One of the reasons why the bets have worked, and why Berkshire has since stopped making them, is that it was able to agree very large derivative contracts where it received all the premium up-front, and then did not have to post collateral. Any payment only comes due when the contracts are unwound or expire.
Simply stated, Berkshire appears to have enjoyed tremendous, and perhaps unique, advantages when it came to selling the derivatives from which the float (and thus the edge’s foundation) comes. Without those advantages in place, the whole thing may not have been possible to begin with. And the true key is that those advantages may be reserved for Buffett and, maybe, just a handful of other people. Enjoying those advantages , in other words, can lead to vast competitive benefits.
Those three key factors that may not have been available to all market players are:
(1) very soft collateral requirements,
(2) utter disregard for quarterly earnings volatility, and
(3) the ability to find buyers of sizable and often heterodox contracts.
Other players may have faced much more stringent collateral requirements. Other players may care much more about cont inuous earnings turbulence. Other players may not be able to sell such contracts. Buffett is very clear about it: If he had to face “normal” collateral rules, he would not have entered into the trades.
Simply stated, Berkshire appears to have enjoyed tremendous, and perhaps unique, advantages when it came to selling the derivatives from which the float (and thus the edge’s foundation) comes. Without those advantages in place, the whole thing may not have been possible to begin with. And the true key is that those advantages may be reserved for Buffett and, maybe, just a handful of other people. Enjoying those advantages , in other words, can lead to vast competitive benefits.
Those three key factors that may not have been available to all market players are:
(1) very soft collateral requirements,
(2) utter disregard for quarterly earnings volatility, and
(3) the ability to find buyers of sizable and often heterodox contracts.
Other players may have faced much more stringent collateral requirements. Other players may care much more about cont inuous earnings turbulence. Other players may not be able to sell such contracts. Buffett is very clear about it: If he had to face “normal” collateral rules, he would not have entered into the trades.
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