2012: Who will manager Berkshire derivatives after Buffett?
BECKY QUICK: This question comes from Joel Bannister (PH) in Dallas, Texas, who says, “Warren, you personally run the derivative book.
“Who will manage these weapons of mass destruction after your tenure? We don’t want to end up like AIG under someone else’s watch.”
He also adds, “P.S. I am wearing the wedding ring you sold my wife last year at the annual meeting at Borsheims.”
WARREN BUFFETT: Well, obviously a man of intelligence. (Laughter)
Yeah, I don’t think there will be much of a derivatives book after I’m around. In fact, there won’t be much of a derivatives book when I am around. I mean, it’s not that big of a deal.
But there will be — there could well be — well, I’ll go back to will be, because it’s almost required in certain of our utility operations that they engage in certain types of derivative activities. The utility boards that they respond to want them to hedge out certain types of activities.
And then they engage in swaps of generation. And there’s a number of activities that there’s some derivatives that fit into doing that, but it’s not of a huge scope.
The railroad formerly hedged diesel fuel, for example. They may do that in the future; they may not. I mean — so there’s a few operating businesses that will have minor positions.
I don’t think that — I think it’s unlikely that whoever follows me — well, they’ll be in — there will be several investment guys that follow me, at least two, and they’re on board now, Todd Combs and Ted Weschler.
We hit a home run with both of them. We got better than we deserved, but Charlie and I like that.
And they — it’s unlikely they do anything — very unlikely they do anything — in derivatives, although I wouldn’t restrict them from doing it because they’re smart people and sometimes derivatives get mispriced.
But it’s not going to be a huge factor at Berkshire. I think we’re going to do really, probably, quite well with the derivative positions that we have. We’ve done fine with the ones that have expired so far, and I like the positions.
But the rules have changed in relation to collateralizing, and I don’t like ever exposing us to anything that would cause me to worry about Berkshire’s financial condition if the Federal Reserve were hit by a nuclear bomb tomorrow, or anything of the sort, or Europe, you know, something terrible happened.
We just — we think about worst cases all of the time around Berkshire. Charlie and I probably think about worst cases more than any two managers you’ll ever find, and we are never going to expose ourselves to a worst case.
And a requirement to collateralize things means that you are putting yourself in a position where you may have to come up with some cash tomorrow morning, and we’re never going to do that on any significant scale, because we don’t know what tomorrow morning will bring.
Charlie?
CHARLIE MUNGER: We wouldn’t — the derivatives have bothered some people. We never would have entered if we’d had to sign normal contracts.
We had better credit than anybody else, and we got better terms. And I think by the time that has all run off, we will have made at least $10 billion, maybe a lot more.
In other words, we’re going to be very lucky we did those contracts.