Nov 19, 2008

Warren Buffet sells puts on equity indices !!

Warren Buffet sold puts on equity indices according to a Bloomberg article:
Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the market indexes are below the point where they were when he made the agreements. By Sept. 30, Omaha, Nebraska-based Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter.

This bet has caused the CDS on Berkshire, Warren Buffet's holding company, to more than double from 140 to 388 basis points.. this maybe, however, maybe a result of counterparties hedging their bets against default risk which might rise if the contracts pay-off..

Buyers of the credit-default swap protection on Berkshire may include the companies that stand to gain if Buffett loses on the stock bets, said Matthews. They may be hedging their gains against Berkshire by entering into separate agreements to ensure they recover some funds if Berkshire is unable to pay, he said.

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