Monday, March 2, 2009

Another Financial Guru Bites the Dust

What?!!! Are there no financial gurus left?

On Saturday, Warren Buffett’s holding company, Berkshire Hathaway, finally released its numbers, which showed that it had the largest decline in book value in its history. But even before this bad news was announced, hedge funds were massively shorting not Berkshire Hathaway itself but the publicly traded companies in its $50 billion portfolio. Their bet is that Buffett would be forced to dump the stock of these companies because of his holding company’s vulnerability to massive losses on derivative contracts, including credit default swaps.

It turns out that even as Buffett was denouncing derivative contracts as “time bombs” and “financial weapons of mass destruction,” he was amassing one of the world’s largest positions in them. In 2008 alone, these contracts had lost nearly $10 billion on paper, and with the market in free fall in 2009 they lost another $3 billion. Indeed, each percentage point these indexes decrease adds another $350 million to the loss Berkshire Hathaway is liable for.

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