The WSJ reports tonight that Warren Buffett’s Berkshire Hathaway has terminated $8.25 billion in municipal CDS contracts (derivatives insuring municipal bonds in the event of default by the municipality)- 50% of his overall position!
As the announcement likely just gave the remaining 50% of Berkshire’s position a massive haircut (Buffett’s sale is quite likely to initiate a massive panic for the exits in the muni market), perhaps Buffett should have invested a few million into convincing the ISDA to treat the upcoming tsunami of US muni bankruptcies like a Greek bankruptcy and label them ‘voluntary credit restructuring events’.
In any case, Buffett’s drastic move indicates the long awaited US muni bankruptcy crisis is likely imminent.
From the WSJ:
A decision by Warren Buffett’s Berkshire Hathaway Inc. to end a large wager on the municipal-bond market is deepening questions from some investors about the risks of buying debt issued by cities, states and other public entities.
The Omaha, Neb., company recently terminated credit-default swaps insuring $8.25 billion of municipal debt. The termination, disclosed in a quarterly filing with regulators this month, ended five years early a bullish bet that Mr. Buffett made before the financial crisis that more than a dozen U.S. states would keep paying their bills on time, according to a person familiar with the transaction.
The insurance-like contracts, which required Berkshire to pay in the event of bond defaults, were originally purchased by Lehman Brothers Holdings Inc. in 2007, more than a year before the Wall Street firm filed for bankruptcy, the person said.
Details of the termination, with the Lehman Brothers estate, weren’t disclosed. It isn’t clear whether Berkshire’s move will leave the company with a profit or loss on the wager. Mr. Buffett, Berkshire’s 81-year-old chairman and chief executive, declined to comment.
While the WSJ states it isn’t clear whether Berkshire made a profit or loss on the CDS contracts, based on the WSJ’s chart, ZH believes Berkshire has lost hundreds of millions of dollars on the position.
It is fairly safe to assume that Buffett will close out with a substantial loss. Having sold over $8 billion in insurance on what appears to be 10 year duration CDS at 20 bps, the fact that he is unwinding at a spread four times wider, at a massive DV01, means that there is no way the roll alone would have offset the blow out in spread. As a result it is fair to assume that hundreds of millions in P&L were lost as a result of this trade.
If Warren Buffett is locking in hundreds of millions in losses on a trade- and guaranteeing much more massive losses on the remaining 50% of the trade, The Oracle must foresee massive imminent bankruptcies in the muni market.
But we thought Ben and Timmy had informed us the recovery was progressing slowly?
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/images/live/s_silv.gif)
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/images/live/s_gold.gif)
Canaries in the coal mines
Jail Birds on the fly
Vultures in the corn fields*
Silver’s cheap to buy
* Omaha corn fields, that is.
Uh oh, did he figure out that his debtors cant sell any of their positions in their CAFR funds to pay him back?
I can’t wait for the opening bell tomorrow. The Markets should panic!!! Being that this is the exact same move that triggered the fall of Lehman Brothers. I would expect a break out in the precious metals. Great report…This thing is coming!!!! I am glad I have little currency in the bank.
https://www.youtube.com/watch?v=EVZh4WcdC3s
Time to Freak Out!!!
As the dominoes start to fall, how long til the end of the row?
I don’t have a firm view on this. But I tend to think we’re not looking at an “imminent” crisis because there’s a huge amount of money flowing into MUNIs from people fearful of all the taxes coming down the pike in the US. But then again, that money flow could easily top out about nine months from now and that’s not far in the future. The long-term Treasury market will likely roll over first (and might actually be starting just that right now), with MUNIs following with a lag given this tax shelter aspect to current money flows. Meanwhile, the state of local economies across the nation are dreadful and getting worse. Imminent or not, the MUNI market is going to get hit hard.
Currently viewing the Asian Markets and Silver and Gold are going vertical again. The dollar is going down an the time is 8:57 Hawaiian Time. So we will see what happens in about five hours from now when New York opens. Like I stated previously above that with this shocking information that has come from Berkshire Hathaway some serious shit is going down behind the scenes.
another one falls
I think an old fart is about to become a barbarous relic…..
I always think of Forest Gump, when I see his name.
He should be this person and inspiration!
However, he is this guy. Yet his move proved me right last night. Keep Stacking and smiling!!