Looks like Warren Buffet has paid out over half the proceeds he received from writing credit default insurance on baskets of high yield bonds. And once again, folks are questioning the wisdom of his forays into the derivatives market.
Bloomberg: Berkshire paid about $825 million on the contracts in the second quarter and $350 million in July, compared with $675 million in the three months ended March 31, the company said in a regulatory filing last week.
“I told you a year ago that I thought we would make money on those, but we have run into far more bankruptcies in the past year,” Buffett said in Omaha at Berkshire’s annual shareholder meeting in May. “I would expect those contracts to show a loss before investment income, and perhaps after.”
Still, he apparently received 75% of the maximum loss in fees for some of these swaps which would mean it takes three defaults with zero recovery, out of each of four companies, just to reduce him to breakeven on these trades. And this is before factoring in the investment income he earns on the fee float as well. Warren Buffett is human, but betting against him has been a bad strategy, and once again we’ll place our odds on him doing ok.
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