Democrats Reject Warren Buffett's Bid for Derivatives Exemption

Democrats in the Senate aren't buying what Warren Buffett's Berkshire Hathaway is selling.

Warren Buffett
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Warren Buffett

The Wall Street Journal reports (subscription required) late this morning that Democrats have agreed to "kill a provision from their derivatives bill pushed by Berkshire Hathaway that would have allowed the company to avoid a significant financial hit." CNBC's John Harwood has confirmed that development with his sources, although John notes the finreg debate still has a ways to go in the Senate, and then in House-Senate negotiations.

The government wants to require companies to set aside collateral to cover potential losses from derivatives contracts. A front page piece (free content) in the printed edition of the Journal earlier this morning said Berkshire and Nebraska Senator Ben Nelson have been pushing to "largely exempt existing derivatives contracts" from the collateral rules. The Journal says Berkshire's argument is "it shouldn't be made to redo existing contracts and that it is already healthy enough to cover its obligations."

But even if the White House and Treasury aren't worried about Berkshire's financial health (and they're not saying one way or the other,) they presumably don't want an exemption provision that would keep the government from requiring more collateral from any number of companies that aren't as careful.

Berkshire has a multi-billion dollar derivatives portfolio, including sizable bets that global stock markets won't be substantially lower 15 to 20 years from the time the contracts were written. In exchange for the "insurance" it is writing against a long-term stock collapse, Berkshire collects "premium" payments up front, which it can use for investments.

Berkshire's push for Congress to limit curbs on derivatives may sound surprising, given Buffett's famous 2002 declaration that they are "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

But even then, in the midst of 21 paragraphs about derivatives as systemic "time bombs," Buffett did note that they can help "eliminate bumps for individual participants" and added, "At Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies."

And in his "Ask Warren" appearance on CNBC's Squawk Box in March of 2009, after criticism and concerns over Berkshire's derivatives, Buffett had this to say:

"We've used derivatives for many, many years. I don't think derivatives are evil, per se, I think they are dangerous. I've always said they're dangerous. I said they were financial weapons of mass destruction. But uranium is dangerous, and I just went through a nuclear electric plant about two weeks ago. Cars are dangerous. But I mean, every American wants to have one. You know, the--a lot of things can be dangerous, but generally we regulate how they're used. I mean, there was a--there was some guard up there with a machine gun on me, you know, when I was at the nuclear plant the other day. So we use lots of things daily that are dangerous, but we generally pay some attention to how they're used. We tell the cars how fast they can go."

At this point, it looks like Washington's speed limits will be applied to both new cars and the cars already on the road.

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