WARREN BUFFETT SMACKDOWN: Senate Denies Derivatives Loophole Sought By Berkshire
UPDATE: May 2 -- Buffett might win this battle (Bloomberg)
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Most of the stories we cover are depressing and generally not positive for the American taxpayer. It's the nature of bailouts.
Occasionally however, something hits the wire that reaffirms the withering notion of righteousness and fair play, and we celebrate modestly. To wit, Warren Buffett and his mumbling simpleton, Senator Ben Nelson, just got denied.
Yesterday morning it looked as though Buffett would be successful in garnering a special exemption in reform legislation that would have allowed existing derivatives contracts to remain free of new collateral requirements.
In other words, under current law, derivatives buyers and sellers get to play at the craps table without buying chips. They enter into arcane contracts without being required to post any collateral. The Senate bill seeks to remedy the situation by creating a clearinghouse/exchange for future derivatives trading, and Buffett and Berkshire wanted an exemption established for existing derivatives contracts.
So now, assuming financial reform eventually passes, Berkshire and everyone else will be required to post collateral for old trades and it could cost Warren billions on those 2017 S&P puts. The arrogance of his lobbying effort is thick with irony considering Buffett is famous for his oft-quoted aphorism that:
"Derivatives are weapons of financial destruction."
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Check out these links to read the painful details of Buffett's lobbying effort:
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And here's some color on the Buffett denial:
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Chris Whalen offered his thoughts in an email this morning:
There is a lot of news this week on financials coming from Washington and the noise level is drowning out some of the detail. So when I heard that Berkshire Hathaway (BRK) CEO Warren Buffett was trying to slip an exception into the substitute legislation offered by Senator Blanche Lincoln (D-AK) to give his OTC derivatives book special treatment, I put aside my book project and picked up the short sword.
The "Buffett Amendment" would have exempted all of the existing OTC derivatives contracts from the new collateral requirements in the financial reform legislation. The fact that such a ruse was even necessary illustrates why we need to drive a wooden stake through the heart of OTC securities and derivatives, namely that some of the biggest corporates in the world are allowed to play at the roulette table without buying chips. The "AAA" rated BRK, Caterpillar (CAT) and the other big corporates can trade OTC without posting any collateral or initial margin.
What's wrong with this picture?
When you trade on a derivatives exchange, all of the customers must post margin. It does not matter whether you are Warren Buffett or Lloyd Blankfein or Joe Sixpack, you must "show us the money." But apparently Warren Buffett, the man who once called OTC derivatives "weapons of mass destruction," now needs to supplement BRK earnings by trading OTC derivatives without any collateral backing up the trades. Hmm.
Now we know why BRK, CAT and the other big corporate came oozing out of the woodwork last year to defend the OTC derivatives market. JPMorgan (JPM), Goldman Sachs (GS) and the other OTC dealers let Warren Buffett and the other "AAA" corporates play at the roulette table w/o any chips. Wouldn't you like to be able to sit at the big table and play poker alongside Mr. Buffett w/o actually putting up any cash to back your bets?
The best part of all is that Mr. Buffett called upon US Senator Ben Nelson (R-NE) to create a derivatives loophole that would benefit his company to the tune of billions, a proposal Senate Democrats quickly quashed. Nelson was the insurance commissioner of NE prior to coming to Washington, so you could say that Nelson is a "previously owned" Republican. It is my impression from speaking to members of both parties in Congress that Nelson is viewed as a complete idiot by his peers in the Senate. Maybe the Sage of Omaha needs to find a new boy to carry his dirty laundry. Do you think?
In any event, keep an eye on Mr. Buffett and the gang who populate the BRK CSUITE. Despite their protestation of being conservative, "fundamental value" investors, it seem that Buffett and Co. are no different from the OTC derivatives dealer banks which enable his derivatives speculation.
And in case you find this opinion a little harsh, just remember that Mr. Buffett and his colleagues at BRK are the same folks who have been sanctioned by the SEC on several occasions for aiding and abetting the manipulation of corporate earnings using side letters and other canards taken from the insurance markets. The use of side letters in the case of American International Group (AIG) to falsify corporate financial statements is the functional equivalent of using OTC derivatives sans collateral or initial margin to goose BRK earnings. Do we see a pattern forming perhaps?
But of course the Big Media is probably going to ignore this story tomorrow. Other than a mention on WSJ (Damian Paletta who broke the story), CNBC earlier today (kudos to Michelle Caruso-Cabrera for enjoying the moment so) and MarketPlace radio, there has been virtually no press coverage of the Buffett Amendment.
I am attaching the revised OTC derivatives amendment that Chris Dodd (D-CT) and Senator Lincoln hope to put into the financial reform bill this week. One of these days I will tell you how Chris Dodd worked his way through "high" school. Is this a great country or what?
Be well -- Chris
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DailyBail
Update added at the top of story...
Reader Comments (19)
Senate Dems to Deny Buffett’s Derivatives Exception
http://www.propublica.org/ion/blog/item/buffett-a-longtime-derivatives-critic-lobbies-for-an-exemption
http://online.wsj.com/article/SB10001424052748703465204575208030785525128.html?mod=WSJ_hpp_LEFTTopStories&mg=com-wsj
http://washingtonindependent.com/83204/democrat-ben-nelson-votes-against-moving-forward-with-financial-regulation
http://marketplace.publicradio.org/display/web/2010/04/26/pm-should-derivatives-be-subject-reform/
market place audio...has some whalen sound bites...
what's your point...other than serving as an apologist for the oligarchy...
http://www.reuters.com/article/idUSN2964648020080301
Do you know why he called them financial weapons of mass destruction? Because they are almost always extremely complicated products to which risk is extremely difficult to assign in any generalizable way. So, risks can skyrocked with no mechanism in place to counter those risks. If you read the Berkshire annual report, you will find that the derivatives which Berkshire sold are very clearly communicated. This is possible because they are very simple contracts--for example, assigning a target valuation on a popular market index on a particular date. Moreover, the report describes the worst case scenario (and response) in monetary language.
So, of course he did 'cash in' on those contracts. Berkshire is, operational, largely an insurance operation after all. So, yes, the company was doing it's job. They sold what are basically insurance contracts provided to large companies/institutions to guard against catastrophic market failure.
James H --
Berkshire is very important to the state. I don't know how much employment and money (through tourism, imports, etc) you bring to your state. But, I'm going to assume it is not close to what Berkshire contributes to the state through taxes, etc. This year, an estimated 40K people will attend the annual meeting (i think around 20K or so from out of town). Anyway, I don't see why one should have to explain why a representative of the state is representing the interests of his or her residents.
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So then you supported paying AIG 100 cents on the dollar because they were previously negotiated contracts....
And calling it nullification is a stretch...the contracts remain in place...the only change is in the requirement of collateral...and that's kind of the whole point...there are some $500 odd trillion of derivatives out there with no central accounting...let's get everything managed under 1 (or several) exchanges (just like equities and debt) and have some basic rules for capital/collateral/margin...
Are you a Berkshire shareholder...
Fixing the derivatives issue requires that ALL contracts regardless of when they were created to be subject to the same rules...I like the fact that you mentioned leverage in the system in one of your response...stick around and join our discussions more often...we're always in search of more pitchforkers...
"I believe each contract we own was mispriced at inception, sometimes dramatically so," he said. "I both initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the chief risk officer as well. If we lose money on our derivatives, it will be my fault."
http://www.reuters.com/article/idUSTRE51R1LW20090228
I'm not sure what point you are making with that quote. Of course, it is preferable that the contracts are 'mispriced' if it favors your viewpoint. Buffett does not seem to indicate whether he thinks they were mispriced (at inception) in his favor or not.
DailyBail--
I'm going to respond to your comments later (I do have a response) because it is a longer answer and I am tired..
But I hope to see you commenting more in the future...