– Jonathan Ford is a Reuters columnist. The views expressed are his own –
The credit crunch has exposed many one-time financial heroes as having feet of clay. Even the great Sage of Omaha, Warren Buffett has fallen from grace.
The shift in mood has been brutal. The price of shares in the Sage’s investment company, Berkshire Hathaway, has more than halved since last September. Meanwhile, his one-time iron-clad balance sheet now looks rather frail. The credit default swap market is saying that the company’s vaunted AAA rating is so much baloney. Berkshire’s bonds are trading close to junk levels.
The pain is largely self-inflicted. It stems from Buffett’s decision to raise $4.9 billion by writing put options that insured buyers against falls in the value of several large global stock indices, including the S&P 500 and the FTSE 100. These he sold to a range of unknown counterparties between 2006 and the end of last year. The indices in question have slumped putting the Sage potentially on the hook for an AIG-style payout. On a mark-to-market basis, the positions were $10 billion underwater at the end of 2008, giving a $5.1 billion loss after the premium is accounted for.
Why, one might ask, did Buffett make such a bet? This is, after all, the man who has railed in the past against over-the-counter derivatives, describing them as “financial weapons of mass destruction”.