Warren Buffett's challenge for future financing

as foreseen by the brilliant Andrew Clavell:

... a put written by BRK without collateralisation is worth less than a fully collateralised put by an amount equal to the notional of the put times the difference between a risk free zero and and a zero valued at BRKs credit spread. With a BRK credit spread of 50bps our $19bn credit-risked put is worth 17.2bn, but with current CDS levels of, say, 400bps the credit-risked put is valued considerably less than $10bn! (1)

It will be interesting therefore to see if BRK choose to mark the present value of the puts discounted at their own credit spread in much the same way as banks have realised mark to market gains on their fixed income liabilities as their credit spreads have blown out. (I doubt they will).

Whoever actually still owns these puts/BRK credit risk (GS is still my favourite) likely hedged some credit risk on BRK at inception. Not enough! As equity markets fell and implied volatilities have risen, their credit exposure to BRK has increased enormously. The put owner has been forced into purchasing a lot more credit cover in a nasty cross gamma effect. No wonder BRK's credit spreads have gone bananas; they will likely remain volatile as there is a short cross gamma hedger out there for the next 20 years.

Moreover, as a result of the credit hedger's scramble for CDS protection, his mark to market on the original option is potentially worth only half the value had he been fully collateralised. Time to boot this into the level 3 asset pool I suspect, even if most of the pricing inputs are observable in the interdealer market. Note however the converse is also true - if the market rallies and volatility subsides, the put owner will be long way too much CDS protection on BRK.

Meanwhile, Warren sits there like a contented actuary. He has the cash, he doesn't have to post collateral (we hope), he's comfortable that in 18 years the market will be 65% higher, and he claims he doesn't care about the mark to market risk. I'm not sure he thought it through completely though: even if he has no collateral issues, the action of the person covering themselves against his risk certainly does, and that person is screwing up Warren's ability to finance himself elsewhere.