The Berkshire Bailout: Congress Misunderstands Markets

Dave Mason / April 26, 2010

The Wall Street Journal reports that Barack Obama’s favorite capitalist, Warren Buffet, is seeking an exemption from Obama-endorsed derivatives rules for his insurance-and-everything conglomerate, Berkshire Hathaway.

Derivatives are risk-shifting financial contracts that Buffet infamously described as “weapons of financial mass destruction.”   After the 2008 financial crisis, Buffet decided to join the nuclear club and Berkshire has amassed a $63 billion derivatives portfolio.

At issue is a proposed new rule in the Senate financial reform legislation requiring everyone who buys, sells, or trades derivatives to post collateral: cash or cash equivalents to protect against losses on the contract.  Buffet doesn’t want the new rules to apply retroactively to contracts his company has already written.

Buffet has a fair point on retroactivity: Congress should not rewrite contracts already in force.  But the retroactivity argument obscures a larger point: why should anyone be required to post margin on a derivatives trade? (more…)