Warren Buffett's 'Steakhouse' Argument Against Retroactive Rules on Derivatives

For Warren Buffett, it's a matter of simple fairness: "If the restaurant only gets paid for an 8-ounce steak, they don't want to give you the 12-ounce one."

Warren Buffett
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Warren Buffett

It's a concept at the core of his argument against allowing the government to require collateral on existing derivatives contracts.

He tells the Omaha World-Herald that Berkshire Hathaway would have been able to get hundreds of millions of dollars more for the contracts it has written in the past, if it had put up collateral as part of the original deal.

As an example, Buffett says a big Wall Street firm recently offered Berkshire $7.5 million for a deal without collateral, and $11 million for the same deal if it posted collateral.

"There's two different markets for these contracts. To change one contract into another contract ... retroactively would be just the same as changing the price on the contract."

Or making a restaurant serve a bigger steak to a diner who had already paid for, and been served, a less expensive piece of meat.

Berkshire has been arguing on Capitol Hill that financial regulation legislation should explicitly exempt existing contracts from any new collateral requirements.

Senate Democrats, however, aren't going along, despite the efforts of Nebraska Democrat Ben Nelson. The finreg bill now being considered in the Senate does not include the exemption sought by Berkshire and some other companies. That could change as the debate continues.

The stakes are high. Berkshire has roughly $63 billion tied to derivatives contracts. Putting up collateral would be very expensive.

Buffett tells the World-Herald he's confident any attempt to require collateral on existing contracts would be rejected by the courts as unconstitutional. Still, he'd like to avoid any litigation.

While Buffett says Berkshire doesn't have a position on whether collateral requirements should be placed on future contracts, he does think the government needs to do something about derivatives. "They are dangerous to the system. That's why I have no objections to the idea that regulation is coming on them."

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