patrick.net

mell says

We all don't know if it would have happened without TARP, but the likelyhood was significant.

That's a long way from BUFFET=TOAST. You are basing this on what information? Any article, research, link, anything at all or just I believe it's true? I haven't seen anything yet that documents how BK would have been taken under by AIG. I was assuming you could supply that since you are so definative it would have happened. I'll read the FCIC report and see what it says.

bob2356 says

mell says

We all don't know if it would have happened without TARP, but the likelyhood was significant.

That's a long way from BUFFET=TOAST. You are basing this on what information? Any article, research, link, anything at all or just I believe it's true? I haven't seen anything yet that documents how BK would have been taken under by AIG. I was assuming you could supply that since you are so definative it would have happened. I'll read the FCIC report and see what it says.

You cannot make a 100% sure claim without knowing the exact math, reading 8Ks or 10Ks gives you half the information at best. The FCIC report is not worth much since they are based of the 8Ks and 10Ks. That's where Cramer got his info from when he screamed "buy buy buy Bear Stearns, they are rock solid!" - just before they went belly up. I have given you numbers of CDS exposure that alone could have brought BRK down - why do you think the Fed backstopped them? It certainly is much much much much much more likely that BRK would have gone belly up then it is that the Fed has no influence on the markets.

The Professor says

Does anyone know how much of these "CDS", "MBS", and other non-treasury assets the Fed holds? Beside all of this debt, is their ANYTHING REAL backing the "Federal Reserve Note"s I have in my wallet?

That's exactly the problem. A net CDS number is not worth much. They are assuming a closed financial universe where the counterparties cancel each other out. However that assumes that each of them can pay and that assumption is based on their last financials. Not only are financial statements often heavily cooked (not much has changed here), the money can escape the closed universe in an instant, for example when a whale trader makes a huge losing bet where thew money ends up in a totally unrelated (and possibly foreign) party and the sudden loss makes them insolvent should they have to pay out insured risk, which then triggers the events we have seen in 2008.

mell says

The FCIC report is not worth much since they are based of the 8Ks and 10Ks. That's where Cramer got his info from when he screamed "buy buy buy Bear Stearns, they are rock solid!" - just before they went belly up. I have given you numbers of CDS exposure that alone could have brought BRK down - why do you think the Fed backstopped them?

So you are saying that no can get the information, but lacking the information you can predict that BK would have gone under? How is it your numbers lacking the details are better than anyone else's numbers lacking the details. That's an interesting position.

bob2356 says

So you are saying that no can get the information, but lacking the information you can predict that BK would have gone under? How is it your numbers lacking the details are better than anyone else's numbers lacking the details. That's an interesting position.

The CDS exposure numbers and the way their own swaps traded back then lead me to the conclusion that it was a likely event. Then Buffet himself said something along those lines. Even if not, he would have been severely decimated and certainly not the greatest billionaire investor of all times anymore, just a regular smart guy with ups and downs in the market. By the way, if you want to tag my toast expression as hyperbole, I have no problems with this. But then you should tag ramblings such as "The Fed has nothing to do with the markets/wealth inequality" as mega-hyperbole ramblings of lunatics ;)

mell says

I have given you numbers of CDS exposure that alone could have brought BRK down

For educational purposes, would you say the same re AIG?

mell says

Not only are financial statements often heavily cooked (not much has changed here), the money can escape the closed universe in an instant, for example when a whale trader makes a huge losing bet where thew money ends up in a totally unrelated (and possibly foreign) party and the sudden loss makes them insolvent should they have to pay out insured risk, which then triggers the events we have seen in 2008.

I read somewhere that this could be said of GE and Jeff Immelt in the repo market.

indigenous says

mell says

I have given you numbers of CDS exposure that alone could have brought BRK down

For educational purposes, would you say the same re AIG?

mell says

Not only are financial statements often heavily cooked (not much has changed here), the money can escape the closed universe in an instant, for example when a whale trader makes a huge losing bet where thew money ends up in a totally unrelated (and possibly foreign) party and the sudden loss makes them insolvent should they have to pay out insured risk, which then triggers the events we have seen in 2008.

I read somewhere that this could be said of GE and Jeff Immelt in the repo market.

CDS are difficult to predict, but I believe that AIG and GE would have ceased to exist before BRK. Just an opinion ;)

mell says

CDS are difficult to predict, but I believe that AIG and GE would have ceased to exist before BRK. Just an opinion ;)

Thanks, that gives me a perspective of the magnitude of this situation.

However it would be Much preferable, to let the market takes it's course, to what is on the horizon.

@mell obviously has not read (or utterly misread) the FCIC report as it is based on extensive testimony and documents and only in a minor way on SEC filings.

mell also appears not to understand legal or economic liability for stock investments. Liability is limited to the amount paid for a stake less dividends received.

And while Iagree that FASB and SEC rules enable misleading financial statements, a subject on which I have written extensively, mell ignores the relative size of B-K investments in companies with exposure to credit default swaps.

Out of $484 billion of assets, its Wells Fargo stake cost less than $12 billion; its USBancorp stake $3 billion; its Goldman Sachs stake $750 million. Add in smaller institutions like M&T Bank and you still do not get to 5% of B-K assets.

But what mell seems not to understand is that even if every bank whose shares B-K owned had been allowed to fail the only liability to B-K would be that its positions in those banks would be wiped out. Thus we could have let market forces, instead of crony rescues, proceed and B-K would still be there.

Buffett earns actual profits from numerous businesses (many benefitting from government rules that tilt the playing field) and also gathers up subsidies by the train load, none of which would have been reduced by the combined failures of Wells, US Bancorp, Goldman, M&T and other companies in which it is a minority shareholder.

Mell displays appalling ignorance of the facts when he writes "Without TARP => W. Buffet = toast." Utter nonsense.

You have not addressed the CDS at all, so what's new? I am all for letting it play out in 2008 and maybe he would have survived, but you cannot seriously disregard the - not only indirect, but also direct - CDS exposure. I am happy though that you have so much faith in the market and advocate for letting it play out instead of using crony bailout policies.

mell says

I am happy though that you have so much faith in the market and advocate for letting it play out instead of using crony bailout policies.

I will give him that. As to the government influence that is where the blinders come in.

@mell continues to ignore that his CDS statements regarding B-K have exactly zero factual basis. mell is not off by a little, but is completely wrong.

WHAT direct exposure, as mell now claims?

Neither Geico nor Buffett's smaller reinsurance companies were TARP beneficiaries. No B-K subsidiary is on the TARP list.

(Buffett did turn a fat profit from a side deal, as I revealed on Dec, 22, 2008. That, however, cuts against what mell posted. A reprint of my column is here: http://taxprof.typepad.com/files/121tn1427.pdf

B-K's exposure was limited to the value of its shares in Goldman, USBancorp, Wells, AmEx and some smaller institutions. And that means less than 5% of B-K assets could have been wiped out.

So, again, even if every single bank B-K was a minority investor in had failed -- and but for friends in high places most of them would have -- not only would B-K still be in business, it would still have more than 95% of its assets.

mell's "Without TARP => W. Buffet = toast" has not a scintilla of truth to it. Oh, and you misspelled his name, too.

Be honest. Acknowledge you got it completely wrong, not just in writing that B-K would have failed but for TARP, but also in asserting the basis for the very solid FCIC report. Facts matter. When people make up facts, or fail to correct mistakes, they pollute.

mell says

if you want to tag my toast expression as hyperbole, I have no problems with this. But then you should tag ramblings such as "The Fed has nothing to do with the markets/wealth inequality" as mega-hyperbole ramblings of lunatics ;)

I have many times.

@mell - what you wrote its not hyperbole; it is false. World of difference, especially after you doubled down. Facts matter.

Raising the issue of the Fed role in inequality is a red herring even though, of course, Fed policies have a great deal to do with inequality and markets, not to mention the quality of banking regulation.

I'm trying understand something,

A while back Bob indicated that David Stockman's characterization that AIG would not have gone under, because the corporate veil. But Bob contended that AIG corporate would have been pierced because IIRC laws are in the UK are different and because AIG agreed to put it's collateral in the US at risk. Despite the fact the insurance companies are rigidly held to rigorous standards.

If BK was highly leveraged through the CDSs, is that where the danger came from?

DavidCayJohnston says

Raising the issue of the Fed role in inequality is a red herring even though

More like the very cause of the whole thing which was continued through the bailouts.

indigenous says

mell says

I have given you numbers of CDS exposure that alone could have brought BRK down

For educational purposes, would you say the same re AIG?

You seem to be confused about AIG which originated the CDS and BRK/ge which would have been a holder. Actually as DC points out, BRK held positions in conpanies that were holders of CDS. Most of those were banks. You seem to willfully misunderstand the CDS market. Most banks were hedged on cds. They wrote cds policies and took out cds on bonds. For the most part only the big investment banks and hedge funds were really exposed to AIG cds problems since they tended to take a lot more polices and than they issued if they issued them at all. Without AIG the vast majority of cds was a wash. The problem is AIG wrote one sided. They issued CDS only. So AIG had tremendous exposure to the investment banks and hedge funds, but not nearly as much exposure to commercial banks. No surprise at all, the treasury guys screaming bailout were all ex investment bankers.

mell says

but you cannot seriously disregard the - not only indirect, but also direct - CDS

What exactly was BRK's direct cds exposure? I am under the same impression as David, the exposure was limited to the position in the banks that were subsidiaries. Shareholders can't lose any more than the cost of the shares. What knowledge do you have that there was additional exposure? An article, blog, statement, anything at all that documents this?

@indigenous - B-K was NOT highly leveraged with CDSs.

AIG is NOT a Warren Buffett company -- it was Maurice Greenberg's shop.

On inequality -- which mell raised as a red herring to the issue of his flat out errors -- while the Fed's failure to regulate (see the 40 plus hours of Carmen Segara tapes,surreptitiously made, telling her to not challenge Goldman's books) was a major factor in the 2008 collapse, it was less important than other factors.

The largest factor was plain old fashioned fraud, aided by the abandonment of underwriting. Bill Black, Michael Hudson, ProPublica, Matt Taibbi and others including me have laid this story out quite fully -- including the failure of the Obama administration to prosecute and Eric Holder's lies, as I report din several Newsweek pieces inn the past year. The fraud and lack of underwriting is thoroughly documented in the FCIC report.

DavidCayJohnston says

On inequality -- which mell raised as a red herring to the issue of his flat out errors -- while the Fed's failure to regulate

But the overarching point on this is that the Fed increased the money supply starting after the .com bust courtesy of Greenspan. Yea there was liar loans etc but the cause was too much money was made available.

That and the link I gave above regarding how the banking has been centralized since the 80s and egregiously prone to cronyism.

DavidCayJohnston says

B-K was NOT highly leveraged with CDSs.

If not than where was the danger of them going belly up?

mell --yet again -- indicates mell does not understand what mell reads. The link mell offers at 2:08 provides no support for his baseless assertions.

What Buffett wrote,and the secondary source comments on, concerned the concentrated risks taken by his re-insurance company. This has zero to do with the issue at hand -- TARP bailouts.

Nowhere does Buffett assert or even hint that all of Berkshire-Hathaway was at risk, only its General Re subsidiary.

Gen Re's amounts to less than 8 percent of B-K's total assets. I haven't read the legal documents, but I am sure B-K is insulated from claims against Gen Re that exceed the assets of Gen Re and that B-K has insurance to protect itself from Gen Re disasters.

again mell demonstrates a failure to grasp facts --a catastrophic failure in this case -- that appears to explain mell's jumping to wildly wrong conclusions. Andmell still has not acknowledged he was flat out wrong earlier.

mell says

http://brontecapital.blogspot.com/2008/11/berkshire-credit-default-swaps.html

I don't understand this post at all. The blog was about the cost of buying cds on BRK bonds. What does that have anything to do with cds owned by BRK. Go read the comments. You and indeginous both seem to randomly shift between writers of cds, holders of cds, and the objects of cds.

I think you are confusing berkshire hathaway with berkshire hathaway finance. There was some exposure to finance but it wasn't anything like the numbers you are putting up. Here is a pretty good aritcle about that very subject. You will have to register to read page 2 and 3.It's from 2009 and has some very sold numbers in it. http://seekingalpha.com/article/124623-berkshire-hathaway-proof-that-the-cds-market-is-irrational

bob2356 says

I don't understand this post at all. The blog was about the cost of buying cds on BRK bonds. What does that have anything to do with cds owned by BRK. Go read the comments. You and indeginous both seem to randomly shift between writers of cds, holders of cds, and the objects of cds.

It was about both, cds owned and their own cds spread. It was a discussion of traders at that time referring to the fact that the market was betting against BRK (as witnessed by the spreads). Regarding the numbers, they are fairly accurate as reported by Buffett himself as net cds exposure in billions (~5 vs ~20 gross). Sure you can say they were irrationally priced, but they are priced as what they are, the market doesn't care whether you think it's rational or irrational and companies have blown up simply from the credit pressure on them and the sell-off of their stock (as debt was called in by concerned parties). It was not meant to prove any financials, which didn't help Bear Stearns as mentioned earlier.

DavidCayJohnston says

mell --yet again -- indicates mell does not understand what mell reads. The link mell offers at 2:08 provides no support for his baseless assertions.

Read the above, you haven't provided any numbers at all, and you are making a lot of assertions yourself ("haven't read xyz...", "I am pretty sure..."). I have to put you on ignore, which I haven't done since that binary guy, good luck riding that FCIC report ;)

mell -- noun: a person who cowers behind a nom d'Internet, cannot accurately describe what he or she reads, tosses around terms in ways that indicate ignorance of accounting, finance and legal concepts and who flees from from verifiable fact rather than be forthright when errors are exposed.

bob2356 says

What exactly was BRK's direct cds exposure?

They did have direct exposure, not just through positions, Buffett detailed them as roughly 5 billion. Here's another opinion point with some data if you're interested:

http://jeffmatthewsisnotmakingthisup.blogspot.com/2008/11/is-buffett-worried-no-but-somebody-is.html

Nobody can know for sure one way or the other, but the hedgies I am friends/acquainted with were afraid to touch BRK with a 10ft pole back then, and I consider them centainly pro's compared to myself posting on patnet ;) Another interesting question is also what liabilities they could have simply walked away from, which also doesn't seem to have a clear answer to this day.

Just to be clear the taxes are used to fund pretend jobs. IOW there is no price discovery for these jobs.

The Fed would be more effective if it was privatized. And it would be honest money without inflation. Interest rates could easily be dictated by the market instead of "policy". The volume of money does not need to change one iota if there were more goods produced the money would be worth more if there were less the money would be worth less. But in any case we sure as hell do not need 2-3% inflation, except to pander to the very fractional reserve banks.

So DCJ you have it half right, but the rest is just a charade.

Indigenous, I deal in facts, verifiable facts. People like mell who ignore facts and then declare their willful blindness are not engaging in debate and should be called out for their egregious and time wasting conduct.

I have long argued in columns and reviews that that noms d'Internet debase debate and encourage people who cower behind them to pollute and hurl invective. And I have never found identifying myself to be a problem, even when I wrote about heavyweight criminals and had small children at a home. Plenty of nasty grams, some menacing.

DavidCayJohnston says

I deal in facts, verifiable facts.

Yet you ignore the facts about growth in government (not just Obama, but the trend over the past 4 decades), or the hugely onerous affects of the Fed.

Sorry, but trend on government spending is not as you imagine.

Federal outlays as share of GDP in the last four decades averaged 20.6 and in FY2014, just ended, were 21.1. Federal receipts in FY 2015 were an eyelash less than the 40-year average.

Federal employment per capita has fallen by more than half since 1962, from federal workers, civilian and military, equally 2.9% of population to 1.4%. Indeed, it has fall in absolute terms -- from 5.354 million to 4.312 million. So population up just short of 70%, federal jobs down 19,5 percent.

Like you I have been highly critical of the bailouts and ZIRP, but not of the existence of the Fed per se. Article I of our Constitution empowers Congress to control money and it has outsourced this duty, just as it does accounting rules (to FASB and GASB). The failure of the Fed (which is obligated to make limited reports to Congress) to properly regulate banks, the appointment of a Fed president who is a tax cheat as Treasury secretary http://taxprof.typepad.com/files/122tn0661.pdf for actions for which an IRS employee would have been fired and many other specifics show scandalous problems. A strong case can be made for replacing the Fed with a central bank under direct government control so, no, I have not ignored those facts or any other actual facts.

errata that should e :
Federal receipts in FY2014 ((( 2015))) were an eyelash less than the 40-year average.

DavidCayJohnston says

Federal employment per capita has fallen by more than half since 1962, from federal workers, civilian and military, equally 2.9% of population to 1.4%. Indeed, it has fall in absolute terms -- from 5.354 million to 4.312 million. So population up just short of 70%, federal jobs down 19,5 percent.

The GDP number is dubious. How do you explain this graph?:

DavidCayJohnston says

not of the existence of the Fed

Factually all of the functions of the Fed could be replaced by the private market with infinitely more accountability. That aside the purpose of the Fed is to create a more stable economy. The Facts are that he has inflated the dollar to 4% of it's value before 1913. Before the Fed the value of the dollar rose in value from the 1700s value of 100% to 111%. It has given us the ability to finance wars through inflation and the great depression and the current calamity.

The Professor says

Argue the facts, don't make personal attacks.

Agreed.

bob2356 says

What does that have anything to do with cds owned by BRK.

indigenous says

If not than where was the danger of them going belly up?

They were quite leveraged, the numbers vary a bit because with CDS exact math is impossible, but the exposure was significant enough to potentially go belly up.

http://www.thestreet.com/story/11858752/1/buffett-barely-survived-berkshires-omaha-whale.html

"In 2008, Berkshire also wrote $4 billion in individual swaps guaranteeing the bonds of 42 corporations, trades the firm indicated didn't require initial collateral. Berkshire wrote a further credit protection of $18 billion in notional value tied to the bonds of states and municipalities, the 2009 filing shows, putting the firm's CDS exposure at about $30 billion, at its crisis-time peak."

30 billion is nothing to sneeze at and around Berkshires net valuation at that time.

A little off topic but you said that AIG's exposure was about 50 billion. AIG has assets of what a trillion dollars? Was this a liquidity problem?

Berkshire Hathaway shareholder equity was more than $130 billion at the end of 2009 with assets of $297 billion so a $30 billion lost would have reduced shareholder equity by no more than 30 percent.

Mell errs in asserting $30 billion was roughy equal to its net valuation at the time.

indigenous says

A little off topic but you said that AIG's exposure was about 50 billion. AIG has assets of what a trillion dollars? Was this a liquidity problem?

That was what that dude in the discussion gleaned from looking at the dtcc website back then, which doesn't cover a lot of obligations AIG took on worldwide. Their estimated total exposure was close to 500 billion. That's another problem with these instruments, they are sliced and diced and difficult to track. It's prudent to assume that no company with debt on its books back then and significant exposure to the CDS and derivatives market was safe from going BK, especially since mark-to-market became worthless during the crisis as the markets underneath them literally disappeared (no liquidity), rendering them worthless when they needed to be sold. Asset numbers don't mean much unless you are forced to sell them or you actually sell them, even secured debt is only secured as long as the debtor is solvent. That;'s why nobody wanted to buy even an until-then reputable company such as BRK back then. So yes, liquidity had a lot to do with it. Companies real valuations differed vastly depending on when you measured, before or after the Fed stepped in. Way into 2009 most of the (liquidity) risk was assumed/absorbed by the Fed and its infinite zero percent discount windows, so valuations started climbing rapidly again. Doesn't mean you can bank on them though ;)

mell says

Their estimated total exposure was close to 500 billion.

AIG did not get that big by being stupid, how did that happen? I'm assuming big leverage, but still?

indigenous says

mell says

Their estimated total exposure was close to 500 billion.

AIG did not get that big by being stupid, how did that happen? I'm assuming big leverage, but still?

No idea, they also weren't hedged (which doesn't fully guarantee that you aren't on the hook one or more significant counterparties go down), i.e. they only sold but didn't buy CDS, which was mostly unheard of, and they dabbled in foreign nations' debts. Probably best not to do business with anybody who does business with CDS.

mell says

Probably best not to do business with anybody who does business with CDS.

Or bail them out

I read somewhere that the govt is now going to regulate OTC trades. How well is that going to work out, (8^())

mell says

bob2356 says

What exactly was BRK's direct cds exposure?

They did have direct exposure, not just through positions, Buffett detailed them as roughly 5 billion. Here's another opinion point with some data if you're interested:

http://jeffmatthewsisnotmakingthisup.blogspot.com/2008/11/is-buffett-worried-no-but-somebody-is.html

The article talks about cds on BRK not anything about cds held by BRK the same as the other one. There is talk about holding derivatives, puts, cdo's, and issuing reinsurance. Not a word about cds holdings.

mell says

"In 2008, Berkshire also wrote $4 billion in individual swaps guaranteeing the bonds of 42 corporations, trades the firm indicated didn't require initial collateral. Berkshire wrote a further credit protection of $18 billion in notional value tied to the bonds of states and municipalities, the 2009 filing shows, putting the firm's CDS exposure at about $30 billion, at its crisis-time peak."

There was 18 billion in cds for municipal bonds. For christ sakes, these were municipal bonds not corporate bonds. What a desperate stretch. How many towns were in danger of going out of business in 2008? How many municipal bonds have defaulted in the last 30 years. How did 2008 become the financial crises peak, anyway? Interesting BRK has gotten out of these this year. Buffet must see a shitload of municipal bankruptcies coming down the pike.

A whole 4 billion in corporate bonds cds in 2008? Again 2008 was not the peak of the crisis. So picking up these up after the shakeout isn't exactly high risk. The article took buffets comments on this totally out of context and managed to badly misquote him. Here is the full quote about derivatives:

Considering the ruin I’ve pictured, you may wonder why Berkshire is a party to 251 derivatives contracts (other than those used for operational purposes at MidAmerican and the few left over at Gen Re). The answer is simple: I believe each contract we own was mispriced at inception, sometimes dramatically so. I both initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the Chief Risk Officer as well. If we lose money on our derivatives, it will be my fault.

In other words Buffet is saying he thought he picked the cds up at bargain basement prices, but if he is wrong he's responsible. He's not offering an apology for buying them like it appears in the article.

I don't put much faith in people who are dishonest to sell their spin like the author of this article. Apparently you do. I wonder why he has to call his blog jeff matthews is not making this up?

bob2356 says

Interesting BRK has gotten out of these this year. Buffet must see a shitload of municipal bankruptcies coming down the pike.

He got out of those because he realized that these are weapons of financial destruction. You would have seen more municipal bankruptcies, of course looking at a past-tarp/QE lense it doesn't look that bad. But they will show up again if spending isn't curbed and there is no indication of it. I also wonder why you did not address the last article from the street and keep riding that exposure thing. Last time they DID have direct CDS exposure, the numbers vary a little as CDS are hard to track:

http://www.thestreet.com/story/11858752/1/buffett-barely-survived-berkshires-omaha-whale.html

"In 2008, Berkshire also wrote $4 billion in individual swaps guaranteeing the bonds of 42 corporations, trades the firm indicated didn't require initial collateral. Berkshire wrote a further credit protection of $18 billion in notional value tied to the bonds of states and municipalities, the 2009 filing shows, putting the firm's CDS exposure at about $30 billion, at its crisis-time peak."

Sure you can keep saying they are all wrong (Gara used to work at Lehman), we don't know for sure. The reality is much simpler, that there are no oracle traders.

mell says

I also wonder why you did not address the last article from the street and keep riding that exposure thing. Last time they DID have direct CDS exposure, the numbers vary a little as CDS are hard to track:

Most of my post was about the street article. Didn't you notice the quote I posted and you reposted was from the street article? I would think you would know what it is you posted.

You're the one that keeps harping on exposure. I don't believe there was any significant exposure. You keep insisting there is. Nothing you have posted addresses that, they just keep regurgitating the raw numbers, not looking at what the numbers mean. I find it very hard to believe that you or the writers you quote could seriously believe that cds on municipal bonds written after the financial crises represented a company destroying threat to BRK. Makes splashy headlines for bloggers looking to make a name, but that's about it.

mell says

Gara used to work at Lehman

That means something? Lehman is history, BRK is raking in money. That is the reality.