Tags: Warren | Buffett | Steakhouse | Logic | Derivatives

Buffett Uses Steakhouse Logic for Derivatives Case

By Dan Weil   |   Friday, 30 Apr 2010 01:39 PM

Investment icon Warren Buffett is happy to see more regulation of derivatives, but he objects to new requirements being applied on contracts already written — especially his own.

Buffett's Berkshire Hathaway Inc. pushed Congress to weaken proposed swaps legislation, but Democrats decided on Monday to rebuff the measure. Berkshire pushed a measure in the bill that would exempt it from having to post billions of dollars of collateral, largely exempting existing derivatives contracts from proposed rules, the newspaper reported.

As of year end, Omaha, Neb.-based Berkshire had about $63.1 billion of derivatives exposure. Roughly 60 percent was tied to long-term contracts whose value depends on the performance of major equity market indexes.

Regulations being considered by Congress would require firms to post more collateral on their derivative positions.

But that would put a whole new spin on the contracts that have been made, Buffett says. Counterparties who put up more collateral would get paid less because there is less risk.

He used a little "steakhouse logic" to make his point in an interview with the Omaha World-Herald.

“If the restaurant only gets paid for an 8-ounce steak, they don't want to give you the 12-ounce one,” Buffett said.

He still maintains that derivatives are dangerous to the financial system. “That's why I have no objections to the idea that regulation is coming on them,” Buffett said.

He just doesn’t want existing contracts to be subject to collateral increases.

Whatever Congress decides will have little impact on Berkshire Hathaway, Buffett says. That’s because he believes any retroactive regulation of existing contracts would be defeated in court.

Not everyone supports the Oracle of Omaha on this one.

“In another blatant example of the ‘Animal Farm’ mentality of big supporters of the Obama administration, Buffett’s opposition to derivatives regulation recalls the sentence, ‘All animals are equal, but some animals are more equal than others,’" Matthew Buckley, chief strategy officer of Options University wrote on TheStreet.com.

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