The financial reform bill now before Congress contains a big provision, sought by Warren Buffett's Berkshire Hathaway Inc. and pushed by Democratic Nebraska Sen. Ben Nelson, that would largely exempt existing derivatives contracts from the proposed rules — and potentially help the famed investor avoid a financial hit.
Buffett's push is 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.
The White House is reportedly trying to kill the Berkshire provision on the grounds that it would weaken the government's ability to regulate the enormous market for derivatives. However, Berkshire argues that it shouldn't be made to redo existing contracts and that it is already healthy enough to cover its obligations.
The fate of Berkshire's effort to influence the legislation remains uncertain, The Wall Street Journal reports, noting that a key Senate committee had changed its proposed overhaul of derivatives regulation after lobbying by Buffett's company, congressional aides say.
Previously, the legislation could have allowed regulators to require that companies such as Berkshire put aside large sums to cover potential losses. The change would aid Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.
Berkshire says it is healthy enough to cover its obligations, especially given that it has $20 billion of cash, and should not have to modify existing contracts, the newspaper reported.
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.
David Sokol, chairman of Berkshire's MidAmerican Energy Holdings Co. unit, has been meeting scores of government officials, including several senators, to argue Buffett's case, the newspaper reported. Sokol is considered by many the leading candidate to eventually replace Buffett as Berkshire's chief executive.
Republicans could support a Democratic proposal to limit trading of derivatives, Sen. Richard Shelby, said today on "Good Morning America."
"That might be a good idea," Shelby told ABC.
"I haven't seen all the details of it, but I can tell you when they use other people's money, especially when they rely on the taxpayer to do this kind of risk-taking,” Shelby says.
“If something goes wrong, they take the whole system down. We don't need this."
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