watsa_is_a_randian_hero

I was saying if you hedged it out.

If you have access to a database such as CapitalIQ you can get about 20 years of history on FCBN - very stable, conservative management. If you don't have access I'd be happy to email to you. Here's another idea - I'm only sharing this now because I'm already up to my eyeballs in this trade. BRK-BNI I entered this first back in November. The trade involves selling the $100 apr put on BNI and buying the $95 put. For doing so, you currently receive about $1.1, and must post $3.90 in margin per share ($5 - $1.1 = $3.9). This results in a 28% return as long as the deal with BRK goes through. If you want to hedge, you can hedge buy shorting BNI shares, and will earn a risk-free return in the neighborhood of 10-15%. I hold the position unhedged, and was able to sell the spread at an average of $1.60 (a 47% return on $3.40). This is probably the single-best trade I've seen since Fairfax in Aug 2007 in terms of risk-reward.

I have traded before, only in very large companies. Liquidity is very low. Definitely do not use market orders. Use EFP (Exchange For Physical) orders. These let you order the future in terms of a premium/discount to the underlying. Benefits- Reduced margin Downside- Reduced liquidity Tax treatment (no ability for long-term cap gains) An interesting note is that the IRS actually considers them not to be commodities (as most futures are), and rather are treated securities. Normal futures are treated as Section 1256 contracts. Section 1256 contract gains are allowed to be treated 60% as long term and 40% as short term. However, because single stock futures are not treated as Section 1256 contracts, and because you must roll your contracts, you will always be treating gains as short term.

vindicated

My replies would be as follows: Rebuttal 1 Your reply (correct me if I'm wrong) seems to argue that the bailouts may have been flawed (bailing out investors), but now that they are done, this justifies taxing investors (who aren't the same) and employees (who aren't the same either). The error in the bailouts doesn't justify another error now is what I would say. Rebuttal 2 You admit the investors are not the same, so I'm not sure why you still feel justified to tax the companies. Instead of trying to "get them back for last time" why not just come out with a law providing for receivership of any financial company deemed systematically important? Lets get to the root of the problem. Rebuttal 3 As far as the employees go, I still don't understand, if you agree there are better solutions, why do this? 1. Employee A at Ibank takes enormous risks that pay off and is paid with cash bonus (not restricted stock). 2. The risks don't pay off the next time & recession occurs. 3. Huge regulation on horizon for Ibanks causes unfavorable environment 4. Employee A leaves for hedge fund. 5. Employee B is hired, and does a better job controlling risks 6. Regulation is passed to tax employee B's bonuses Do you really agree this is the best solution? If not why are you arguing for it when better solutions exist?

I used cancer as an example. I'm sure it could have been put to use among cancer, infrastructure investment, education, and other initiatives. And yes, I do think these would have been better investments. And no, I don't think we would have had a depression. Again, I'm still talking about an orderly wind down or recapitalization. There is no reason the AIG debtholders needed to get paid out. Their annuity holders (ordinary american's savings), yes, should be protected to prevent a depression. Making debtholders take a haircut in no way would have caused a depression.

it is true guns are better than butter in some scenarios, but I would be hard-pressed to find a scenario where bailing out goldman $$$ for their AIG contracts at full price was a better use of American taxpayer money than cancer research or infrastructure investments or a hundreds of other better uses. Any argument/debate has to be made 1 point at a time, built up to a holistic viewpoint. How else do you propose we debate this? Here are my key sticking points: 1. Bailouts were given to investors that shouldn't have been. This could have been done in a way that avoided a depression (bailing out depositors, but not bondholders) 2. Punishing employees for bonuses (a) isn't the right party to punish, (b) infringes on individual rights. 3. Taxing banks with a special tax is the right party to punish either. The investors now, 1.5 years later, aren't the same as before.

This think to say this statement is the same as saying "pricing risk": "The primary role of the capital market is to raise long-term funds for governments, banks, and corporations while providing a platform for the trading of securities" The product is cash. By providing $, you inherently have to put a price on it (i.e., credit spread, required rate of return, ect). There is a limited supply that can be loaned out/invested. There is not an unlimited supply for the capital markets to just provide $ to any government, bank, corporation or individual that says they want/need it. The capital markets, through pricing risk, determine who best deserves that cash based on ability to repay and interest rate that can be charged. As a corollary (I just thought to add this), the limited supply of $ means bailing out firms invested in AIG/Fannie/Freddie debt, providing guarantees on bank-issued debt, and other "bailouts" meant taking $ that could have been invested in projects such as aids/cancer research, funding school systems, ect, and bailing out these debt investors. What do you think was the best use of this capital?

I'm not trying to take it personally, I'm just explaining my personal situation because it does appear I have a bias and people are using that against me in this argument. As far is this statement is concerned, are you arguing investors shouldn't have to take losses? Are you arguing I should have to pay for a church that bought AIG debt through higher taxes? 1. Charity takes risk, earning a spread over risk free rate 2. Risk pays off, they get to keep interest earned. 3. The reinvest the profits into a new asset, again taking risk and earning a spread over risk free rate 4. The asset defaults, but we should bail them out? Who does this make sense to? They earn a spread on their assets over the risk free rate to compensate them for this risk. That is the whole point of capital markets, to make sure that this risk is priced correctly. It will never be corrected and priced correctly if bailouts of risk-takers continue.

no problems

I would also say they did a ok job given the circumstances...under time pressures, decisions that needed to be made were made. Taking circumstances out of it I think they did a D job. Mistakes that were made, given the circumstances (i.e. bailouts of certain firms, forced tarp investments on firms like WFC), should not be punished after the fact. Furthermore, they are punishing the wrong parties. Investors (bondholders and stockholders), were the real beneficiaries from the bailouts, and should have been wiped out/diluted to a larger extant, at the time the bailouts were made. Its like a dog, you can't beat it a year after catching it pissing on your couch.

??? Trust? You lend on trust? The only person I would lend based on trust to is my Mother. People in a capitalist system lend based on earning a premium to compensate for risk taken. And if those bets sour (the risk materializes), they take losses. People who took bad risks should have taken losses. Is there something wrong with that? -How come people who owned Fannie/Freddie Debt took 0 losses? -How come people who owned AIG Debt took 0 losses? -How come people who traded CDS with AIG (i.e., Goldman) took 0 losses? Isn't that the whole point of capitalism? Lending to those you think can repay...getting compensated for risk...taking losses if your judgment was poor? Are you arguing that the banks had to be bailed out because if they weren't people would have taken losses? Which would have made the recession worse? Isn't that the whole point? Make investors take losses, they learn from it and use better judgment next time? I'm not talking about not bailing out depositors...I'm talking about not bailing out debtholders (sophisticated investors who bought debt, and should have done more due diligence than looking at a credit rating).

I think this is getting a little out of hand. watsa_the_i_banker? Yes, I do work for an investment bank...with about 100 employees...with no involvement in underwriting or trading MBS, CDS, CDOs, or other toxic assets. In no way can you attach any sort of responsibility for this mess on myself personally or the firm I work for. I've worked about 80-100 hours/week this year, and after my bonus, I made less than my girlfriend on an hourly basis...is this the evil you desire to tax? That will provide great motivation and incentives for people all across America... -why not tax anyone who bought a 2nd home between 2004 - 2007? -why not tax members of the former greenspan federal reserve for not preventing this bubble? -why not tax former employees of Fannie/Freddie for overlevering its balance sheet? -why not tax oil companies for causing $140 oil & perhaps increasing the severity of this recession? -why not tax members of congress meddling with the economy to the point where it slows growth? My point is there are many places one can point a finger for the cause of this recession...not just ibanks. Yet people have a desire to single-out this set of people and cap their wages out of some sort of jealousy...as if they know better than the employees/shareholders who these people work for. Is it possible that some bankers / traders create enough value for their employers to justify these bonuses? Or no, that is impossible? And the average American (with no banking or trading experience) somehow knows better than the employer trying to pay these sums of money? Everyone on this board is entrenched in their own political/philosophical views. This is going nowhere...

To answer those questions: I do not agree wholeheartedly with everything Rand proposed. It does not work for a global economy with intricacies on our level. However, I do agree that individual rights, especially those for private property, should be protected. You cannot prove the statement you have made: "most of the Major financial institutions in the World have collapsed?." But yes, those that were not solvent should have gone BK. Many more companies should have gone BK that didn't. Nobody can say "we would have gone into a depression" if AIG wasn't bailed out. Nobody knows. But I do know Lehman's BK didn't cause any fundamental changes (even though the press likes to pretend it did). The market declines that occurred after Lehman's BK would have occurred either way. I agree the Fed should have powers for orderly winddown. But that includes wiping out stockholders AND BONDHOLDERS (bondholders were bailed out in all cases). This was a credit crisis, after all. Maybe we wouldn't have such moral hazard if we didn't have a government that bailed out bondholders of AIG. I guess what I don't understand is why people keep looking for a "cause" of this recession and try to point figures, greenspan, bush, bankers, speculators. Recessions are part of a market economy. You will not achieve growth and innovation without open markets, and volatility in growth is a price you must pay for open markets. Bankruptcies happen; let them happen. Capital is taken away from those who are poor risk takers, and given to those who are more capable. Letting poor companies continue to survive is nonsense.

SD - I'm not sure I understand this comment. ???

Sure they do. It's called the progressive tax system. To an extreme the government could impose a 100% tax bracket for the highest income earners. The government has a right to tax its people. That is by law. So I don't understand how you say 'the government has no right'. That statement is completely false, the government has every right as long as it's passed by law. Have you ever read Atlas Shrugged? I suggest you do. "That statement is completely false, the government has every right as long as it's passed by law." - This is probably the dumbest statement I have ever read. Have you ever considered what gives the government the right to pass a law? The government has only powers, given to it by the people it governs. The definition of an illegitimate governing body is one that exercises powers in excess of those given to it by the individuals it governs.

If this is the case, then do you think the gov't has no right to bail out the capital markets and the financial companies? You shouldn't have your cake and eat it too. The fact that the gov't and the tax payers shelled out much dough to save these idiots gives them every right to impose restrictive legislation. No, I don't think that the bailouts should have happened. Further, the employee is not the company. Wipe out shareholders and bondholders if you want to punish the company for getting bailouts. Bailouts were agreements between company's and the GOVT (the word agreement is a stretch, look at WFC). Employment agreements are between EE's and companies.

My thoughts exactly. As far as the bonuses are concerned in the first comment, these companies shouldn't have been bailed out in the first place, and then the bonuses wouldn't be a problem. -For companies that ARE bailed out, limiting compensation restricts ability to retain best EE's when they can jump ship and make more elsewhere. -Limiting comp on the INDUSTRY AS A WHOLE would be the equivalent of a barbaric 1917 Russian Revolution. There should be specific rules, i.e. 1. If you are a financial firm on a watch list created by the fed, you are deamed "too big to fail" 2. If you are on the list the Fed has the power to shut you down (outside of BK courts) and wipe out stockholders AND BONDHOLDERS (this did not happen in a single bailout) 3. If you are on this list you pay additional insurance costs similar to FICO for bailout protection. 4. If you are on this list you are restricted to a Pay Czar that has the power to limit TYPE of comp (long term restricted stock) but NOT size of comp 5. Fed has power to shut down firm at any time, so would provide guidance ahead of time on risk limitations, and what would trigger being shut down (i.e. capital below X)

My opinion here is biased (I work in ibanking). However, I would proffer that there are separate things that should be debated here: 1. Can financial institutions be "too big to fail" and deserving of social bailouts? 2. Should the government have the power to impose limitations on size of compensation between two private parties in the private markets? 3. Should the government have the power to impose limitations on type (i.e. 5 year restricted stock vs. cash)of compensation between two private parties in the private markets? I think 1 should rarely if ever happen. 2. I dont think should ever happen. The government has no right to impose limitations on the ability of a person to earn a specific wage. 3. I think should happen only for firms that are deemed "too big to fail" and therefore potentially needing a bailout down the road.

I wouldn't worry about that. I transferred mine to FFH.TO. No initial currency impact (you own shares, not a currency). If I go to sell, I will received CAD. In that case IB has some of the tightest FX spreads

Many Fortune 500 companies have stuff like this at headquarters. From Progressive's website: Collection History Progressive's Art Collection, conceived and nurtured by former CEO Peter Lewis, began in the early 1970's as a print collection. Peter's goal was to bring the creative experience to the work environment. In 1985, under the direction of Toby Devan Lewis, the Progressive art program was accelerated and the Corporate Art department was formed. Toby expanded the scope of the collection to include works of art by emerging artists in a variety of media. Today the collection includes more than 6,000 artworks displayed in Progressive offices countrywide. While the collection has no central theme, its emphasis is on emerging artists who create innovative and daring work. The purpose of the collection The art is intended to challenge and inspire people's creativity and originality while serving as a visual reminder of the importance and necessity of risk-taking and innovation at Progressive. While encouraging originality, the art reflects respect for all people. Artwork in the collection is often provocative and has fostered discussion and sometimes passionate controversy through the years. Each artwork is accompanied by a wall label giving a brief explanation and information about the artist.

Here is another example, of a fairly successful company spending money on art/collectibles: http://art.progressive.com/ Fairfax actually held the stock at one point. Hows that for endorsement of corporate spending of "frivolous" aesthetics!

Lots of money is spent on marketing, "appearances," interior design, and overall aesthetics and it has more of an effect on peoples subconscious than many are willing to admit. You said it best for the finance industry "people feel that their money is more secure for some reason." It is subconscious; an impressive office makes people assume you are successful. An impressive corporate campus could make some take more pride in their work; it could impress prospective new hires, it could impress clients. And again, as long is they didn't pay more than the market price (we have no way of knowing that), the only real cost is insurance. I guess that is my biggest point; that $12 mm is not even the real economic cost. Art/collectibles generally do not depreciate. The real cost is basically insurance. Lets say that is 2% of value a year (I have no idea if this is correct, but I can't imagine it being higher given property insurance rates), then the real cost would be $240k/ year. Spread that out over 7.6 thousand employees at CHK and you are talking about $31 per employee on an annual basis. Its insignificant. Who cares.

I think there is an explanation for this - Options on VIX pay out on actual observed volatility for a given month, same with futures (I'm 95% sure of this). This actual observed volatility for a month can be different that current implied vol, especially if a month is half over (in which case quoted VIX is only forward-looking, while option VIX payouts based on future 1/2 month and historical 1/2 month). I'm not positive, but I think that is the explanation.

I don't have a problem with corporate art as long as there isn't a conflict of interest. In this case however, there's a conflict of interest so large, you could drive a bus through it! A cash strapped CEO selling his own useless maps to the company without an independent valuation is most certainly that. "These maps have been displayed throughout the Company’s headquarters for a number of years, complementing the interior design features of our campus buildings and contributing to our workplace culture." "A dealer who had assisted Mr. McClendon in acquiring this collection over a period of six years advised the Company that the replacement value of the collection in December 2008 exceeded the purchase price by more than $8 million." If these statements are not lies than I would not be put-off by this as a shareholder. Statement 2 is probably a large exaggeration, but in order for them to have gotten a bad deal they would have had to exaggerate by 66% here ((8+12)/12)=66%.