Buffett & Options: Laws of Unintended Consequences (BRK-A, BRK-B)

Warren Buffett of Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) might be one the greatest investors of all time and he may have recruited 34 billionaires to donate up to half of their wealth.  New reports and new questions are out now about just how the newly passed financial regulations will affect that casino-esque strategy Buffett has taken with all the options and derivative contracts he now has Berkshire Hathaway on the hook for.

Today was one of those interesting instances where Buffett coverage was doubled-up at Reuters with a morning take versus an afternoon take.  There are many reports, but this is an issue that is not going to just be a “one and done” report.

The first take showed Berkshire Hathaway’s total bets on the S&P 500, the FTSE 100, the Euro Stoxx 50 and the Nikkei with European options (decision at expiration) with $36.76 billion at risk if those indexes go to zero.  That being said, there is much more detail there and no one really believes that the full value is zero….

A second take is an audio-video showing more detail that Berkshire needs to cover some of these naked-short options.  This shows how Buffett might need to stack up some of its assets as collateral under the new Fin-Reg rules.  The end… more than $5 billion that could be needed to get in compliance.

Buying and selling these were fun for Buffett at the time.  They may or may not end up being a huge pain in the Depends by the time it is said and done.  With Buffett being a large supporter of Obama in 2008, maybe Buffett can ask for some exceptions or clarifications.  Either way, chances are likely that this part of Buffett’s legacy is going to be kicked down the road for the undisclosed Buffett successor to deal with.

Before you spend too much time worrying about this, don’t fret too much.  Berkshire Hathaway was the top performing conglomerate of 2010 at the end of last week, and conglomerates have outperformed the broad market in 2010.

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JON C. OGG