Only the Paranoid Survive?

The trust in the financial community has broken so badly. No one trust anyone - not even Warren Buffett? Many people underestimated Buffett, he is still the master of generating float. He received cash upfront by selling derivatives that will expire beginning of 2019, which is a form of float that he can take advantage of the current crisis to fund his "shopping spree". If many of his "retail" chicken little got frightened by "short sellers", that is just too bad.

Dec. 9 (Bloomberg) -- Short selling of Warren Buffett’s Berkshire Hathaway Inc. rose to its highest level in six years on speculation that costs tied to derivative contracts will drive down the insurer’s stock price.

Short-selling increased by 1,013 shares, or 29 percent, to 4,495 between Nov. 14 and Nov. 28, the most bet on Berkshire’s decline since 2002, according to data compiled by Bloomberg. That’s equal to 0.69 percent of all Berkshire shares available to trade, compared with the average 3.38 percent for insurers listed on U.S. stock markets.

Short sellers were circling Omaha, Nebraska-based Berkshire as concern increased about the firm’s derivative contracts, which may cost the firm as much as $35.5 billion beginning in 2019 if markets don’t recover. Prices on credit-default swaps that protect against a Berkshire default rose to record levels last month before Buffett promised more disclosure about the company’s derivative holdings early next year.

“The derivative issue came to the fore in that period of time, and may have caused a few people to think that where there is smoke there’s fire,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Greenwich, Connecticut-based hedge fund Ram Partners LP. “There may be some folks who thought there was a chance this thing could get worse.”

In a short sale, traders try to profit from a price decline by selling borrowed shares in the hope of repaying the loan with cheaper stock. Berkshire stock, which sold for $104,000 on Nov. 28, closed at $107,500 today.

The stock fell as much as 27 percent in intraday trading from its Nov. 14 closing price in the two-week period before Buffett pledged to provide more information on how he calculates losses on the derivative bets. Berkshire spokeswoman Jackie Wilson had no immediate comment today when contacted by e-mail.

Derivatives

He said the firm’s annual report for 2008 will disclose “all aspects of valuation.” By the end of November the stock had risen 3 percent from the last time the number of shorts was reported by the New York Stock Exchange. The Nov. 28 figure was released today.

“It’s an indication of the fear and uncertainty that people feel when you have someone with as much transparency and a track record of trust as Warren Buffett telling us the derivatives are a good deal and there are still some people who don’t believe him,” said Michael Yoshikami, the president of YCMNet Advisors in Walnut Creek, California, which holds Berkshire shares. “People simply don’t believe anyone at this point, not even Warren Buffett.”

Liabilities

Buyers of the derivatives could be entitled to billions of dollars from Berkshire if the four stock indexes, including the Standard & Poor’s 500 Index, drop below agreed-upon levels on dates beginning in 2019. The indexes would all have to fall to zero for Berkshire to be liable for the entire $35.5 billion that’s at risk. The sum was estimated at $37 billion as of Sept. 30 in a filing and shrank because of fluctuations in currency exchange rates, Buffett said in an e-mail Nov. 21.

Buffett sold the derivative contracts to undisclosed buyers for $4.85 billion through Sept. 30. Until the derivatives come due Berkshire can use the cash to make investments or acquisitions.

Investors also were concerned that Berkshire might have to put up collateral, draining cash and setting off a chain of events like those that brought American International Group Inc. to the brink of failure this year. In his e-mail, Buffett said the collateral requirements are “under any circumstances, very minor.” Berkshire had $33.4 billion in cash at the end of the third quarter.