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TheStreet Open House

Buffett Barely Survived Berkshire's Omaha Whale

Stock quotes in this article: BRK.A, BRK.B, JPM, AIG

Ultimately, both 'whale' trades are a cautionary tale about the fallibility of even the best chief executives and the constant risk investors face of CEO overreach.

Still, it appears Buffett's candor in admitting the trades early on may have helped the 'Oracle of Omaha' to gracefully ride out his ill-advised foray into the credit default swap casino with a few billion extra in Berkshire's pocket.

After a forced exit to a similar, but more complex and opaque position, Dimon called JPMorgan's CDS trades egg on his face, and has made scores of apologies to investors and the media in recent public appearances.

The difference may hinge on Buffett's earlier recognition of the ill-advised trades, his accountability for their performance and a bigger mandate to make proprietary bets on behalf of shareholders.

While potentially smaller than JPMorgan's London Whale, Berkshire clearly stood to lose a lot on its CDS trades and Buffett devoted large sections of post-crisis annual reports to explain why his firm was unlikely to lose money on trades over the long-run, even if it booked billions in losses through the financial crisis.

In 2008, Berkshire set aside $3 billion to cover losses on its CDS contracts and recorded over $500 million in losses, putting the firm's overall index position in the red.

By the end of 2009, the apex of bankruptcies during the credit crunch, Berkshire had paid out $2.5 billion in losses tied to its high yield bond index contracts. As of 2011, that figure stood at a total of $2.6 billion.

Had Berkshire been forced to unwind its CDS trades at the crisis-time peak, Buffett would have been exposed to terminations and fees that could have been exposed to significant losses. Unlike Dimon at JPMorgan or Jon Corzine at MF Global, for that matter, Buffett was able to ride the trade out.

While the 'Oracle of Omaha' may now present the winning trade as part of his bet on America since Berkshire's exposure guaranteed a wide swath of corporate bonds, the fact is Buffett barely survived what was his own 'Omaha Whale.'

For more on Buffett and Berkshire's annual meeting, see why the "Oracle" is questioning his performance.

In an appearance on CNBC on Monday, Buffett revealed that Real Money's Doug Kass has been appointed to represent the bearish view of Berkshire Hathaway at its shareholder meeting scheduled for May 4.

Doug Kass headlines RealMoneyPro.com where he posts his Daily Trading Diary. See it free for 14-days.

-- Written by Antoine Gara in New York

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