The Berkshire range

By Ben Walsh
January 27, 2014

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Warren Buffett’s Berkshire Hathaway, no stranger to exotic insurance risks, is insuring Quicken’s $1 billion prize for picking a perfect NCAA tournament bracket. The odds of picking the winner of all 63 basketball games are absurdly low: somewhere in the realm of 1 in 128 billion to 1 in 772 billion. Those odds raise the question of why Quicken is even looking for insurance in the first place. Maybe, as David Merkel points out, “those seeking insurance on unlikely events think the events are more likely than they actually are”.

Warren Buffett is very good at both the insurance business and the publicity business. A combination of those talents is presumably why Quicken is probably paying more than the $0.01 fair value (the payout multiplied by the odds, or $1 billion times 1/128 billion) for the policy. How much more Quicken is paying, however, isn’t clear, and there just may not be enough data to accurately price the policy.

Dan McCrum has a great look into more arcane but much larger bets made by Berkshire, which sold a series of “very large and very long dated put options… against stock indices in the US, UK, Europe and Japan between 2004 and 2008”. McCrum quotes business professor Pablo Triana, who has calculated that Buffett could lose between $14 billion and $20 billion if markets move against him. Here’s Triana on the implications of those derivatives:

The main point is not that those unfavorable things will unfailingly happen, and we certainly don’t even try to assign any specific probability to their occurrence. The point, rather, is to illustrate the myriad of exposures Berkshire got itself entangled with by deciding to sell the puts and how the firm could hurt badly both accounting-wise and cash-wise just if some things that have already happened (and not that long ago, actually) were to happen again.

The WSJ’s Ryan Tracy reports on just how big those exposures are: $31.4 billion in gross outstanding CDS, and $5.8 billion in derivatives. As a result of its risk exposure, the US Financial Stability Oversight Council is considering labelling Berkshire too big to fail and subjecting it to Fed oversight, Bloomberg reports.

Matt Levine points out that Berkshires is largely in the business of “taking financial risks away from other people”. And it does seem to be doing that: it has more outstanding CDS, on a net notional basis, than any too big to fail bank. The very luster that makes it seem like Buffett can’t fail, Levine writes, can actually be an argument that he is, in fact, too big too fail.  – Ben Walsh

On to today’s links:

Investigations
Wage theft in Silicon Valley: Did top CEOs conspire to hold down wages for tech workers? – Mark Ames

Do Less
Keynes, TS Eliot and the economic case for working less – David Spencer
Hesitate more: Indecision is a cognitive feature, not a bug – Aeon

Right On
Why we can’t afford to leave inequality to the economists – Justin Fox

Charts
The aging of the American workforce – BLS
2013 in media jobs: more journalists, fewer editors – South Mountain Economics

New Normal
Why is the American dream so much harder to achieve in the South? – Matthew O’Brien

Billionaire Whimsy
“Most well-known and beloved Chinese role model”: A tycoon’s quest to buy the NYT – Jessica Pressler

Modern Problems
A Greenwich mansion broker reflects on the “aspirational schnooks” who are ruining his town – NYT

Wonks
What is money? Mostly credit, it turns out – FT

The Fed
The Fed’s chief of staff: one of the most powerful women you’ve never heard of – WaPo

Revolving Door
One of the biggest critics of the revolving door joins the board of a big bank – Matt Zeitlin

Says Science
“Stop trying to take selfies on the frozen tundra”: why your phone dies more quickly when it’s frigid out – Drake Martinet

Tax Arcana
Tax-avoiding CEOs successfully avoid tax-avoidance tax – Matt Levine

Ugh
Banned from ethics and compliance conference for caring about ethics and compliance – Francine McKenna

Growth Industries
“Sex toys are definitely mainstream, but investors and banks are still too scared to join in” – Katie JM Baker
“Each year, startups’ exit price grows 3x faster than inflation” – Tomasz Tunguz

Popular Myths
The young actually read more than the old – Pew

Trends
“Where have all the wrong people gone?” The decline of working-class pop heroes – Sean O’Hagan

Ipso Facto
Why are US corporate profits so high? Because wages are so low – Jamie McGeever

Alpha
When your hedges don’t work – John Hempton

Likely Hyperbolic
“This generation may never really own a thing in their life” – Pando Daily

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