Archivo del November, 2012

Spain Is Not Greece (Right?)

Was invited the other day to a panel on Spain´s deleveraging process. Next to me were BBVA´s chief economist and S&P´s head for EMEA sovereign credit ratings. They both espoused optimistic messages: Spain will be ok. Shy that I am when it comes to domestic issues, I machiavellianly chose to muse on the recent Greek debt restructuring and what lessons it may hold for Spain. Greece, you may recall, imposed a 53.5% haircut on 97%+ of its private sector bondholders. Could the same thing happen in the country where I was born? The numbers here, needless to say, would be a tad more dramatic. Spain owes much more money than Greece, so investor losses could be significantly more painful. And not only on bonds: those who sold Spain protection via credit default swaps could also be fatally wounded (outstanding net Spain cds volume is four times what Greece´s was). A big haircut on Spainiard debt could cause ripples throughout markets, in particular when it comes to Euro sovereign debt.
None of my co-panelists believes that such a state of affairs will prsent itself. Spain, they argue, will not follow Greece into haircut-land. But let´s not forget that Greece had to impose haircuts as an inalterable pre-condition to receiving further EU aid. Should Spain finally submit to pressure and become the fourth Euro nation to request a comprehensive bailout, similar conditions may arise.
A haircut need not be a disaster, of course. In fact, it may be argued that investors (creditors) losses would be (should be?) a natural outcome of a crisis such as the current one. No big surprise there, no need for shock. What can be more debatable is whether only private investors should feel the dagger, or rather whether public creditors (the ECB and the like) should also incur setbacks. In the case of Greece, the latter were utterly spared, while the former were mercilessly subjugated.

Spain is not  Greece, but it´s nonetheless useful to understand what happened in the Hellenic Republic. Just in case.

 

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Warren Buffett´s big derivatives trade suffered almost no losses in Q3 2012

Mark-to-market (accounting) losses suffered during the quarter amounted to just $118 million, compared with $2,443 million a year earlier.
Those of you who attended the FL Seminar “The Big Short” may recall that Berkshire Hathaway (Mr Buffett´s firm) several years ago sold a ton of equity index put options and a ton of credit protection through credit default swaps. Buffett raised about $7 billion in premium upfront, which he most likely invested in the markets. He hopes that any eventual cash losses on his short derivatives positions will be more than compensated by the returns earned on those premiums (“float”, in the insurance jargon). Through the derivatives, Buffett is exposed to the folllowing risks: declining stockmarket prices, increasing stockmarket volatility, enhanced probability of credit problems, actual credit problems. Most of these derivatives have long maturity dates and Berkshire won´t have to make almost any cash payment (if at all) until those dates. Berkshire seems not to be beholden to its derivatives counterparties through collateral agreements, so temporary accounting losses would not transform into real losses.
While credit swaps recovered in value in Q3, the equity puts lost another $500 million in value.
Notional amount of the equity puts is $34 billion and that of the credit swaps is $15 billion. The current MTM liability for Berkshire is $10 billion.
Berkshire had total revenues of $117 billion in the first nine months of the year and net earnings of $10 billion.
Derivatives gain/losses go into earnings (these are not hedge products).
So Buffett´s big bet against the Black Swan has had an overall not so bad recent quarter. But, like any other derivatives shorty, he continues to expose his firm to the “rare” event making an appearance and blowing up those who dared challenge it.

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Welcome to the new Finance Lab blog!

Welcome to the new Finance Lab blog!

Pablo Triana, ESADE professor and top expert in Finance is bringing the world of Finance closer to ESADE students and now the general public, right here on this new blog!

Professor Triana and The ESADE MBA are committed to providing  extensive exposure to critical and current topics in this field for participants interested in a career in Finance, with the newly created Finance Lab, aimed at providing sophisticated, up-to-date and highly practical knowledge to students.

The results are clear: intellectual enrichment, competitive advantages and a whole host of new career prospects.

Find out more about the Finance Lab here

 

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