ERICOPOLY

Rabbitisrich wouldn't start out by selling puts on WCOM. The running insult here is that you assume we are all stupid, and that you must enlighten us.

For a minute there I didn't think you had a sense of humor. Good on you.

There is somebody else that has been talked about recently on this board that tried to talk like Warren in his letters, but it ultimately turned out that the character of the man shined through.

I can't wait to hear it. I'm a big boy, please tell me what "volumes" it spoke.

Citi has the lowest commercial real estate exposure -- only 3% of total loans. Based on the theory that consumer losses peak first, Citi is a well capitalized survivor of the consumer loan loss peak, but one with little exposure to the next debacle.

I guess even the assets:loans ratio isn't that meaningful. Like you suggest, the issue is really more one of loan quality, and past history is enough to scare you away from this company. The reason why I say that assets:loan ratio isn't that meaningful is that this is after all the banking industry we're talking about. A bank can have a very high amount of absolute leverage (12:1) while taking on very little risk. Imagine if the loan book of a bank today were entirely comprised of real estate first mortgages where the buyer put 30% down. The bank could lever that 12:1 without much risk at all. Even if we saw yet another 30% decline (after already suffering one the past few years) the bank would still be making money as it is the borrower losing that 30% of equity, not the bank. Berkowitz (in January 2010) stated that "we are in the spring of a recovery". That's why he owns Citigroup -- he believes the economy has already crashed, and he also stated that Citigroup is "overcapitalized". That's not an unreasonable viewpoint if you start with the premise that the economy is truly in recovery. Sprott on the other hand doesn't agree with this macro view.

You are forgetting to add back in the loss reserves. They offset some of the assets that you include in your tangible equity to assets ratio, so I think it's fair to include them in your ratio. The ratio seems to only serve to give you an idea of the leverage involved -- I think that's the point right? So the loss reserves help mitigate the risk. The higher the loss reserves as a percentage of total assets, the more it mitigates the risk. When you say 5% ratio, it implies 20:1 leverage. But they have a loss reserve of 6.7% (I think that's just for CitiCorp but I could be wrong). I believe their leverage is more like 12:1 -- accounting for the loss reserve.

I guess Goldman Sachs doesn't care, they upgraded Citi: http://wallstreet.blogs.fortune.cnn.com/2010/05/24/citi-rallies-on-upgrade/?source=yahoo_quote

Consider that it wasn't too long ago where for every put you sold at-the-money in SHLD you collected enough premium to purchase two calls at-the-money. This gave you 100% upside while only taking risk of 50% downside. Moral of the story: never dismiss an asset class.

It's fairly arbitrary isn't it.

The past few weeks I've watched my YTD gains go from +27% to +9.8% for the year. If only I'd locked in that 27% I would be a good deal better off. However if I were bearish enough to do that I doubt I would have racked up the 27% gain in the first place. So it's difficult to say if I cost myself anything.

Obviously he didn't intend for the stock price to fall after putting out the compensation proposal, but usually the parasite class-action guys will try and say he did. It might be true that he didn't intend for the stock price to fall, but I have trouble believing that he did not expect it to fall. I expected it to fall. Who here didn't expect the share price to fall? His compensation proposal destroys intrinsic value per share... there is only one way you can expect a stock to react to that kind of news.

The Q1 2010 conference call transcript addresses this uncertainty a bit: Matt Troy – Citigroup The timeframe, is it possible to assume that you could have addressed the majority portion of that $140 million by the end of this year? I know obviously there are various moving parts and pieces, market variables where rates are, what the markets look like. In terms of timeframe is it reasonable to assume that 2010 will see the majority of that addressed or is it more of a 2011 solution? Gerry Wang We’re very confident that this will be taken care of before the end of this year but one thing I want to highlight to you and to the audience here; what we are trying to do is not just taking care of the equity requirements starting from mid year 2012 what we want to do is really to create additional fire power for the company to take care advantage of the opportunities that arise from the distressed situations that I have just mentioned in terms of the unavailability of financing for some of the new building vessels that are under construction or that have already been finished in terms of construction. That’s our set plan and we’ll continue to be very diligent and to make sure that whatever we do is not going to dilute our existing shareholders. They also provided a forecast for 2013, after all the ships have been delivered: We expect to exceed approximately $700 million for year of contracted revenues, $500 million of EBITDA and $300 million of distributable cash flow starting from the year 2013 when all our new builds are delivered.

I guess they put the company ahead of lining their own pockets partly because share dilution would make a .475 dividend harder to attain. I have a lot of SSW now -- I started buying a little below $10 and bought the rest up to an average of about $11. I don't understand why it's so cheap. It's not like it's hard to see the dividend power -- they say in the latest quarterly release that $40.368m cash was generated "available for distribution". On today's price that's a 22% yield.

Some of you guys run partnerships and are already paid on something like 25% of profits over 6% hurdle. (similar to Buffett partnership) If this goes through and you continue to hold it, then imagine what your partners are left with after Sardar's 25% tax and your 25% fee. Holy smokes! It's like a fund of funds at that point. An underlying 15% rate of book value growth will translate to only 10.85% realized by your partners.

Too funny!

Warren Buffett offered his strongest defense yet of Goldman Sachs, saying he doesn't believe the investment bank acted improperly in a sale of subprime-related securities at the heart of a Securities and Exchange Commission fraud case. http://money.cnn.com/2010/05/01/news/companies/buffett_goldman.fortune/index.htm

Today I listened to the replay of the conference call. Very interesting tidbit from Brad Martin: On an accident year basis they wrote a CR of 95% if you exclude ALL cat losses. This compares favorably to q1 2009 where they wrote 96.1% on an accident year basis, excluding all cat losses. Translation: They improved the CR by 1.1 points, exclusive of that which is beyond their control. They are hitting the ball better, fielding it better. Underwriting improved. Lumpiness in cat losses hides this underlying trend. They also said that they have $2.3b at holdco right now and will still have $1b after buying ZeniTh. Prem said high CRs at Zenith due to extremely soft workers comp market in California. Zenith wrote $1b a few years ago and now writes $400 -- so CR crushed by expense ratio.

If they have pricing power then inflation may help them up until the point it is time for them to refinance their debt. Then inflation will kill them. Inflation of course is good for high debt companies (with appreciable assets) over the near term as their assets grow in value (while their liabilities in the form of debt stay fixed), yet it is terrible for high debt companies when it comes time to roll over that debt. I think many forget to factor in refinance rates in high inflationary environments. One of the nuances I'm thinking of is that they already pay extremely high rates on their debt, much higher than average corporate debt costs -- my preliminary thinking is that this is partly based upon a thin margin between their total debt levels and what their assets would conservatively sell for at auction. Inflation widens that gap between liquidation and total debt. So if interest rates on corporate debt were to rise 700 bps, theirs might not rise as much. Or maybe their debt would go up just as much -- perhaps what's recoverable at liquidation matters less to investors than I suspect. Or maybe inflation would cause the opposite effect -- put such a squeeze on what corporations could afford to pay that instead of getting increasingly more money for sale of assets at auction, the bidders would simply be getting an increasingly terrific deal in real terms?

All right, so what you are saying is that you want lower CRs as a measure of margin of safety. Currently, at about 5% yield the insurance operations break even around CR of 115%. But they've been writing 105 CR despite some very nasty cat years. I imagine to hit the break even point of 115%, you could rewrite history of the past decade to include a disaster nearly as large as the Chilean quake EVERY SINGLE QUARTER. Fortunately, that 5% yield is just a conservative number and their actual returns were far in excess of that -- so they still made money on their insurance ops despite a Chile sized loss EVERY quarter. It looks to me like their insurance business isn't really that bad, and that there is a fairly large safety margin before taking losses.

It feels like LVLT would benefit enormously from inflation. Do I understand it correctly that the maintenance costs are low, that replacement costs and barriers to entry are extremely high? Further, long term demand is dependable and growing? Isn't their asset a real one and aren't they levered a very high amount against that asset? Would rising demand long term bring about pricing power to help them increase revenue at least in line with inflation? Would a high interest/inflation environment make it tricky for competition to find the money to lay new fiber? Or perhaps I'm ignoring a core reason why inflation would serve to hurt them instead? Thoughts?

Well, let's go back to the beginning of time (when they started Fairfax) and let's ask whether shareholders would have been better off in a hedge fund run by Prem. A couple of things go through my head. 1) book value per share for Fairfax has compounded far in excess of the pre-tax returns on their stock picking 2) the hedge fund therefore needs to use leverage to beat the book value growth rate Now, let's discuss these 105 CR's that you seem to think are worthless today... On $4b of underwriting this costs them 200m a year. But they have roughly 12b a year in float. For their hedge fund to invest 12b in bonds and have it only cost them 200m a year, they will need to borrow money at 1.67% per year. Where are they going to find money at 1.67% per annum interest cost? I won't wait for the answer, it's a rhetorical question. And suppose somebody did offer them some crazy low rate like that... is it callable? As in, a margin call? Who borrows money at 1.67%? Name a single hedge fund.

You need to look at the benefit of incremental float. I am not saying float has no benefit for fairfax. Say Fairfax is able to choke the 4b written at 105 CR by 25% so that you are writing only 3b at 100 CR. If they exhibit this level of discipline the float would be about 9b instead of 12b. (Calculating a crude average float tail of 3 years - 12b float/4b written). By giving up 3b float fairfax is able to save 200m. So the cost of incremental float is 6.7% after tax (200/3000) - so we need 10% pre-tax returns on the incremental float that need to be generated from the bond portfolio. Is this worth the cost and risk?0 Vinod 105 CR on 4b -- that 200m that I'm talking about is pre-tax. You seem to think it's after-tax... Do I have it wrong? I believe the hurdle on the incremental 3b of float is only 6.67% pre-tax. Not 10% pre-tax. When I worked at Microsoft, it amazed me that they launched product lines that never made money. I could suggest to Mr. Ballmer that we should just stop doing this... I mean, why launch products that won't make money? My point is that... nobody really belives that Fairfax intentionally writes an extra $3b of business on purpose where they need to make more than 6.67% investment performance to make it pay off. I'm sure anyone admitting to doing this would already have been dealt with by Prem. If they aren't doing it on purpose, then it's not going to be easy to identify exactly which policies to cut. One year it's a quake in Chile, the next year a windstorm in Europe, another year it's 9/11 and another year it's Katrina. Which lines do you cut... all of them? They each contribute equally. Next year it will be a hurricane in Hawaii or a quake in California. Maybe it will come again this quarter. I think it's whack a mole, where they can't just run in there and surgically cut out 3b of the most costly policies.

When you have CR of 105 on 4b written, you lose 200m to underwriting. But when you also are making 5% yield on 12b float, you wind up with 600m income. This nets out to 400m a year in profit from insurance operations. Some people think they are losing money from their insurance operations but I'm not in your club.

Cardboard, Regarding that pond... I found some facts on C&F's product mix. They have a much lighter mix of the business where Chubb has it's best CRs (Property & Multi-peril) In 2009 gross premiums written at C&F were $863.8m. $87.4m was in property and $81.5m was in multi-peril. So that represents only 19.5% of their business. Chub wrote $1,121m in Multiple Peril (85.8% CR) and $1,264 in Property and Marine (83.3% CR). That's 51.18% of their total $4,660m commercial business! Remember what I posted before about Chubb (look at where their sub-90 CRs come from): Chubb's 4 commercial classes of business: Multiple peril (85.8% combined ratio) Casualty (96.7% combined ratio) Workers' comp (92.7% combined ratio) Property and marine (83.3% combined ratio) Total commercial (89.9%) Also, I discovered that 23% of Chubb's market is "international" (South America, Australia, Asia). Don't know whether the pricing is better in those markets, but it looks pretty good in Asia judging by what Fairfax Asia produces.