November 21, 2008 / 8:26 PM / 11 years ago

SEC asked Buffett's Berkshire for derivative data

NEW YORK (Reuters) - Warren Buffett’s Berkshire Hathaway Inc (BRKa.N) (BRKb.N) provided details to the U.S. Securities and Exchange Commission on how it values what has so far been a money-losing $37.04 billion derivatives bet, after the regulator asked for better disclosure.

Warren Buffett, CEO of Berkshire Hathaway, addresses The Women's Conference 2008 in Long Beach, California October 22, 2008. REUTERS/Mario Anzuoni

The SEC completed its review on October 7 without further comment, four days after Berkshire said it did not need to buy equities that underlie its derivative contracts. On June 4, the SEC had demanded “a more robust disclosure” of factors that Berkshire used to value the contracts.

The SEC released correspondence between Berkshire and the regulator on Friday, two weeks after Berkshire said more than $1 billion of losses on derivatives led to a 77 percent overall profit decline at the Omaha, Nebraska-based company.

Buffett’s derivatives bet has faced much scrutiny from analysts and investors this year. They have led to paper losses for Berkshire, and Buffett, perhaps the world’s most admired investor, has previously called derivatives “financial weapons of mass destruction.”

Berkshire's derivatives could require the company to pay up to $37.04 billion between 2019 and 2027 if the Standard & Poor's 500 index .SPX and three other stock indexes were lower than when Berkshire entered the contracts.

The company obtained about $4.85 billion of premiums upfront, which Buffett may invest as he wishes.

Buffett has said he expects the contracts to be profitable. But falling equity values had by September 30 forced Berkshire to write down $6.73 billion on the contracts. Losses have almost certainly mounted since then as stocks worldwide tumble.

On July 3, the newly released correspondence shows, Berkshire Chief Financial Officer Marc Hamburg told the SEC that the company’s model to value the contracts was based on such factors as equity prices, interest rates, dividend payouts and currency fluctuations.

“Berkshire believes the two most significant economic risks relate to changes in equity prices and foreign currency exchange rates,” Hamburg wrote.

Hamburg also told the SEC that Berkshire’s nearly 20 percent stake in Moody’s Corp (MCO.N) did not mean Berkshire could “control or significantly influence” activities at the parent of credit rating agency Moody’s Investors Service.

Connecticut Attorney General Richard Blumenthal in May said he was examining the potential for conflicts of interest arising from Berkshire’s stake in Moody’s and its operation of a bond insurance unit, Berkshire Hathaway Assurance Corp.

In a separate development on Friday, USG Corp USG.N said Berkshire agreed to buy $300 million of convertible senior notes yielding 10 percent from the building materials supplier. USG also sold $100 million of the notes to Canada’s Fairfax Financial Holdings Ltd (FFH.TO).

Berkshire owns a 17.2 percent stake in USG. Shares of USG rose as much as 30.7 percent on Friday.

Berkshire Class A shares rose $3,000 to $80,500 in late afternoon trading on the New York Stock Exchange. Their record high is $151,650 set last December 11.

Reporting by Jonathan Stempel; Editing by Gary Hill

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