LC Posted December 5, 2013 Author Posted December 5, 2013 She's saying that the put options are the reason why Berkshire lost its AAA credit rating, which affected the ability of its reinsurance business to get good rates. With a AAA rating, his reinsurance units could have written a lot of business and he could have invested all of that float. Many thanks for the explanation!
Guest wellmont Posted December 5, 2013 Posted December 5, 2013 Here is what Buffett has to say about gen re in the 2009 annual. He explains why they did not have to post collateral in 2009. Our third insurance powerhouse is General Re. Some years back this operation was troubled; now it is a gleaming jewel in our insurance crown. Under the leadership of Tad Montross, General Re had an outstanding underwriting year in 2009, while also delivering us unusually large amounts of float per dollar of premium volume. Alongside General Re’s P/C business, Tad and his associates have developed a major life reinsurance operation that has grown increasingly valuable. With limited exceptions, our equity index put option and credit default contracts contain no collateral posting requirements with respect to changes in either the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit ratings. Under certain conditions, a few contracts require that we post collateral. As of December 31, 2009, our collateral posting requirement under such contracts was $35 million compared to about $550 million at December 31, 2008. As of December 31, 2009, had Berkshire’s credit ratings (currently AA+ from Standard & Poor’s and Aa2 from Moody’s) been downgraded below either A- by Standard & Poor’s or A3 by Moody’s an additional $1.1 billion would have been required to be posted as collateral. this from the 2008 annual: General Re, our large international reinsurer, also had an outstanding year in 2008.
AZ_Value Posted December 5, 2013 Posted December 5, 2013 Curious if anyone has knowledge of this this: Those equity index puts that created issues with the rating agencies. I think the reason he had difficulty with those is that he knew immediately how to price them and that the odds were very high that they would make money for Berkshire, if looked at on their own as contracts. The other elements that were subjective — the way they would create short-term volatility in the balance sheet; the way hedgers might respond; the regulating agencies — these didn’t come into the equation because the trained, automatic part of his mind fastened on how much money could be made and the probability. If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it. Can anyone fill in more detail, especially regarding how Buffett was unable to pounce in 2008 due to negotiations? Was he unable to invest cash because of these puts on the B/S which would somehow affect BRK's credit/collateral reqs? I don't buy this at all. buffett invested $10s of billions in that period. He added so much value...He bought Burlington in late 2009. brk had no need to borrow. +1 I haven't read the interview and will try to do so tonight, but this is complete nonsense. at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it How is it considered to be tepid when you spend $26 Billion to buy Burlington, put $5 billion in Goldman, $3 billion in GE, buy $300M of Harley Davidson bonds, and also participate as a financing partner in the Mars and Wrigley deal to the tune of $4.5 billion. And every quarter that went by it seemed like he was buying tens of millions (if not hundreds) of additional WFC and other stocks. Does Schroeder have any numbers or anything like that to tell us how she figures WEB became tepid? Actually WEB never let up throughout the entire time those puts have been on BRK's books, early 2011 he spent $9 billion to acquire Lubrizol, then put $5 billion into BAC, and let's not forget when we woke up to find out that he had put $11 billion into IBM. And all along the "derivatives" that the media (and Schroeder) were focusing on were swinging up and down each quarter. Alice Schroeder has been such a big disappointment (IMHO).
AZ_Value Posted December 5, 2013 Posted December 5, 2013 If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it. I think this quote is very good. As it once again reinforces my idea of put options being very dangerous and as I see it cash is always 90% better alternative. As one should just wait until an opportunity arises and then invest. Be it 10 years or not cash is just so much simpler then theses puts. Rather sleep tight and wait opportunity's always arises some times(hopefully not ten years ala Munger). Thanks for bringing it up LC The puts in question were sold by BRK. i.e. He's not buying puts to hedge or protect his downside, he thinks that the markets will be much higher in 15 or 20 years or whenever they expire thus doesn't expect to pay anything on them while he gets to collect the float upfront to invest in the meantime.
ragu Posted December 5, 2013 Posted December 5, 2013 She's saying that the put options are the reason why Berkshire lost its AAA credit rating, which affected the ability of its reinsurance business to get good rates. With a AAA rating, his reinsurance units could have written a lot of business and he could have invested all of that float. She's not saying that at all. However, you do have one thing in common with Ms. Schroeder: You are both wrong about the puts handcuffing WEB in a manner that had significant implications for Berkshire shareholders. Best, Ragu
twacowfca Posted December 5, 2013 Posted December 5, 2013 If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it. I think this quote is very good. As it once again reinforces my idea of put options being very dangerous and as I see it cash is always 90% better alternative. As one should just wait until an opportunity arises and then invest. Be it 10 years or not cash is just so much simpler then theses puts. Rather sleep tight and wait opportunity's always arises some times(hopefully not ten years ala Munger). Thanks for bringing it up LC the put options were never dangerous. He takes money In and invests it. And if he loses, which was highly unlikely, he would have paid way down the line, a fraction of the net worth of the company. the media had a hissy fit about them. And that was so annoying that he probably wishes he never did it. Because it was annoying when people who did not understand what he was doing had a platform to misinform. The put options were safe because he knew what his total exposure was when he wrote them. Yes, but Warren stated before the financial crisis that BRK's AAA rating was extremely valuable to the company, suggesting its value was perhaps worth as much as $20B. Therefore BRK's internal compass for their true value at risk should have included the unstated value of that intangible asset, their AAA rating. The value of their AAA rating was certainly worth much more than the maximal possible gain on the puts they sold that was about $6B. If BRK had retained their AAA rating through the crisis, they would have stood alone among all financial companies, and the value of the AAA rating would have been even greater. If the puts expire out of the money as they probably will, the loss on the unstated intangible asset minus the gain on the puts will be perhaps $14B net. And, the contra factual result of what likely would have happened had they retained their rating at that crucial time would suggest the lost opportunity cost was in the tens of billions of dollars.
ASTA Posted December 5, 2013 Posted December 5, 2013 AZ_Value sorry if I did not mention it but of course everyone here will now that he sold the puts. + twacowfca that's what I meant :D If you want to play with options the hedging or leaps are the way too play. Of course if your asset pool is growing over time work cash flow selling puts might not be to bad.
Guest deepValue Posted December 5, 2013 Posted December 5, 2013 Great interview; I hadn't seen this before. btw: -"Warren is extremely precise and literal in what he writes and says" -"reluctant to criticize anyone and hypersensitive to criticism himself" -"He’s got a keenly honed sense of justice" -"[susie] enabled him socially to overcome his shyness" and Dale Carnegie, "hard work in the social area to overcome his natural awkwardness" -"a great synthesizer and especially strong at pattern recognition" -"Repetition doesn’t bore him the way it bores other people." -"his emotional pendulum swings in a very narrow arc" -"prodigious memory" You could probably say all the same things about Michael Burry. Some of these (and I am no doctor) sound like symptoms of asperger's, which Burry has been diagnosed with. That's what I was thinking. Asperger's Syndrome is an obsolete diagnosis now rejected as too vague. I once sat in a TQM training session in 1999 and watched an audio video feed of Buffet, Gates, Ted Turner, Richard Branson and Steve Case. After a few minutes, my wife poked me in the ribs and said, "Case is the only one who is normal". She was right. The other four were hyper excitable, bubbling over with synergistic insights they were eager to share as they lighted up with voltaic energy in the aura of their combined mental insights. Each one of the four who weren't normal stuttered slightly in restrained eagerness to share golden nuggets of wisdom. It definitely wasn't normal, but it wasn't pathological either. That must have been what it was like when Leslie Groves confined the greatest minds in theoretical physics on the mountain plateau of Los Alamos, NM until they hatched the bomb. :) :( It has been rejected and now the official diagnosis is just "Autism" -- of course, that's a spectrum so it is vague. The idea of Asperger's was just "high functioning Autism". We always understood that distinction before the term "Asperger's" was thrown out -- it's too bad, because at least before it was rejected it was implicitly understood to be "high functioning" -- now it takes extra words to explain that to people My daughter was diagnosed with Asperger's 6 years ago. While I'm not the world's expert on it, I've given it a good deal of thought. You can't put her in the room with other Autistic children and say "yeah, they all have the same thing". She's not the only one in the family to have similar traits, but we wanted the diagnosis so that we could get her an "IEP" in the public schooling system. Now she gets a lot of help from the public school that she can't get without the diagnosis. Before Asperger's was dropped there were also "high-functioning" autistics who did not qualify for the Asperger's diagnosis due to a delay in speech development. Other than that distinction, there is a lot of overlap between adult HFAs -- Asperger's or not. The whole spectrum is pretty vague and not particularly useful; I'm sure the diagnosis will be revised again in DSM 6.
twacowfca Posted December 5, 2013 Posted December 5, 2013 Great interview; I hadn't seen this before. btw: -"Warren is extremely precise and literal in what he writes and says" -"reluctant to criticize anyone and hypersensitive to criticism himself" -"He’s got a keenly honed sense of justice" -"[susie] enabled him socially to overcome his shyness" and Dale Carnegie, "hard work in the social area to overcome his natural awkwardness" -"a great synthesizer and especially strong at pattern recognition" -"Repetition doesn’t bore him the way it bores other people." -"his emotional pendulum swings in a very narrow arc" -"prodigious memory" You could probably say all the same things about Michael Burry. Some of these (and I am no doctor) sound like symptoms of asperger's, which Burry has been diagnosed with. That's what I was thinking. Asperger's Syndrome is an obsolete diagnosis now rejected as too vague. I once sat in a TQM training session in 1999 and watched an audio video feed of Buffet, Gates, Ted Turner, Richard Branson and Steve Case. After a few minutes, my wife poked me in the ribs and said, "Case is the only one who is normal". She was right. The other four were hyper excitable, bubbling over with synergistic insights they were eager to share as they lighted up with voltaic energy in the aura of their combined mental insights. Each one of the four who weren't normal stuttered slightly in restrained eagerness to share golden nuggets of wisdom. It definitely wasn't normal, but it wasn't pathological either. That must have been what it was like when Leslie Groves confined the greatest minds in theoretical physics on the mountain plateau of Los Alamos, NM until they hatched the bomb. :) :( It has been rejected and now the official diagnosis is just "Autism" -- of course, that's a spectrum so it is vague. The idea of Asperger's was just "high functioning Autism". We always understood that distinction before the term "Asperger's" was thrown out -- it's too bad, because at least before it was rejected it was implicitly understood to be "high functioning" -- now it takes extra words to explain that to people My daughter was diagnosed with Asperger's 6 years ago. While I'm not the world's expert on it, I've given it a good deal of thought. You can't put her in the room with other Autistic children and say "yeah, they all have the same thing". She's not the only one in the family to have similar traits, but we wanted the diagnosis so that we could get her an "IEP" in the public schooling system. Now she gets a lot of help from the public school that she can't get without the diagnosis. Before Asperger's was dropped there were also "high-functioning" autistics who did not qualify for the Asperger's diagnosis due to a delay in speech development. Other than that distinction, there is a lot of overlap between adult HFAs -- Asperger's or not. The whole spectrum is pretty vague and not particularly useful; I'm sure the diagnosis will be revised again in DSM 6. Great interview; I hadn't seen this before. btw: -"Warren is extremely precise and literal in what he writes and says" -"reluctant to criticize anyone and hypersensitive to criticism himself" -"He’s got a keenly honed sense of justice" -"[susie] enabled him socially to overcome his shyness" and Dale Carnegie, "hard work in the social area to overcome his natural awkwardness" -"a great synthesizer and especially strong at pattern recognition" -"Repetition doesn’t bore him the way it bores other people." -"his emotional pendulum swings in a very narrow arc" -"prodigious memory" You could probably say all the same things about Michael Burry. Some of these (and I am no doctor) sound like symptoms of asperger's, which Burry has been diagnosed with. That's what I was thinking. Asperger's Syndrome is an obsolete diagnosis now rejected as too vague. I once sat in a TQM training session in 1999 and watched an audio video feed of Buffet, Gates, Ted Turner, Richard Branson and Steve Case. After a few minutes, my wife poked me in the ribs and said, "Case is the only one who is normal". She was right. The other four were hyper excitable, bubbling over with synergistic insights they were eager to share as they lighted up with voltaic energy in the aura of their combined mental insights. Each one of the four who weren't normal stuttered slightly in restrained eagerness to share golden nuggets of wisdom. It definitely wasn't normal, but it wasn't pathological either. That must have been what it was like when Leslie Groves confined the greatest minds in theoretical physics on the mountain plateau of Los Alamos, NM until they hatched the bomb. :) :( It has been rejected and now the official diagnosis is just "Autism" -- of course, that's a spectrum so it is vague. The idea of Asperger's was just "high functioning Autism". We always understood that distinction before the term "Asperger's" was thrown out -- it's too bad, because at least before it was rejected it was implicitly understood to be "high functioning" -- now it takes extra words to explain that to people My daughter was diagnosed with Asperger's 6 years ago. While I'm not the world's expert on it, I've given it a good deal of thought. You can't put her in the room with other Autistic children and say "yeah, they all have the same thing". She's not the only one in the family to have similar traits, but we wanted the diagnosis so that we could get her an "IEP" in the public schooling system. Now she gets a lot of help from the public school that she can't get without the diagnosis. Before Asperger's was dropped there were also "high-functioning" autistics who did not qualify for the Asperger's diagnosis due to a delay in speech development. Other than that distinction, there is a lot of overlap between adult HFAs -- Asperger's or not. The whole spectrum is pretty vague and not particularly useful; I'm sure the diagnosis will be revised again in DSM 6. DSM 5 is an improvement because it allows for the entire spectrum of human behavior and disorder, without forcing a diagnosis into a certain label that prejudices a future reevaluation of that diagnosis. Eric, you may want to check out the work of the late Dr. Rimland's organization in San Diego that used to be called The Autism Research Institute. I attended a conference there in 2001. One of the most interesting exhibits was a chart showing the evaluation by about 34,000 parents of autistic or PDD children of which therapies worked best for their children. Way at the top of the list was a strict gluten free, casein free diet. :) Interestingly, Dr. Rimland's son, Mark was the model for the high functioning autistic spectrum character in the movie, Rainman, played by Dustin Hoffman.
Liberty Posted December 8, 2013 Posted December 8, 2013 For those who suspect they might not be neurotypical, this can give you an idea: http://rdos.net/eng/Aspie-quiz.php I won't tell you my score.. :)
LC Posted December 9, 2013 Author Posted December 9, 2013 Oh boy! Thanks for the link, Liberty...for what it's worth, my fiancee agrees with my results :D
Liberty Posted December 9, 2013 Posted December 9, 2013 Oh boy! Thanks for the link, Liberty...for what it's worth, my fiancee agrees with my results :D If you want to do a bit of light reading... :) http://www.amazon.ca/The-Complete-Guide-Aspergers-Syndrome/dp/1843106698
west Posted December 9, 2013 Posted December 9, 2013 Ok, so I took the test. I have quite a few concerns about it in general, but I guess my biggest concern is there's no explanation on how to interpret the results. For example, I'm 95 out of 200 on the Aspie scale. Hrm... What exactly does this mean? Is 100 the average? Or is it a linear, say from zero, scale? Or logarithmic? Or is it something else? I'm guessing I missed the explanation page somewhere... Also, I'm not sure how to interpret the polar graph thing at the end: http://www.rdos.net/eng/poly12c.php?p1=86&p2=52&p3=65&p4=63&p5=31&p6=78&p7=38&p8=62&p9=21&p10=16&p11=44&p12=12 Should I read the part to the left of, say, "Intellectual" as being associated with Intellectual? Or should I read the part to the right of "Intellectual" as being associated with Intellectual? Also, what does "Physical" mean? Just grumbling. Again, I'm guessing I missed the explanation page somewhere...
west Posted December 9, 2013 Posted December 9, 2013 Ok, so I took the test. I have quite a few concerns about it in general, but I guess my biggest concern is there's no explanation on how to interpret the results. For example, I'm 95 out of 200 on the Aspie scale. Hrm... What exactly does this mean? Is 100 the average? Or is it a linear, say from zero, scale? Or logarithmic? Or is it something else? I'm guessing I missed the explanation page somewhere... Also, I'm not sure how to interpret the polar graph thing at the end: http://www.rdos.net/eng/poly12c.php?p1=86&p2=52&p3=65&p4=63&p5=31&p6=78&p7=38&p8=62&p9=21&p10=16&p11=44&p12=12 Should I read the part to the left of, say, "Intellectual" as being associated with Intellectual? Or should I read the part to the right of "Intellectual" as being associated with Intellectual? Also, what does "Physical" mean? Just grumbling. Again, I'm guessing I missed the explanation page somewhere... Well... To answer my own question, it looks like they give some explanations in the associated paper: http://m.sgo.sagepub.com/content/3/3/2158244013497722.full.pdf For the lazy, it looks like the average Aspie score for males (I'm guessing most of this board?) is 93-94. The average neurotypical score is 109-113. I'm still not sure what the distribution stuff is, or what the axis thingies on that polar graph are though. I'll have to read more of that paper tomorrow.
tengen Posted December 9, 2013 Posted December 9, 2013 Hmm, my Asparagus score was 18. Maybe I'm eating the wrong vegetables?
matjone Posted December 9, 2013 Posted December 9, 2013 I've never read anything on this stuff. Why does it focus so much on hunting? 143 aspie and 62 neurotypical. Maybe this means I can be declared disabled and quit working.
Liberty Posted December 9, 2013 Posted December 9, 2013 I've never read anything on this stuff. Why does it focus so much on hunting? 143 aspie and 62 neurotypical. Maybe this means I can be declared disabled and quit working. Asperger's is not a disability, just a different way of seeing the world. I'm pretty sure Buffett wouldn't be where he is today if he wasn't (most probably) an aspie; all these anecdote about him locking himself in a room to read annual reports during parties at his house, etc. Very typical. It comes with pros and cons, and there are ways to overcome many of the problems if you are aware of them (ie. many social skills can be learned with conscious practice - like learning a second language vs. other people learning them as a native tongue). With your scores, I'd definitely look deeper into it. http://www.amazon.ca/The-Complete-Guide-Aspergers-Syndrome/dp/1843106698 https://en.wikipedia.org/wiki/Asperger%27s_syndrome http://www.aspergersyndrome.org/ http://greatergood.berkeley.edu/ei_quiz/ (body language/facial expression recognition quiz, also telling)
matjone Posted December 9, 2013 Posted December 9, 2013 Thanks, Liberty. Have you been diagnosed with asperger's? I took the facial recognition quiz and did alright. I think I can read people, but I don't naturally communicate my own. Maybe I should have been a poker player.
Peregrine Posted December 9, 2013 Posted December 9, 2013 Great interview! I've heard that Schroeder and Buffett aren't as close as they once were. Any details?
Liberty Posted December 9, 2013 Posted December 9, 2013 Edit: remove off-topic message as it seems to have killed the conversation about the Schroeder interview. If anyone has anything to say about Asperger's, send me a private message.
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