Buffett Barely Survived Berkshire's Omaha Whale

NEW YORK ( TheStreet) -- JPMorgan ( JPM) 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) 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) 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.

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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