| "He added that the company recently restructured two of its so-called equity put contracts. Under one of the restructurings, the S&P 500 would have to rise just 13% over the next 10 years for the put to expire worthless. Before that deal, the S&P would have had to rise 72% over 18 years to preclude Berkshire from having to make a payout." http://money. It sounds like Buffett purchased a diagonal spread, buying back the 18-year put he had originally sold and selling a nearer-term 10-year put at a lower strike price. At the recent price around 880, a 72% rise would bring the S&P 500 back up to 1508, which is still below its all-time high of 1576 set in October 2007. Buffett said on CNBC that he "didn't pay a dime" on this restructuring: http://www.cnbc. Given the lower strike price and earlier expiration date, this means that he must have sold MORE puts at the new strike and expiration date than he did originally, which potentially increases Berkshire's risk if the market remains low. I also read that this restructuring was NOT at Buffett's request, but was done at the request of the counterparties. The counterparties with this big current gain on their books, are being told by their risk management departments that they have to buy insurance (CDS) on BRK actually paying out this gain. And that it is the demand from the put buyers that has driven BRK CDS to ridiculous levels. Buffett was very amused by this, said it was not something he had anticipated, and that it made the deal much worse for the put buyers. He said the costs of their BRK CDS were proportional to the amount by which they were in the money on those puts, so counting those insurance costs, they would rather have puts that were not so deep in the money, and so cost much less (or nothing) to insure. --- On Sun, 5/24/09, Sandra McMakin <s.mcmakin@comcast.
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