Sunday, March 8, 2009

The attack on Berkshire Hathaway

Warren Buffett said this at the 2007 annual meeting regarding "naked" shortselling:

Buffett begins his response with a sort of amused recap of the question for Munger, who for the first and only time of the day could not make out the question: “It’s about this so-called failure-to-deliver and naked shorting,” he tells his partner, clearly unimpressed by any supposed naked shorting crisis. He doesn't even have a problem with legitimate short-selling.

“I do not see the problem with shorting stocks,” Buffett says, “But it’s a tough way to make a living.”

Recalling that Berkshire Hathaway made good money lending shares of US Gypsum to short-sellers when it was under siege from asbestos lawsuits, before the stock went up ten-fold, Buffett says: “If anyone wants to naked short Berkshire, they can do it until the cows come home. In fact, we’ll hold a special meeting for them,” he says, to laughter.

Who's laughing now?

Buffett is being shorted in spades with credit default swaps, and AAA Berkshire with it's supposed fortress balance sheet trades in credit default swap land comparable to Vietnam!

Buffett said in his annual letter this year, that he likes it when stock prices come down, because it allows him to buy.

The market is ripping these myths espoused by Buffett apart as the Oracle of Omaha meets the oracle at Delphi, but this time the net of the omphalos stone consists of naked shorts and credit default swaps!

After 9/11 Buffett put out a press release indicating that Berkshire would take a hit of about $2.2 billion from the terrorist attack.

And look how pissed Warren was discussing his underwriting and this loss in Berkshire's 2001 shareholder letter:

When property/casualty companies are judged by their cost of float, very few stack up as satisfactory businesses. And interestingly . unlike the situation prevailing in many other industries . neither size nor brand name determines an insurer.s profitability.Indeed, many of the biggest and best-known companies regularly deliver mediocre results. What counts in this business is underwriting discipline.

1. They accept only those risks that they are able to properly evaluate (staying within their circle of competence) and that, after they have evaluated all relevant factors including remote loss scenarios, carry the expectancy of profit. These insurers ignore market-share considerations and are sanguine about losing business to competitors that are offering foolish prices or policy

2. They limit the business they accept in a manner that guarantees they will suffer no aggregation of losses from a single event or from related events that will threaten their solvency. They ceaselessly search for possible correlation among seemingly-unrelated risk

The events of September 11th made it clear that our implementation of rules 1 and 2 at General Re had been dangerously weak. In setting prices and also in evaluating aggregation risk, we had either overlooked or dismissed the possibility of large-scale terrorism losses. That was a relevant underwriting factor, and we ignored it.

So far this year, Warren's portfolio has taken a hit 7X greater than what Berkshire suffered during 9/11; yet Warren hasn't commented about Berkshire's current portfolio.

If Buffett was this annoyed for paying money out because of an unforeseen terrorist attack, then what is Buffett thinking of the evaporation of Berkshire's equity portfolio?

We'll soon find out. Monday morning, from 6:00-9:00 am Buffet will be live on CNBC taking viewers questions.

It should be an interesting morning.

Maybe now we'll have that credit default swap meeting with the shortsellers!

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