The investment bank has taken a big hit to its bottom line this quarter writing off $1.2 billion, or its entire anticipated profit, reports Reuters. The one-time charge is necessary to reconfigure stock options under new accounting rules.

The bank obviously gives out a lot of stock and needs to account for it now, and not as under the old rules, when the shares vest. Merrill’s regulatory filing also said it will force employees to work more years and retire later if they want to cash out shares granted to them. That is attributed to a compensation committee decision that retaining employees required longer service … Hmmm. Seems kind of obvious, doesn’t it?

But employees can retire now and take their entitlements under the old rules, so the bank is taking a big hit expecting that there will be plenty who want to take the money and run.

The bottom line here is that the new rules about expensing stock options, (often euphemistically called “employee stock compensation”) is going to bite this reporting season.

And in a departure from Warren Buffett’s long-stated policy that derivatives were dangererous, Berkshire Hathaway is offering put contracts on four stock indexes, including three foreign markets, reports Bloomberg. The company reported to the SEC that is is offering 15-20 year contracts on stock indexes. Its total exposure if all markets fall to zero is $14 billion. And says one analyst, only Berkshire’s deep pockets allow it to sell this kind of insurance product.

The news service reports that Buffett’s strategy of buying and holding undervalued companies is no longer working as it once did because the market has become much more adept at ferreting out undervalued companies and so there are far fewer of them around. The boom in private capital has put even big pension funds into the game of reviving unrecognized companies and so it’s no wonder that Buffett is struggling to do what he once did so well. It shows how good his original idea was because so many have copied it.