The cost of credit default swaps (debt insurance) on GE (GE) and Berkshire Hathaway is soaring.
Bloomberg: Investors are paying as much for contracts that protect against a default on the bonds of Omaha, Nebraska-based Berkshire, which has $25.5 billion in cash, as for KB Home, the homebuilder that lost money for seven consecutive quarters. The cost of credit-default swaps on the finance arm of GE and its $45 billion in cash is about the same as for building materials- maker Louisiana-Pacific Corp., which posted nine straight quarterly losses.
GE blames low trading volume (nice try):
Sellers of credit-default swaps tied to the debt of General Electric Capital Corp. for five years yesterday demanded 16.5 per cent upfront, in addition to 5 per cent a year, according to broker Phoenix Partners Group. That means it costs $1.65 million initially and $500,000 annually to protect $10 million of obligations. The cost was $446,000 a year two weeks ago… GE Chief Financial Officer Keith Sherin said in an interview on the GE-owned CNBC television network yesterday that the surge in credit-default swaps on his company’s finance unit “is overdone” and worsened by below-average trading volume.
Berkshire’s showing the same pricing action (which does seem ludicrous, even to us), but at least Buffett’s not pointing to bogeymen. Bloomberg speculates that thinly traded Berkshire is hard to borrow to short, so traders are accomplishing the same thing via the debt derivative markets.
Swaps on Berkshire have soared 2.26 percentage points the past two weeks to 5.35 per cent a year, CMA data show.