of risk that Buffett, the company's chief executive, and Charles Munger, the vice chairman, are turning to more often as undervalued companies get harder to find.

"They figured out a very interesting strategy that basically nobody else can do because of their size and long-duration capital," said David Winters at Wintergreen Advisers, who has held Berkshire stock for his own account for more than a decade. "Buffett and Munger have made the ultimate contrarian play here. They take a premium in today and they're willing to buy securities if markets really plunge."

The stock-index contracts - derivatives that function like put options - increase Berkshire's risks from market losses. A 30 percent decline in each of the indexes last year would have led to a $900 million pretax loss for the company, according to the March 7 SEC filing. Berkshire's "maximum exposure" was about $14 billion at the end of last year, the filing said.

Berkshire did not disclose which stock indexes are covered under the contracts, how they are structured, who bought them or how much it was paid. Berkshire officials declined to comment.

For Berkshire to lose the $14 billion that the company says is at risk, all four indexes covered by the puts would have to fall to zero, according to Gary Gastineau, managing director of ETF Consultants. Historic trends show that is unlikely to happen.

Buffett, 75, has become one of the world's richest people by buying stocks he considered undervalued, such as Coca-Cola and American Express, and then holding them for years.

He has been a critic of derivatives, obligations whose value is tied to the price of underlying assets such as stocks, debt or oil. In 2003, he called them "financial weapons of mass destruction" and since 2002 Berkshire has been unwinding the derivatives positions at the securities unit of its General Re subsidiary.

Still, Berkshire, controlled by Buffett since 1965, continues to use derivatives to take financial risks of its own. The March 7 filing said it had $801 million of derivative contract assets and $5.06 billion in liabilities as of Dec. 31. That included $35 million of assets and $1.59 billion in liabilities on equity-option contracts with a notional value of about $14.5 billion.

WASHINGTON Warren Buffett, struggling to find acquisitions large enough to improve Berkshire Hathaway's returns, is making a $14 billion bet on the global stock market.

Berkshire sold a form of insurance to buyers who wanted protection from a drop in "four major equity indexes" over the next 15 to 20 years, according to a recent U.S. Securities and Exchange Commission filing. Instead of buying the individual shares, Buffett is wagering the indexes, three of which are outside the United States, will not fall and force Berkshire to pay a claim.

The "long-duration equity index put contracts" are among the largest transactions that Berkshire has disclosed, and they represent the kind of risk that Buffett, the company's chief executive, and Charles Munger, the vice chairman, are turning to more often as undervalued companies get harder to find.

"They figured out a very interesting strategy that basically nobody else can do because of their size and long-duration capital," said David Winters at Wintergreen Advisers, who has held Berkshire stock for his own account for more than a decade. "Buffett and Munger have made the ultimate contrarian play here. They take a premium in today and they're willing to buy securities if markets really plunge."

The stock-index contracts - derivatives that function like put options - increase Berkshire's risks from market losses. A 30 percent decline in each of the indexes last year would have led to a $900 million pretax loss for the company, according to the March 7 SEC filing. Berkshire's "maximum exposure" was about $14 billion at the end of last year, the filing said.

Berkshire did not disclose which stock indexes are covered under the contracts, how they are structured, who bought them or how much it was paid. Berkshire officials declined to comment.

For Berkshire to lose the $14 billion that the company says is at risk, all four indexes covered by the puts would have to fall to zero, according to Gary Gastineau, managing director of ETF Consultants. Historic trends show that is unlikely to happen.

Buffett, 75, has become one of the world's richest people by buying stocks he considered undervalued, such as Coca-Cola and American Express, and then holding them for years.

He has been a critic of derivatives, obligations whose value is tied to the price of underlying assets such as stocks, debt or oil. In 2003, he called them "financial weapons of mass destruction" and since 2002 Berkshire has been unwinding the derivatives positions at the securities unit of its General Re subsidiary.

Still, Berkshire, controlled by Buffett since 1965, continues to use derivatives to take financial risks of its own. The March 7 filing said it had $801 million of derivative contract assets and $5.06 billion in liabilities as of Dec. 31. That included $35 million of assets and $1.59 billion in liabilities on equity-option contracts with a notional value of about $14.5 billion.