Monday Apr 26 2010
Okay, let's as the saying goes, connect the dots.
Warren Buffet is supposed to be an advisor to Pres Barack Obama
Warren made a comment in this 2002 annual report that derivatives were potential weapons of mass destruction.
The financial reform bill will require derivatives to traded on exchanges, subject to collateral and margin requirements.
Warren sold a large PUT position to various investors. The PUT 'insures' against loss for the investors if the stock averages close below a certain level at a certain date in the future.
The PUTs that Warren sold were off exchange, a private transaction, not subject to exchange regulations or margin requirements. If the PUTs had been on an exchange, or were now on an exchange, when the value of the PUT increased, Warren would have to post more cash collateral.
Now, guess what? Warren wants all existing derivatives grandfathered, especially his! He does not want to have to abide by exchange rules, he claims Congress cannot affect already existing contracts. He notes that BRK has $20 B in the bank anyway.
Well! Appreciate that in the 2008 meltdown, the theoretical value of the PUTS soared, but Warren was not worried as the expiration date was still years away. Under the new law, BRK would be forced to post cash collateral in the event of a market decline. And this is precisely what Congress wants to regulate. The fear, as was Greenspan's fear regarding Long Term Capital Management, is that a firm or firms will exceed their ability to perform on such bets, that failure would likely implode the financial system if one party failed to another and another.
Are you following all this? Now recall that BRK is in Nebraska. Recall the Cornhusker Compromise, where Ben Nelson, D NB got an exemption for his state on the health care bill in exchange for his vote. Recall that NB itself recoiled over this deal and Nelson's ratings plummeted. No doubt Washington does not want a repeat of that fiasco.
But the failure to force all existing derivatives to list on an exchange now would defeat the idea of marking everyone to market and forcing them eliminate or close out contracts that cannot be covered.
AS it is, BRK never has to post any cash to anyone. The reason BRK sold the PUTS was to use the billions in premiums for years with no interest cost or margin requirement.
Hmm, I wonder if Vegas is taking bets, a derivative, on how this turns out?
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