Democrats Kill Financial Reform Loophole Pushed By Buffett

Monday, 26 Apr 2010 01:16 PM

By Frank McGuire and Julie Crawshaw

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Senate Democrats reportedly have agreed to kill a provision from their derivatives bill pushed by Warren Buffett's Berkshire Hathaway Inc. that would have allowed the company to avoid a significant financial hit.

Democratic Nebraska Sen. Ben Nelson initially helped push the provision into a bill passed by the Senate Agriculture Committee last week, The Wall Street Journal reported.

The provision was rejected Monday, the Journal and CNBC reported.

The provision would have prohibited the government from requiring companies to hold collateral against their existing derivatives trades, the newspaper said. The change would have aided Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.

Buffett has been able to use the company's strong financial position to post little collateral against its big derivatives portfolio, freeing up capital for investing elsewhere, the Journal reported.

The provision's demise is a blow to Berkshire Hathaway, which had lobbied strongly for its inclusion, and could bring challenges from other companies who contend Congress can't force them to amend the terms of existing contracts, the Journal reported.

Buffett's push was especially notable because he has warned of the potential dangers of derivatives, branding them "financial weapons of mass destruction."

Derivatives are financial products — such as corn futures or stock options — whose values depend on the values of underlying investments. Companies use them to hedge against risks, such as interest rate swings or oil price spikes. Derivatives also became vehicles for speculation and helped trigger the financial crisis.

In his letter to investors this year, Buffett wrote that while Berkshire has "long invested in derivatives," the contracts "can be dynamite," the Journal reported.

© 2014 Moneynews. All rights reserved.

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