Reform Law Might Push Buffett from Derivatives

Friday, 20 Aug 2010 11:28 AM

By Dan Weil

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The new financial regulation law may push Berkshire Hathaway, the company led by Warren Buffett, to write less derivatives contracts, says senior Berkshire official David Sokol.

The company, which currently has more than $60 billion at risk in derivatives, may pull back because of increased collateral requirements, he told Bloomberg.

Sokol, who led Berkshire’s lobbying on the Dodd-Frank Act, was able to help convince Congress to avoid applying the collateral increases retroactively to existing deals.

Berkshire’s derivative liabilities provided $4.9 billion in premiums.

While he’s “comfortable” with the new derivatives rules, they still could put a damper on Berkshire’s activity, Sokol says.

“If you are now going to have to post dollar-for-dollar collateral, and you can’t get a price in the market that we think reflects the value of the credit quality of the company, then we wouldn’t take on that risk,” Sokol said.

The new law will affect pricing, he says. “If one of our competitors is prepared to offer a similar instrument at a cheaper price, then there will probably be less of them” from Berkshire.

Some have accused Buffett of hypocrisy on derivatives, citing their risk while at the same time trying to use them to boost profits.

“The fact that the same man who warned Congress about the danger of derivatives, only to grovel for a special rule that would protect his own, is evidence that something isn't right,” wrote Lauren Tara LaCapra of TheStreet.com.

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