“Mr. Hamman suggested a $1 billion prize for nailing every game in the NCAA tournament. Before coming to terms, SCA and Mr. Buffett, along with his reinsurance-business chief, Ajit Jain, set about answering a tough question: What was the chance of a winner? Mr. Buffett said the odds can’t be calculated.”, Wall Street Journal, February 10, 2014

“I think Warren Buffett is a hypocrite whose long track record of success (and nerdy persona) may be affecting his business judgment. I think it irresponsible to force the shareholders of Berkshire to take on a $1 billion insurance risk for a one-time fee of around $10 million plus or minus. (He should make this bet personally, if he wishes.) Who cares how mathematically improbable his paying out the $1 billion is? Pre-financial crisis models showed the odds (of a crisis) to be astronomically low too and yet it happened. Plus, with 10 million entrants, the connectivity of the web, and supercomputers how do you know for sure there hasn’t been collusion? This is exactly the sort of “tail risk” that prudent financial institutions are not supposed to be taking on post-crisis. And no it is not the same as insuring against unpredictable hurricanes, typhoons, and earthquakes, as Buffett has claimed in an earlier article. Those events have occurred (and the risk can be modeled to a much greater extent), the insurers have earned billions in fees and will continue to do so, and there is a social value to this type of insurance (protecting people and institutions from catastrophic risks). A “Final Four” insurance contract is not that dis-similar to a lot of derivative securities he says he despises: “Weapons of Mass Destruction”. While I am at it, does anyone else notice that Buffet seems to be enamored with cute women? Notice how Buffett seems to love the attention of the ladies at CNBC? Was he the nerd who never got the cute girl when he was young? That is pretty harmless, but it seems to me this tendency has now become a management risk for Berkshire shareholders. He has hired a cute, very young lady, with virtually no experience, and appointed her Chairman of some of the major corporations he has purchased. I don’t care how well he has performed as an investor and how well Berkshire has performed. It seems to me, that he is taking on risks that are not prudent; both insurance and management risks. Has this always been the case or is this new since he became a celebrity?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Buffett Bails, Yahoo Left at the Court In $1 Billion ‘March Madness’ Contest

Updated Feb. 10, 2014 12:09 a.m. ET

Last year, Yahoo Inc. drew up plans to offer $1 billion for predicting the winner of every March Madness game. Then, a nearly identical offer emerged, backed by Warren Buffett.

Now comes a lawsuit, opening a window into the obscure business of such prizes, and the insurance companies that make them possible.

The dispute in state court in Dallas is narrow: Does Yahoo owe Dallas-based SCA Promotions roughly $4 million for canceling the Internet company’s plans once Mr. Buffett backed a separate contest?

Companies like SCA work with sponsors like Yahoo to offer prizes for stunts with long odds, such as half-court basketball shots or fan field-goal kicks. Then, the sponsors pay a much smaller sum to insure against the possibility of actually having to pay out. The contests often involve intricate calculations of odds for rare human achievements.

The following narrative is based on interviews with Mr. Buffett and the president of SCA, Bob Hamman, who both gave a similar account of the events, along with court papers filed in connection with the suit.

The story began last summer at Mr. Buffett’s lunch table, when longtime bridge buddy Mr. Hamman mentioned the big prizes he has helped organize and underwrite for unlikely feats, like $1 million for irrefutable evidence of Bigfoot.

Mr. Buffett, whose Berkshire Hathaway Inc. insures such offers, was intrigued. He and Mr. Hamman began discussing other deals. Mr. Hamman suggested a $1 billion prize for nailing every game in the NCAA tournament.

Promotional contests pegged to a perfect bracket have proliferated in recent years, typically for rewards between $1 million and $10 million. This bet would raise the stakes dramatically.

After the lunch, Mr. Hamman started assembling a deal. SCA would strategize and coordinate. Mr. Buffett’s Berkshire Hathaway would take on the risk, and earn a fee for doing so.

Before coming to terms, SCA and Mr. Buffett, along with his reinsurance-business chief, Ajit Jain, set about answering a tough question: What was the chance of a winner?

Mathematically, there will be more than nine quintillion possible outcomes, once the NCAA field is set next month. But not all will be equally likely. In the early rounds of the 68-team tournament, the teams viewed as the strongest are paired against the weakest, mismatches that can lead to thrilling upsets and disrupt even sophisticated prediction models. (Mr. Buffett’s challenge, like most, ignores the four initial “play-in” games, requiring the winner to correctly predict 63 games.)

Even among statisticians, there is little consensus on how to set the odds for a perfect bracket. ESPN has hosted a bracket contest for the past 16 years, drawing more than 30 million entries, collectively. No one has picked a perfect bracket, a spokeswoman said.

Mr. Buffett said the odds can’t be calculated. “Any math professor who says the odds are a quintillion to one, they better have tenure,” Mr. Buffett said Wednesday, adding that the professor shouldn’t apply at Berkshire’s insurance department if he loses his university position.

Last fall, Messrs. Buffett and Hamman took the idea to Yahoo, a big player in sports fantasy leagues, to negotiate a fee. Mr. Buffett’s team worried about a surge of entrants, up to 10 million. With more entrants, the chance of a winner increases.

Mr. Buffett wanted a premium for more entries. The two sides couldn’t reach an agreement and Mr. Buffett withdrew from the talks.

Some say he was needlessly fretting. “I wouldn’t even bother insuring it,” said Andrew Becker, an astrophysicist at the University of Washington. Mr. Becker estimates the odds of a winner are so slim that the premium should be less than a dollar.

Mr. Hamman of SCA had a different worry: computer hackers. “A significant percentage of the risk is just a data-security problem,” he said.

For its part, the NCAA, the governing body of college sports, fears that big bucks will tempt participants to alter the outcome of games.

“Two fundamental principles of college athletics are the integrity of the game and the well-being of the student-athletes,” an NCAA spokeswoman said, adding that the contest “poses a potential threat to both of these important values.”

Mr. Hamman would have preferred to work with Mr. Buffett, his bridge friend of many years. But he kept negotiating with Yahoo, which eventually agreed to pay him $11 million to insure against a winner. according to the SCA lawsuit. Mr. Hamman worked with other deep-pocketed insurers to mitigate the risk.

In late November, Mr. Buffett attended a Detroit event sponsored by Goldman Sachs that included Detroit Mayor Dave Bing, a former NBA star. Mr. Buffett mentioned the $1 billion promotion to Dan Gilbert, founder of Quicken Loans Inc. and owner of the NBA’s Cleveland Cavaliers.

Quicken and Berkshire reached a deal; Mr. Buffett declines to discuss the fee. Mr. Hamman was caught off guard when Mr. Buffett and Quicken released details of their contest on Jan. 21. The contest is limited to 10 million entries. Quicken reserved the right to expand the pool.

Yahoo executives cooled on the idea once they learned Mr. Buffett was backing a competing contest, according to people familiar with the deal. On Jan. 27, Yahoo canceled its plans, according to Mr. Hamman.

A Yahoo spokeswoman declined to comment.

Yahoo had already paid $1.1 million to SCA, according to the suit. The contract specifies that Yahoo would have to pay half of the $11 million fee if it canceled the contest. Yahoo claims SCA violated the contract by breaching the confidentiality of the deal, according to a letter sent by Yahoo.

SCA is asking for $4.4 million in the suit, which it says is what remains to be paid beyond the $1.1 million.

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Posted on February 10, 2014, in Postings. Bookmark the permalink. Leave a comment.

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