Buffett wants compensation if derivatives contracts rewritten

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

'raised some eyebrows' doet de tegenstelling tussen uitlatingen van WB
en zijn handelen heel veel tekort.
Hoe verklaart WB enerzijds "weapons of mass destruction" in zijn 'annual
letter to shareholders' van 2003 (toendertijd geschat op $85000 miljard)
en zijn 'eigen' portefeuille van 250 contracten met een waarde van $63
miljard?
Voordat hij daar een verklaring voor geeft, zal hij toch eerst zijn
broek moeten optrekken ;)

Groet / Cees

Buffett weighs in on derivatives legislation
Berkshire chairman wants compensation if contracts rewritten
http://www.marketwatch.com/story/buffett-weighs-in-on-derivatives-legislation-2010-05-01

OMAHA, Neb. (MarketWatch) -- Berkshire Hathaway Inc., Chairman Warren
Buffett weighed in on derivatives legislation on Saturday, arguing that
if new rules force companies to rewrite old contracts they should be
compensated.

Berkshire had 250 derivatives contracts with a notional value of $63
billion at the end of 2009. They include long-dated equity put options
on equity indexes and high-yield bond indexes. The company also sold
protection through credit derivatives on the debt of states,
municipalities and individual companies.

Buffett famously called derivatives "weapons of mass destruction," so
his foray into this market raised some eyebrows.

Sen. Ben Nelson of Nebraska has shown support for Berkshire Hathaway's
positon on derivatives legislation.

In 2008, when stock and credit markets plunged, Berkshire reported an
accounting loss of $6.8 billion. However, the company recognized a $3.6
billion accounting gain when markets recovered in 2009. Buffett has
advised shareholders to ignore those accounting-induced swings.

The contracts gave Berkshire $6.3 billion in cash up front.

That is money Buffett can put to work in other investments.

Crucially, Buffett also structured almost all the derivative contracts
so that Berkshire doesn't have to post collateral if the positions move
against the company over the short term. This type of collateral posting
requirement felled American International Group Inc. in 2008 (Cees:
omdat GS onmiddelijke betaling eiste en een paar maanden later al weer
winst boekte op dezelfde posities!), triggering a huge government bailout.

However, derivatives legislation being considered in Washington could
force companies to set aside more collateral against derivatives
contracts. If passed, this could force Berkshire to do the same on its
existing contracts.

"If we were found to be dangerous to the financial system by the
Treasury Department or some commission" Berkshire would be required to
post collateral on its contracts, Buffett said Saturday, describing the
potential effect of the legislation.

Buffett said that Berkshire shouldn't be considered a danger, noting
that it has 250 derivative contracts while other firms have as many as a
million contracts.

Still, Buffett said that if "sweeping" legislation passes, Berkshire
would comply with it. However, he stressed that the company would expect
to be compensated for re-writing its derivatives contracts.

"We would like that language to be in the bill," Buffett said.

Counterparties pay more for derivatives contracts that are backed by
collateral and Berkshire probably missed out on roughly $1 billion of
extra premiums by structuring its contracts without collateral posting
requirements, he noted.

"One has to wonder to what extent Berkshire may be being penalized for
the sins of others," Bill Bergman, an equity analyst at Morningstar,
said in an interview before the annual meeting. "Public policy and the
reaction to financial crises have costs by potentially rewarding weak
players that were threatening the system and penalizing the strong."

Berkshire has become involved in the political process on the
legislation. Sen. Ben Nelson (D., Neb.) opposed the part of the
legislation that would apply retroactively to derivatives contracts that
have already been written. Nelson has reportedly received tens of
thousand of dollars in campaign contributions from Berkshire and owns
millions of dollars in Berkshire stock.

Berkshire executive David Sokol, considered a candidate to replace
Buffett, met with lawmakers on Capitol Hill to try to get the provision
struck from the bill, The Wall Street Journal reported recently.

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