Finance

What Warren Buffett Wants From Washington

Warren Buffett famously called derivatives "financial weapons of mass destruction." Rather less famously, he also led Berkshire Hathaway into the derivatives business. Now he's pushing for a change in the finance reform bill that would benefit that business.

Basically, the WSJ reports, Buffett doesn't think the new rules should apply to existing derivatives contracts.

Update: Senate Democrats have agreed to kill the provision Buffett's been pushing for, the WSJ reports.

Berkshire (which, at its core, is an insurance company) enters into derivatives contracts that are similar to insurance — buyers pay Berkshire something like a premium, and in exchange Berkshire agrees to pay something like a claim if, for example, a company defaults on its debt, or the stock market is below a certain level at some point in the future.

Like the insurance business, derivatives are profitable in part because Berkshire can add the money it collects from derivatives to its "float" — essentially, free money it can hold and invest however it sees fit.

But the financial-reform bill working its way through the Senate would require companies to set aside money against the possibility that they will have to pay a claim on the derivative. This is known as posting collateral, and it would cut into Berkshire's derivates float (and, by extension, its profits).

Buffett and Berkshire are pushing for a provision that would prevent the new rules from applying retroactively to existing derivatives contracts. If they are successful, they wouldn't be forced to post collateral against the billions of dollars worth of contracts they hold.

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