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Buffett Barely Survived Berkshire's Omaha Whale

NEW YORK ( TheStreet) -- JPMorgan (JPM - Get Report) CEO Jamie Dimon barely survived the bank's poorly managed trading position, now known as the 'London Whale,' which went unnoticed by most investors until it backfired in 2012 causing over $6 billion in losses.

Don't expect similar scrutiny for Warren Buffett at Berkshire Hathaway's (BRK.A - Get Report) annual meeting, even if the 'Oracle of Omaha' is poised to narrowly escape a similar set of trades that swung by billions and could have been deemed the 'Omaha Whale.'

While JPMorgan spent multiple quarters unwinding a set of credit default swap trades and investigating the soured bet amid investor outcry, Buffett is about to see billions in risky CDS he initiated profitably run off of Berkshire's books by the end of 2013, with little fanfare.

But his reputation narrowly survived intact.

In 2008, when fully documenting the credit derivative trades he'd made for Berkshire and the billions in losses the firm faced, Buffett ultimately put his job on the line.

"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," said Buffett in his 2008 annual letter.

Berkshire's CDS book consisted of swaps guaranteeing indices of high yield corporate bonds written between 2004 and 2008, for which Berkshire received $3.4 billion in premiums on a notional value of about $8 billion, according to 2009 Securities and Exchange Commission filings. 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.

Luckily for Buffett, after years of managing the white knuckle trade, he's now on a path to eek out a profit. It's no surprise, then, that 'mea culpa's' in Buffett's post-crisis annual letters turned to the subtlest of celebrations in 2012.

Berkshire now forecasts an overall pre-tax profit of about $1 billion on the trades and the firm booked a $67 million fourth quarter gain on its remaining CDS position.

As the trades profitably expire, Buffett is adding a positive gloss to what could have been a major trading fiasco similar to JPMorgan's London Whale loss.

"All told, these derivatives have provided a more-than-satisfactory result, especially considering the fact that we were guaranteeing corporate credits - mostly of the high-yield variety - throughout the financial panic and subsequent recession," Buffett wrote in a March 1 annual letter.

He further justifies the trades using insurance industry metrics such as 'float,' in logic that borrows from AIG's (AIG - Get Report) financial products division, a unit that led to the insurer's eventual Treasury and Federal Reserve-assisted rescue.

The likelihood of Buffett successfully exiting his Omaha Whale -- after years of concern -- is a stark contrast to Dimon and JPMorgan's loss-riddled London Whale Waterloo.

Had Berkshire faced scrutiny similar to JPMorgan in 2012, a forced exit of trades could have caused losses that would have put Buffett directly at fault with investors.

[Buffett and Dimon now say they're unlikely to use shareholder money to tangle in the world of CDS, given the prospect of losses that raise question marks far larger than prospective profits.]
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