BRK

Berkshire Hathaway held their annual meeting over the weekend. There has been some news about how lower returns on the insurance business and their derivatives positions (specifically equity index puts) hurt their bottom line. I love to take the time to gloat that I called it (it being losing money on the puts in the short-term).

However, I don't think the coverage of the loss has been that great. He only has European puts which require payment at expiration, so the loss is unrealized. He has paid out no money and won't have to pay out any money for many, many years (if at all, which is what I argued). I'm by no means an expert in the way that derivative contracts are accounted for (see FAS 133 if you want to figure it out), but traditional equities or fixed income can be classified as held-to-maturity, available-for-sale, or trading securities. If a derivative contract were classified under the fixed income or equities held-to-maturity method, then the historical cost would be recorded on the balance sheet and any realized gains or losses would be recorded as they occur. Short of bankruptcy, I can't imagine a situation where Buffett would get out of these positions. I guess I don't understand why he isn't allowed to use this method of accounting since it most fairly represents the value of the position. FAS133 seems to require any derivative that is not part of a hedging operation to have the gains or losses recorded each quarter. That seems inaccurate and misleading. If I were performing equity analysis on Berkshire Hathaway (or any company with large derivative positions that they could never possibly lose money on if they held to maturity and are well-capitalized), then I would restate that part of the balance sheet as if they were held-to-maturity.

Also, I should note that the numbers on the balance sheet that are reported as liabilities and occasionally mentioned in the press for his derivative positions, might also include new positions. A quarter of the increase in liabilities (383 million of 1.6 billion) on equity index puts is due to new positions, and a third (229 million of 667 million) of the CDS losses. I don't know much about the underlying content of the CDS positions, but losses on these positions could be outweighed by the (unrealized) profits on the index puts if the market improves. A little strange that he would lose money on both (market still collapsing in March, but credit conditions improving). Overall, he lost 1.2 billion on the equity index puts that he will never have to pay out. That would make Net Earnings per common of about 1382 instead of 1682 (decline of 18% instead of 64%). Considering other financial firms have performed significantly worse, I would say that isn't that bad. And Berkshire Hathaway will be able to show much greater (unrealized) profit if the market improves, even though we know that they really just gained back money written off.