Buffett has been more prudent than much of the rest of the financial industry, and he should be commended for that. However, the primary business for Berkshire

Buffett has been more prudent than much of the rest of the financial industry, and he should be commended for that. However, the primary business for Berkshire Hathaway is reinsurance. As such, other insurers pay them to take on the risk that claims will exceed a certain level. If New York got nuked, the reinsurance contracts that Berkshire has written with the property and casualty insurers of the area would be invoked and Berkshire would be forced to assume the bulk of their obligations. The "money you don't have" part of the definition of leverage isn't necessarily money that you must pay back like a loan or bonds; it can also be money that you may have to pay under certain conditions. Writing naked puts and selling reinsurance is the latter. From http://community.reinsurance.org/Data/Leverage/Und%20Lvg%202005.pdf http://community.reinsurance.org/Data/Leverage/Und%20Lvg%202... , we can see that Berkshire's 2005 leverage ratio was 143%. That's fairly low for a reinsurance company, and Berkshire is not highly leveraged. However, I'm still going to maintain that the marginal increase in leverage from the specific derivatives deal I mentioned was rather high. Most insurance companies have noncyclical liabilities (e.g. the mortality rate doesn't increase in recessions) and procyclical assets(e.g. stocks and bonds that fall in recessions). The sale of puts added a procyclical liability, increasing Berkshire's leverage at the margin.