Email – #513

Our BRK’B January 2012 $80 call options are down a little from where we got in. Although initially this was to be a longer-term position where we would average in after taking a 50% position, a couple of things have changed since the recommendation that could adversely affect us…

First and most obvious is the Goldman Sachs issue. Berkshire holds a nice chunk of Goldman equity – that is not the issue. The issue is headline risk from the fallout of the Goldman subprime fiasco. In the short term, perception trumps fundamentals.

Second, there is a groundswell in Congress to clamp down on derivatives, which they believe contributed to the housing collapse and the near financial collapse.

I don’t buy their argument since I believe it is the people who traded and formulated the derivatives that are culpable, not the concept behind derivatives. Still, there is no telling what the government will do regarding derivatives. Right now they are looking at requiring companies that trade and hold derivatives to post more capital to soften the downside.

That may or may not have an impact on Berkshire, which does own a substantial derivatives portfolio. The company is pressing Congress for an exception, but in the current “witch hunt” climate, anything is possible and we face greater headline risk from this as well.

Sell your BRK call position.

Karim