Thursday, November 20, 2008

One Rumor Down.....

Brief follow up on yesterdays discussion.

Hypothesis on Berkshire:
1. Derivatives lose value ---> ratings pressure ---->collateral calls ------>ratings pressure

Since this happened at AIG, I suppose it is the first thing on everyone's mind.  

Facts regarding Berkshire:
2. Collateral Calls on derivatives -----> Not with these derivatives.

These contracts don't have collateral calls under any circumstances.*

How do you refute a rumor without raising more questions? BRK today announced that it has nominal exposure to collateral calls on derivatives.  Less then 1% of capital, worst case.

*nominal doesn't mean $0, since it seems that if you do enough of anything, there will be exceptions.  The equity puts very likely have NO collateral requirements.  A few of the CDS's seem to contain contract language requiring them -- so it isn't zero.  Let's just say it rounds to zero.

It is hard to drive a stake through a rumor without raising more questions.    

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