Warren Buffett's derivative drama
Financial reform proposals could hurt Berkshire Hathaway, so the company is lobbying hard on derivatives.
Well, it turns out that Buffett's Berkshire Hathaway (BRK.B) has a $63 billion derivatives portfolio, according to The Wall Street Journal. And Buffett has been lobbying Capitol Hill to protect that portfolio by exempting it from new rules in the financial reform proposals.
Since his "weapons of mass destruction" comments, Buffett has backtracked a little to make his position clear. Yeah, derivatives can be dangerous, but he still uses them. You just have to be careful.
Buffett has a lot at stake here. And so he's pretty antsy about a proposed change that would require companies like Berkshire to put aside oodles of money to cover potential derivatives losses, the Journal reports.
Buffett doesn't want to set aside the collateral, and wants existing derivatives contracts to be exempted from the rules. Berkshire doesn't want to redo its contracts, the Journal reported, and is arguing that it has the money to cover problems if necessary. Post continues after video:
Berkshire surely does, but what about other companies playing in derivatives? The White House reportedly is against Berkshire on this one, saying that it would hurt the government's ability to regulate the derivatives market.
It's always tricky to explain derivatives, but the Journal does it well by calling them "bets between two parties on the future price of a good." They help companies hedge against risk.
Southwest Airlines (LUV), for example, uses derivatives for about 65% of its fuel consumption this year. Derivatives help the airline stabilize its fuel prices. Would Southwest have to set aside money to cover its derivative bets? It looks that way from the legislation.
Berkshire is arguing that hundreds of companies that legitimately use derivatives would be hurt under the proposal. Ironically, the companies that could benefit from this are the Wall Street firms that Congressional Democrats are trying to keep in check, Berkshire says, according to the Journal.
That's because if companies like Berkshire have to put their own collateral down, then Wall Street firms won't have to buy as much insurance for possible defaults.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The solid report comes a month after the retailer closed all of its Canadian operations.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.