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Nov.24

11:06 AM ET

Monday, 24 Nov 2008

Warren Buffett Promises More Info On Berkshire's Derivatives In Annual Report

Posted By:Alex Crippen

Topics:Stock Options | Stock Market | Derivatives | Warren Buffett

Companies:Berkshire Hathaway Inc.

Warren Buffett tells Bloomberg today that more information about Berkshire Hathaway's derivative positions will be included in the company's annual report early next year.

In an email sent by his assistant, Buffett says investors will be told about "all aspects of valuation" for the contracts. In addition, the report will discuss "deficiencies in the formula" for pricing the derivatives, "which we nevertheless use."

Berkshire received almost $5 billion for writing the put option contracts. They act as a form of insurance for buyers who want to limit their potential long-term losses on stocks.

Berkshire would have to pay money to the holders of the contracts if, on certain dates well in the future, four stock market indexes from around the world, including the S&P 500, are below where they were when the deals were made in the last few years.

Berkshire wouldn't have to make any payouts for any of the contracts until at least 2019.

In the meantime, however, Berkshire is required to determine the current value of the contracts and include any "gains" or "losses" in its earnings report. With stocks plunging in recent months, the current value of the derivatives has also been falling.

Some investors have questioned how Berkshire determines the current value, and that process is what Buffett is promising to address in the annual report.

Go to Berkshire Hathaway Portfolio Tracker
Buffett tells Bloomberg that right now $35.5 billion is potentially at risk from the contracts, but only if all four of the stock indexes involved drop to zero.

If stocks eventually move higher by the end of the next decade, as Buffett expects, the contracts will be produce profits for Berkshire.

Buffett also says the contracts' collateral requirements are "under any circumstances, very minor."

Over the weekend, Barron's said Wall Street's worries about the derivatives are "overblown" and Berkshire's decline of about 50 percent from its highs last December has "created one of the better buying opportunities in years."

Current Berkshire stock prices:

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