Warren Buffett on Saturday said he believes the Berkshire Hathaway Inc derivatives contracts tied to equity stock indexes will probably make money, but those tied to the credit quality of junk bonds may end up in the red.
Berkshire at year end had 251 derivatives contracts, most of which are essentially bets on the long-term direction of stocks and junk bonds. They has accumulated billions of dollars of paper losses because stock prices have fallen, but Buffett has said these contracts differ from other derivatives he has called financial weapons of mass destruction in part because of the billions of dollars of premiums he collects upfront.
I personally think that the odds are extremely good that on the equity put options, we will make money, Buffett said at Berkshire's annual meeting.
But he added that we have run into far more bankruptcies in the last year than is normal, and that on contracts tied to credit defaults, Berkshire will probably lose money. He added: I would expect those contracts to show a loss before investment income, and perhaps after investment income.
Berkshire's contracts tied to equity indexes expire between 2019 and 2028. The junk bond contracts expire between 2009 and 2013.
(Reporting by Jonathan Stempel and Lilla Zuill)