2020: What's the status of Berkshire's short puts?
BECKY QUICK: All right, this question comes from Bob (Coleman). He says, “Warren, could you bring us up to date with the status of your equity put contracts? Sourcing the 2019 — ”
WARREN BUFFETT: Yeah.
BECKY QUICK: ” — annual report, found on page 60, it appears at 2019 year-end, the fair value liability was just under a billion dollars. And if the indexes decline 30 percent, the liability obligations balloon to $2.7 billion.
“So, if the indexes are down 60 percent, would Berkshire’s obligation be close to 5 1/2 billion dollars? Does that math seem reasonable? And are there any loose ends or open exposures associated with — ”
WARREN BUFFETT: No, they — we — between 2004, I think, and 2006, I think we wrote 48 — maybe 50 contracts — something like that.
The shortest was 15 years. The longest was 20 years. And we received, as I remember, roughly $4.8 billion, which we were free to do with what we wanted. And we agreed to pay based on where one or more of four indices were selling for, at the time of expiration. They were so-called European style puts, where they’re only payable based on one date. And we did not have — with a small exception — we did not have to put up collateral, which was part of the deal.
And we’ve had that $4.8 billion — we probably had an original nominal value of something over 30 billion, maybe 35 billion — that’s if everything went to zero. I mean, if the Dow Jones went to zero, the FTSE went to zero, and the Nikkei and so on.
A number of those have run off. So, we now have about 14 billion, nominal. We have something less than half left. We haven’t paid out anything significant. We bought back a few of them.
If everything went to zero, we would owe 14 billion. If everything were to sell at the same price it was selling for on March 31st, I think the number is some — I think it’s somewhat less than we carry as a liability on the balance sheet, which is two-and-a-fraction billion.
So far, so good. I mean, we’ve, had the use of a lot of money, and the outstanding potential of them is, if the market went up a lot, we wouldn’t have to pay anything, and if it goes down some more, we have to pay more than a couple of billion, but we’ve had the liability set up for that.
But so far, so good, on that. And it is not anything that causes us any problem. They come due — the final one — I think comes due sometime in 2023. I think there’s — I think maybe 20 or 25 percent of them come due late this year.
And so, it’s — there’s nothing — the questioner doesn’t really understand about them, I can tell by the question — and there’s no surprises there. There’s — there’s no way that some liability could double up on us, except based on — except relating to where those indices close at the expiration of a group of different puts, which, like I said, have been more than cut in half. And we’ve done very well on it.
Key to that —
BECKY QUICK: Warren, you mentioned a few minutes ago that you —
WARREN BUFFETT: Well, I was just going to say, key to that was — with just a couple of tiny exceptions — we did not — we did not agree to put up collateral. We never would have gotten ourselves in that position, and —
That was — when we made the deals, we would just would not get ourselves in that position. And we never, never, will, where on a given date, we could have some tremendous obligation that would come due that we weren’t counting on getting — having come due.
I’m done, then, Becky, yeah.