Mr. Buffett makes some dangerous bets - and the obscure Mr. Summers (Secretary of the Treasury)

Mr. Buffett acts very much like a famous saying about gurus - "Do what the Guru says but do not do what he does". He sold mostly in 2006 puts on global stock indices worth nominally $40 bil., collecting roughly $5 bil in premium with a paper loss of $7 bil. (net about $2 bil.). He condemned derivatives as instruments of mass destruction? He also insured junkbonds worth close to $8 bil. with substantial losses? His bet is smarter than it sounds as the $5 bil. will be worth roughly $13 bil. (taking a 5% yield if invested in zero's) at the end of the option period, since they can only be exercised at maturity. In case we get a market like the Nikkei, which trades at roughly 20%, 19 years later he still will lose around $20 bil. As that happens only once in a century, he might have bet on the probability it will turn out different. He must be sweating though as he should be aware of how serious the situation is. But weirdly enough also safe as that investment is the circumstance that governments are at the brink of producing hyperinflation, which would raise the indices nominally.

Excerpt:

http://www.cnbc.com/id/27596402

Berkshire Hathaway Q3 Operating Earnings Fall 19% To $1335/Share

Companies:NRG Energy, Inc. | Berkshire Hathaway Inc.

Berkshire Hathaway's third quarter operating earnings fell 19.3 percent to $1,335 a share from $1,655 a share in the same period the year before.

That's below the average forecast of $1429 from the two analysts following the stock, as tracked by Thomson One Analytics.

Operating earnings for Berkshire's insurance-underwriting activities took a big hit, falling to $81 million from $486 million in the year-ago quarter.

Net earnings plunged 77 percent to $1.06 billion ($682 per share) from $4.55 billion ($2942 per share.) A big factor there are investment and derivative losses of $1.01 billion, compared to gains of $1.99 billion in last year's quarter. That year-ago period got a boost from Berkshire's profitable sale of PetroChina stock.

The derivative portion of the gains and losses are on paper only. Buffett has said the derivative contracts held by Berkshire will eventually be profitable, but right now they're losers.

The news release talks about how Berkshire is getting investable income from derivatives that are generating paper losses.

"At the end of the third quarter, we had a liability of $6.72 billion for equity index put option contracts for which we have received cash payments of $4.85 billion. This means our recorded loss to date is $1.87 billion though the first payment that could be triggered would be in 2019, and the average maturity is 13.5 years. In the meantime all of the $4.85 billion can be invested by Berkshire."

In a filing with the SEC a few minutes ago, Berkshire says it made its latest purchase two days ago, on October 28, paying $79.65 a share. That puts the purchase price at just under $66 million.

Burlington hit an intraday low of $77.58 on Tuesday, but closed at $83.45. Today (Thursday) it finished the regular session at $86.59.

That means the stock is up 3.8 percent close-to-close, and up 8.7 percent from Berkshire's purchase price.

So, the shares Berkshire bought two days ago for about $66 million are now worth over $71 million, on paper.

But the market value of Berkshire's total stake in Burlington hasn't been doing all that well.

Excerpt from NYT

Obama’s Possible Treasury Choices Draw Criticism

By JACKIE CALMES and BEN WHITE

Published: November 7, 2008

CHICAGO — Former Treasury Secretary Lawrence H. Summers, a member of the new economic advisory board that met with President-elect Barack Obama here on Friday, is also a leading candidate to be the next Treasury chief.

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Former Treasury Secretary Lawrence H. Summers’s policies and his tenure as Harvard president have surfaced as issues.

The New Team

A series of profiles of potential members of the Obama administration

Dennis Brack/Bloomberg News

Timothy F. Geithner, also seen as a Treasury candidate, has been criticized for a link to policies of the current secretary.

That prospect has critics of Mr. Summers, particularly on the Democratic Party’s left, reviving old controversies in hopes of dooming his chances. In the days since Mr. Obama was elected, liberal bloggers have sought to ignite an online opposition by recalling the rocky five years Mr. Summers spent as president of Harvard, where he angered many women and blacks before resigning in 2006.

Reaching back farther, other Web sites have resurrected a 1991 memorandum that Mr. Summers signed as an economist at the World Bank that suggested parts of Africa could be repositories for toxic waste.

Excerpt from

http://en.wikipedia.org/wiki/Lawrence_Summers

Born in New Haven, Connecticut, on November 30, 1954, Summers is the son of two economists – both professors at the University of Pennsylvania – as well as the nephew of two Nobel laureates in economics: Paul Samuelson (sibling of father Robert Summers, who, following an older brother's example, changed the family name from Samuelson to Summers) and Kenneth Arrow (his mother Anita Summers's brother). He spent most of his childhood in Penn Valley, Pennsylvania, a suburb of Philadelphia, where he attended Harriton High School.

World Bank Pollution Memo

Main article: Summers Memo

In December 1991, while at the World Bank, Summers signed a memo written by staff economist Lant Pritchett which argued among other things (according to its author; the full memo is not public) that free trade would not necessarily benefit the environment in developing countries. Pritchett also drafted what he referred to as an ironic aside to the memo which Summers also signed. The aside was leaked to the press and stated that, developed countries ought to export more pollution to developing countries because these countries would incur the lowest cost from the pollution in terms of lost wages of people made ill or killed by the pollution due to the fact that wages are so low in developing countries. The aside went on to state that "the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that"^[14] Public outcry ensued when the aside was leaked.

The AIDS Drug Scandal with HSPH

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In December 2003, the Bush administration formally commenced a program to combat the AIDS pandemic devastating much of the developing world. The President's Emergency Plan for AIDS Relief, or PEPFAR, committed $15 billion over five years to that task. Two Harvard University teams submitted grant applications—one from the Harvard School of Public Health (HSPH) and the other from Harvard Medical School (HMS). In February 2004, Harvard learned that the HSPH had been awarded one of four initial PEPFAR grants, and that the medical school's application had been rejected.

The HSPH grant was to be used to treat AIDS patients in Nigeria and Tanzania with life-prolonging drugs, and to train health workers in Botswana. Dr. Phyllis Kanki was the leader of the HSPH team. Summers was concerned about potential risks—lawsuits and the possibility of AIDS drugs hitting the black market—especially since he wasn't controlling the grant.

Summers decided to take control of the grant. He believed that despite Kanki's accomplishments and extensive experience with HIV/AIDS programs in Africa, she was unfit to lead the mammoth grant (she is a veterinarian, not a medical doctor).

Support of economist Andrei Shleifer

Harvard and Andrei Shleifer, a close friend and protege of Summers, settled a $26M lawsuit by the U.S. government over the conflict of interest Shleifer had while advising Russia's privatisation program. Summers' continued support for Shleifer strengthened Summers' unpopularity with other professors:

"I’ve been a member of this Faculty for over 45 years, and I am no longer easily shocked," is how Frederick H. Abernathy, the McKay professor of mechanical engineering, began his biting comments about the Shleifer case at Tuesday’s fiery Faculty meeting. But, Abernathy continued, "I was deeply shocked and disappointed by the actions of this University" in the Shleifer affair.

In an 18,000-word article in Institutional Investor (January, 2006), the magazine detailed Shleifer’s alleged efforts to use his inside knowledge of and sway over the Russian economy in order to make lucrative personal investments, all while leading a Harvard group, advising the Russian government, that was under contract with the U.S. The article suggests that Summers shielded his fellow economist from disciplinary action by the University.^[22] However, the case actually was filed in 2000, the year before Summers became Harvard's president. Summers' friendship with Shleifer was well known by the Corporation when it selected him to succeed Rudenstine and Summers recused himself from all proceedings with Shleifer, whose case was actually handled by an independent committee led by Derek Bok.

Mr. Summers has an obscure track record, this involvement of Harvard into the Russian privatisation programm speaks volume as it was basically making some people very rich with handing over substantially undervalued assets to some obscure people who more or less paid nothing for it but now are the so-called oligarchs in cooperation with Mr. Yeltsin. He is definetely not a man of 'change'.