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Democrats to Kill Derivatives Provision Pushed by Berkshire

Source: WSJ

Posted on 26 Apr 2010

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Senate Democrats agreed Monday to kill a provision from their derivatives bill pushed by Berkshire Hathaway that would have allowed the company to avoid a significant financial hit, people familiar with the matter said.

Sen. Ben Nelson (D., Neb.) initially helped push the provision into a bill passed by the Senate Agriculture Committee last week. It would have prohibited the government from requiring companies to hold collateral against their existing derivatives trades. The change would have aided Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.

Berkshire Chief Executive Warren Buffett has been able to use the company's strong financial position to post little collateral against its big derivatives portfolio, freeing up capital for investing elsewhere.

The provision's demise is a blow to Berkshire Hathaway, which had lobbied strongly for its inclusion, and could bring challenges from other companies who contend Congress can't force them to amend the terms of existing contracts.

Lawmakers and aides to the agriculture and banking committee panels agreed to merge their separate bills and ended up adopting many of the other provisions in the agriculture committee's bill. The provision wasn't in the Senate Banking Committee bill, despite efforts by Berkshire to include it.

The White House and Treasury Department lobbied against the Berkshire provision, on the grounds that they wanted flexibility to force companies to hold more collateral against their derivative positions. The legislation is part of a larger package of changes designed to prevent another financial crisis. American International Group Inc.'s trading in derivatives was a big factor in the firm's collapse and subsequent bailout.

Agriculture committee members agreed Monday morning to strip out the provision, which was the focus of a page-one Wall Street Journal article Monday.

Mr. Buffett's push was notable because he has warned of the potential dangers of derivatives, famously branding them "financial weapons of mass destruction."

The decision to take out the provision comes just hours ahead of a test vote in the Senate that will determine whether Democrats can begin debating the bill on the Senate floor.