Today's Wall street Journal has a great cover story titled "Emerging Risks In Bond Insurance Add To Turmoil." The article covers the topic of Insurance Counterparties and their capital problems as well as the down grades they might be facing from credit agencies. I covered these issues in my previous essay titled "Counterparty Risk" and will write more on this over the weekend.
One important takeaway from the article is the problems that Berkshire Hathaway's Warren Buffett faced after Berkshire bought the insurer General Re. General Re evidently had thousands of derivative contracts it had written but after Buffett took control he decided to unwind that business. However because of the complex nature of the contracts the process took years. I quote Buffett from the article, " "We lost over $400 million on contracts that were supposedly" safe and properly priced, " and we did it in a leisurely way in a benign market," Mr. Buffett says. "If we had to unwind it in one month, who knows what would have happened?""
*Disclosure: I have no positions in the names mentioned here; the firm I advise may or may not have positions in these names.
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