kiwing100

thank you

For those of you unable to attend the BRK AGM in Omaha, here are some live blog links for you ... Live blog from Morningstar - http://news.morningstar.com/articlenet/article.aspx?id=549818 Blog from Andrew Sorkin - http://dealbook.nytimes.com/2012/05/05/live-blog-berkshires-2012-annual-meeting/ Blog from Wall Street Journal - http://blogs.wsj.com/deals/2012/05/05/live-blogging-buffettpalooza/

here is the link to the full programme: http://www.bloomberg.com/video/92027217/

thank you very much

Some of you may trade these exchange products to hedge or to make outright directional calls. Here's a lesson on how the performance of an exchange traded product varied significantly from the performance of the underlying index it was trying to replicate.. Caveat emptor ... From my perspective - always look at the underlying assets owned by the exchange traded product and the nature of the security which you are buying would be the lesson to take away here. http://www.bloomberg.com/news/2012-03-30/credit-suisse-opened-volatility-bets-to-small-investors.html

An adverse vote outcome here may have an adverse impact on the value of the Bank of Ireland stake held by Fairfax (assuming that Fairfax has not hedged this investment in any way or that Bank of Ireland has not hedged its Irish govt bond exposure) http://www.google.com/hostednews/ap/article/ALeqM5hd3D9t-25nzddH5AHmHmApxzmEag?docId=45bbd9b5352c4a53ae098adfbf686795

http://www.oaktreecapital.com/memo.aspx

dcollon, thank you very much.

FYI, he also put out a note on his opinion on how the economic machine works - a template for understanding - which was updated in March. The link is below http://www.bwater.com/Uploads/FileManager/research/how-the-economic-machine-works/a-template-for-understanding--ray-dalio-bridgewater.pdf

As per Bloomberg story - Net notional credit default swaps on Greek government bonds total $3.2 billion while the gross notional amount of CDS is more than $69 billion, according to Bloomberg data based on the DTCC. I'm not an expert here but shouldn't you be focusing on the gross notional CDS exposure, not the net notional exposure? The $3.2bn is the net notional exposure - the GROSS notional exposure is $69bn. I'm not sure if there is $69bn gross notional long CDS exposure or $69bn gross notional of short CDS exposure outstanding. If there is $69bn of gross notional short CDS exposure, then there is long CDS notional exposure of $66bn. Note that some of the long CDS exposure could be hedging long bond positions, so the actual unhedged short CDS exposure on Greece (excluding the long CDS used to hedge long bonds) is likely to be larger in that case. If there is $69bn of gross long notional CDS exposure, then there is short $66bn of gross notional CDS exposure. Some of this gross long notional CDS exposure could be due to actual hedging of long bond positions being held so the net notional exposure could actually be nil if you take the hedging of bond positions into account. (if more than $3.2bn notional CDS exposure is used for hedging long bond positions, then net notional unhedged exposure would actually be negative (i.e short)) Either way, those who are short CDS are likely to see additional cash collateral calls on the short CDS positions or cash settlement on their short CDS positions - I read somewhere in a Bloomberg article that CDS pricing was about 7mn per 10mn of exposure, (not sure how accurate this is since I don't get the updated market prices) so there is another 3mn of cash to pay up (which is another 42% [3mn on 7mn mark to market]). Of course those that close out their short CDS positions by paying the additional 3mn per 10mn of exposure get delivery of the "defaulted" bond which they can in turn exchange for the newly issued Greek bond(s) (and other securities - I understand that there are warrants to be issued). But they have to come up with the cash before they take delivery of the "defaulted" bond. Where will they get the additional cash from? - their existing cash resources (if they have sufficient cash available), or by fund raising from selling some of their securities in their portfolios to raise cash (which could possibly cause some market dislocation). They can then sell the newly issued Greek bond (securities) in the market when it is delivered and when it starts trading. Who knows what the market value of the securities will be ... If there is counterparty default anywhere along the chain, then if you netted off your short CDS exposure, by closing out in the market you could be caught on one side. Interesting to watch from the sidelines is all I can say ....

eclecticvalue - Thank you for sharing

I had trouble with the above links. Here is the interview I found on youtube

http://www.scribd.com/fullscreen/75516666

for those of you who are interested, a view of the European macro situation http://www.scribd.com/doc/74335711/Hayman-Nov2011

BRK reportedly invested 23.9bn in 3Q http://www.bloomberg.com/news/2011-11-07/buffett-broadens-portfolio-by-spending-23-9-billion-in-quarter.html

it seems that the CDS may not be offering a a hedge to Greek bond investors. They have yet to determine whether there is a credit event on Greek bonds with the voluntary restructuring. Holders may be facing a 50% haircut on the bond and no payout on the CDS. http://online.wsj.com/article/SB10001424052970203554104577002131748108506.html?KEYWORDS=DAVID+REILLY In that case, the arbitrage trade by banks of being long a bond and long CDS where you capture the income differential may result in substantial losses if the underlying are Greek bonds. Use of leverage in this position would magnify this significantly. So what seems like a riskless trade may not be ... Also I am wondering which financials have naked short CDS on Greek bonds, they are likely to face more margin calls (like AIG did in 2008). Also which financials are short CDS on Italian, and Spanish govt debt, and bank debt ... Margin calls caused the downfall on MF Global and Dexia putting pressure on their liquidity ...

http://www.charlierose.com/view/interview/11919

"In an arbitrage situation, they might buy $100m of GM bonds that pay a spread of 200bps and sell CDS credit protection on $100m that generates an income of 220bps - thereby keeping 20bps/year." Hi dwy000, Great posts, and thank you for your insight. I am trying to understand the comment above, and have a question about the comment you made earlier. 1. Trying to understand the cashflows from above which results in net 20bps. On the bank's long bond position, they receive 200bps, and on the bank's short CDS position, don't they receive 220bps? Isn't this a net receipt of 420bps to the bank, rather 20bps? 2. Is the above arbitrage trade a riskless trade? I see risk if the GM bonds default - the long bond position will lose its value of $100mn and the short CDS credit protection position could potentially lose another $100mn as they have to pay out to the CDS credit protection buyer. So that would mean that the bank would have net exposure of $200mn? Not sure if my understanding is correct of the arbitrage trade as you outline above ... Thank you for your help advance in understanding the arbitrage trade.

FYI, transcript of WEB on CNBC Squawk Box post BRK AGM http://www.cnbc.com/id/42859828

To those of you on the board who did not attend the meeting in Omaha. Not a transcript but a summary as reported in local press. http://www.omaha.com/article/20110501/MONEY/705019867#q-amp-a-with-buffett-and-munger

How much is too cheap? Despite all the current headlines surrounding GS, it is interesting that BRK has probably made pre-tax profits of US$3bn on the US$5bn investment in cumulative preferred stock of GS with the attached warrants. This is a pre-tax gain of 60% in about 19-20 months since the investment was made or CAGR of about 35% p.a from the time the investment was made. The absolute dollar level of profits will likely be higher by the time 2013 rolls around (but the return in terms of percentage per annum will be lower) and also highly dependent on the share price of GS at expiry of the warrants. At the very least BRK will earn a 10% p.a return if the warrants expire worthless and that GS remains a good credit risk. The cashflows of the investment so far is estimated to be US$8bn and is attributed as follows: 1. Pref dividend received in 2009 is US$500mn 2. Redemption value of cumulative pref is US$5,500mn 3. Value of warrants on 43.478mn shares at strike of 115 is US$2,043 mn (this conservatively values the warrants at 47.00 each based on the GS Jan 2012 LEAPS with the same strike price - given that BRK's warrants have a longer maturity in October 2013, they are likely to have a higher price using Black Scholes) Is a 35% p.a return, (or US$3bn profit) too cheap? There is one other point to highlight - BRK was given an opportunity to invest in a very attractive security in GS. I highlight a comment that was made in the 1989 Chairman's letter when BRK made investments in convertible preferred stocks of USAir, Gillette and Champion International which all had coupons of 8.75-9.25%. The comment also made reference to BRK's earlier investment in the convertible preferred stock of Salomon. "Our lack of strong conviction about these businesses, however, means that we must structure our investments in them differently from what we do when we invest in a business appearing to have splendid economic characteristics."

thank you

Thank you for the link. Very useful.

Thank you for your posting

Hi there, Looking at convertible instruments and just wondering if anyone here has bought and exercised convertible instruments (i.e convertible preferred, convertible bonds) in the US. Would like to hear about your experiences. There are a few specific questions: If you convert the bond or preferred - do you get registered or unregistered shares? (i.e is the stock you get tradeable on the exchange or do you need to get the company to register the stock before you can trade the stock)? This assumes that the CB is not Reg144A or has some other restriction which limits the security beyond individual investors. I see that in some cases, the company can choose to pay cash or settle in shares upon conversion. What happens normally? I am looking to see if convertible instruments are a better way to buy the stock, so would obviously want stock on conversion rather than cash. Also do you know how long it takes when you convert the bond to get the shares? (I would like to get the dividend entitlement if possible so would like to know how long this would take) Can individual investors do this or do you need to be a big institutional investor to be able to convert bonds and get the underlying shares? I would be buying less than 10 bonds (par value approx US$10,000). Thank you in advance for your help.