Author: JD

BY STUART PFEIFER Think you can guess the winners of all 67 games in this spring’s NCAA men’s basketball tournament? Warren Buffett is betting a fortune that you can’t. In what may be the largest sports bet in history, Buffett’s Berkshire Hathaway Inc. will pay $1 billion to the person who correctly guesses the winner of every game during the March Madness classic. Quicken Loans Inc., the contest sponsor, is paying an undisclosed premium to Buffett for his promise to pay the winner — if there is one. “This will be the most fun. Just imagine if there’s one person left at the last game,” Buffett said Tuesday. “I will go to that final game with him or her and I’ll have a check in my pocket…. I think we’ll be rooting for different teams.” The odds of correctly forecasting 67 games are extraordinarily thin. Even a skilled handicapper would have about a 1-in-1-billion chance of completing a perfect bracket, said Ezra Miller, a Duke University mathematics professor. Buffett said the idea for the contest was his. He said he was talking sports with Quicken Loans’ founder and chairman, Dan Gilbert, in November when he pitched the idea of insuring a $1-billion prize for a perfect NCAA bracket. Quicken and Berkshire announced the contest Tuesday. It will open March 3 to the first 10 million households that sign up online. The winner will have the option of taking 40 annual payments of $25 million or a lump sum of $500 million. Multiple winners would split the money. Quicken also will award $100,000 each to the contest’s 20 most accurate brackets to use toward buying, refinancing or remodeling a home. Other companies have offered $1 million for a winner, but no one has come close to Buffett’s idea — except Buffett himself. In 2003, he backed a Pepsi Cola-sponsored $1-billion contest that involved numbers printed in bottle caps and a monkey drawing the final numbers. Berkshire, which owns a stake in rival Coca-Cola Co., ended up off the hook: There was no winner. Buffett said one of his insurance companies is writing the Quicken policy at a price that neither he nor Quicken would disclose. “Dan would say it’s too much, I would say it’s too little,” Buffett said of the premium. He said the deal is not that different from many other insurance transactions his companies conduct. He evaluated the potential risk and then set a premium that gives him an edge against the probability of having to make a payout. “We own Geico. We insure 10% of all the cars in the United States. You evaluate the risk and you charge a premium of what you think is appropriate,” he said. “Overall, if you’re pricing it right, you should end up with a profit.” Miller, the Duke professor, came up with his 1-in-1-billion probability through an equation that placed games into categories ranging from close games that could go either way to near locks. Based on his finding, Buffett would need to charge a premium of about $10 million to break even against his expected results, Miller said. “If I were Warren Buffett, anything over $10 million, I would probably do it,” Miller said. “If $1 billion were going to ruin me, I wouldn’t. But it’s not going to ruin Warren Buffett.” Buffett said his company is big enough to survive such a hit. “We’ve lost more money in a given event before,” Buffett said. “Hurricane Katrina probably cost us $3 billion. “We will put more at risk in a given insurance transaction than anyone in the world. But we have more capital than anyone in the world.” Jay Farner, Quicken’s president and marketing chief, said his company would benefit from the contest in two ways — news coverage and access to the email addresses of millions of potential customers. Anyone who enters the contest will have the option of receiving email offers from Quicken, he said. “The more familiar Americans are with Quicken Loans, what we’re really about, the higher probability they’ll close a loan with us,” Farner said. “We wouldn’t be investing the money, energy and time if we didn’t think it would be worthwhile.” Berkshire Hathaway investors can take comfort in some news Buffett disclosed Tuesday. He said he would probably strike a deal — at significantly less than $1 billion — with anyone who gets deep into the tournament without missing a game. “If you get to the Final Four with a perfect bracket, I may buy you out of your position,” Buffett said. “I’ll make you an offer you can’t refuse.” Buffett said Quicken would run the contest, but Berkshire would be in charge of security. “There’s a long history of people trying to make sports bets after the game is over,” he noted.