This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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.]
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AIG $54.85 0.00%
BRK.A $216,515.00 0.00%
BRK.B $144.24 0.00%
JPM $61.57 0.00%
AAPL $94.19 0.00%


Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs