WASHINGTON -- Democratic Senators crafting legislation on derivatives have struck an exemption that was sought by Warren Buffett's Berkshire Hathaway Inc., according to a congressional aide briefed on the negotiations.
Berkshire had asked that previously written contracts be exempted from new rules on collateral, said the Democratic aide, who asked not to be identified because the talks are private.
Buffett uses derivatives to speculate on equity markets and the credit quality of U.S. companies. Omaha, Nebraska-based Berkshire's contracts give Buffett cash up front to invest and, in many cases, years before any payouts must be made.
The U.S. reform proposal would establish collateral requirements for derivatives dealers. Berkshire asked Senators including Ben Nelson, Democrat of Nebraska, to grandfather existing contracts.
“Berkshire Hathaway brought the issue to Senator Nelson and a number of others,” said Jake Thompson a spokesman for the Nebraska Democrat. “Senator Nelson agreed that the bill should not be so far-reaching it negatively impacts existing good faith contracts.”
Nelson's support isn't contingent on the provision requested by Berkshire being included, Thompson said. Berkshire owns derivatives tied to about $63 billion in assets.
Buffett, Berkshire's 79-year-old chief executive officer, has long warned about the dangers of an unregulated derivatives market. In 2003, he called the contracts “financial weapons of mass destruction,” a phrase that President Barack Obama quoted in a New York speech last week.
“Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts,” Buffett said in his 2002 letter to Berkshire shareholders.
Lawmakers are weighing new rules for financial markets after collateral calls on derivatives bets by American International Group Inc. forced the New York-based insurer to the brink of failure in 2008. Derivatives, which allow farmers to hedge against declines in the price of wheat and airlines to protect themselves from rising fuel costs, are used by investors to make bets on stock and bonds without buying the securities.
Buffett has said that Berkshire doesn't face the same risks as AIG because his contracts were negotiated to minimize or avoid the posting of collateral if long-term bets turn against Berkshire before the derivatives expire. Buffett didn't return a message for comment left with an assistant today. The Wall Street Journal previously reported on attempts by Berkshire to influence the legislation.
Agriculture committee Chairman Blanche Lincoln, Democrat of Arkansas, has introduced a provision that would force lenders to wall off their swaps trading desks from their commercial banks, according to a Democratic Senate aide briefed on the talks.
Buffett, who advised Obama during his election campaign, praised Nelson in January for voting for health-care reform even though a majority of his constituents may have been opposed, according to a Lincoln Journal Star interview with the billionaire.
