Buffett says derivative values can be misleading

Associated Press | February 28, 2009
By Josh Funk

OMAHA, Neb. (AP) Billionaire Warren Buffett has devoted nearly five pages of his letter to Berkshire Hathaway shareholders to explaining the role derivatives played in the company's nearly $7.5 billion investment losses last year.

Buffett said in the letter released Saturday morning he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor.

Berkshire has received $8.1 billion in payments for derivatives which can be invested until the contracts expire years from now.

But Berkshire has to estimate the value of its derivatives every quarter. Buffett says he supports that mark-to-market accounting, but the formula used to estimate that value can produce absurd results for long-term contracts.

On the Net:
Warren Buffett's 2008 letter: http://www.berkshirehathaway.com/letters/2008ltr.pdf