Sunday, March 8, 2009

One More Time -- Felix Salmon, BRK, CDS's

Talk about an idea that is immutable.  

Berkshire credit default swap rates mean very little.  Commenter Alden on Clusterstock 
notes that:
CDS are outrageous compared to where the actual bonds of Berkshire are trading. Those bonds are trading at about 225 bps over 5 and 10 yr treasuries. Which although seems a bit high to me for AAA, I think that the absolute yields are fairly low, about 4.25% for the 5 year, 5.25% for the 10. This is favorably compared to GE Capital, which has bonds trading with yields above 10%.

Here are quotes from Friday (click for larger view):

The idea that CDS's are the most accurate and reliable reference point for credit quality is simply conjecture.  

Consider another comment:
Given that Berkshire is -- like all insurance companies -- a leveraged financial institution
Once again, not true. First, property casualty companies don't tend to use leverage, unlike some life companies. They fund assets using their own capital and policyholder funds. Nothing close to the type of leverage used by banks or even some of the life insurers. Berkshire with huge amounts of excess capital to support their insurance operations and $23 billion in cash and cash equivalents is remarkably unleveraged.

We will have to see what will happen.  One would expect the CDS's to fall into line with the bonds, but a lot of firms have blown up on negative basis trades and the markets are chaotic.

Since Berkshire is the ONLY AAA insurer, it should be obvious that AAA isn't essential to run the insurance operation (excluding the tiny bond insurer).  

This was all covered a couple of months ago and the issue disappeared.  Even though it is back, the place to look for problems is in the market inefficiencies or manipulation or whatever is driving the CDS markets.  

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