WASHINGTON -- As Congress considers new regulations on the exotic financial instruments known as derivatives, Omaha-based Berkshire Hathaway has been telling lawmakers to keep their hands off existing deals, including its own.
Among those coming to Berkshire's aid were both of Nebraska's U.S. senators, Democrat Ben Nelson and Republican Mike Johanns. Berkshire represents a major home-state company.
Democrats on Capitol Hill are trying to regulate derivatives, a financial instrument many blame for helping cause the near-meltdown of the country's financial system. Lawmakers failed to get enough votes to start debate on the broader financial reform legislation during an initial procedural vote Monday, but they expect to bring up the matter again soon.
In recent remarks supporting the financial reform package, President Barack Obama quoted Warren Buffett's 2003 condemnation of derivatives as “financial weapons of mass destruction.”
The billionaire investor told the World-Herald on Monday that he continues to believe derivatives pose a serious risk.
“They are dangerous to the system,” Buffett said. “That's why I have no objections to the idea that regulation is coming on them.”
However, Buffett said, he wants the legislation to make clear that existing contracts will not be affected by the new collateral requirements. Those would make companies set aside money to offset potential losses to derivatives.
Regardless, Buffett said, the outcome would not hurt Berkshire's finances because he is confident that any retroactive regulation of existing derivative contracts would be defeated in court. But he'd like to avoid litigation.
Buffett said it would be unconstitutional for Congress to essentially rewrite existing contracts and require companies such as Berkshire to post collateral on deals already in place.
David Sokol, one of Buffett's top lieutenants, has been making the company's case on Capitol Hill but he's not the only one. Other companies would benefit from the change and have lobbied for it.
At the urging of Nelson and Johanns, the Berkshire-supported language was included in the legislation approved last week by the Senate Agriculture Committee. In committee, Nelson voted to advance the reform package. Johanns did not.
But both echoed Berkshire's assertion that it's unconstitutional for Congress to tinker with existing contracts. Some companies have pushed to eliminate the collateral requirements altogether.
Overall, 29 members of the House and Senate own at least some Berkshire stock, but only five have more than $100,000 worth, according to the Center for Responsive Politics. Nelson and his wife own $1.5 million to $6 million worth of the stock, according to his most recent financial disclosure report. Sen. Tom Harkin, D-Iowa, has between $1,000 and $15,000 worth. No other Midlands representatives listed Berkshire stock on their disclosure forms.
Berkshire also is Nelson's top campaign contributor, according to the Center for Responsive Politics, with employees and its political action committee donating $75,550 over his Senate career.
Nelson, for his part, said his support of Berkshire's efforts is about good policy. And he was joined in that belief by Nebraska's junior senator, who does not list himself as a stockholder, Johanns.
Johanns said no one should oppose protecting the integrity of existing contracts.
“It just simply is the right policy,” Johanns said.
Nelson said that he has owned stock in the company since before he ran for governor and noted that 40,000 people will be in Omaha next weekend for the company's shareholders meeting.
“My stake in this operation is minor by comparison to others,” Nelson said. “It's a Nebraska company. I would hope that a Nebraska company would support me as they have and their personnel over the years, because it's a Nebraska-based company. Other Nebraska companies and their personnel have supported me in the past.
“No favors have ever been asked nor granted.”
Still, Nelson's advocacy drew some criticism, including from Nebraska GOP Chairman Mark Fahleson, who wrote that the Berkshire provision represented “yet another backroom deal being orchestrated by Sen. Ben Nelson.”
That criticism ignored the role played by the GOP's Johanns.
Pressed to explain the difference between Nelson and Johanns on the issue, Fahleson could offer only that Democrats are in charge and that Johanns didn't support the health care legislation.
In his company's defense, Buffett said Berkshire would have been paid hundreds of millions of dollars more in its previous derivative deals had they put up collateral at the start.
By way of example, Buffett said his company was approached recently about a deal with a big Wall Street firm. The firm offered Berkshire $7.5 million if Berkshire chose not to post collateral and $11 million if it did.
“There's two different markets for these contracts,” he said. “To change one contract into another contract . . . retroactively would be just the same as changing the price on the contract. “
Or to put it another way:
“If the restaurant only gets paid for an 8-ounce steak, they don't want to give you the 12-ounce one,” Buffett said.
The stakes are high Berkshire owns derivatives tied to about $63 billion in assets, though Buffett said that still represents only a fraction of one percent of the overall derivatives market.
“We have about 250 contracts out,” Buffett said. “Lehman and Bear Stearns each had about 700,000.”
The Wall Street Journal also reported that the White House has been fighting the Berkshire provision, but Buffett pointed to testimony by Treasury Secretary Timothy Geithner in December before the Senate Agriculture Committee.
Nelson asked Geithner about the administration's view on how changes to derivatives regulations should affect existing contracts.
“The law needs to be crystal clear that it leaves in place existing contracts, does not change their legal nature, does not add to uncertainty about the legal nature of those claims,” Geithner said.
The treasury secretary did mention that existing contracts should be subject to new record keeping obligations.
“But with that exception, our view is that these reforms should be prospective,” Geithner said.
Buffett said Berkshire does not have a position on whether future derivatives should have collateral requirements.
Nelson said he couldn't support proceeding on the financial reform bill until he'd seen more details.
“We need to regulate Wall Street without doing harm to Main Street, and I'm hearing from Main Street businesses in Nebraska that have concerns about the current bill adversely impacting them,” he said.
Harkin supported starting the debate. Sen. Chuck Grassley, R-Iowa, joined Johanns, other Republicans and Nelson in opposition.
Grassley supported the derivatives bill in the Agriculture Committee, but said his vote Monday meant to send a signal that the legislation should be written to get broad-based bipartisan support.
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