Derivatives law may spare Berkshire

New York :  Warren Buffett, who has warned about the dangers of unregulated derivatives, said a Senate plan to add oversight of the contracts probably won't require his Berkshire Hathaway to put up collateral.

"If the bill passes tomorrow, we would not have to post a dime," Buffett said on Saturday in Omaha, Nebraska, at Berkshire's annual shareholders meeting.

Lawmakers, who are seeking to impose collateral requirements on previously written derivatives, will probably focus only on companies that are deemed to be in weak financial condition, Buffett said.

Buffett uses derivatives to speculate on the direction of equity markets and the credit quality of companies. Berkshire, where Buffett is chief executive officer, has about $63 billion (Dh231 billion) at risk in its contracts. The firm has been pressing Congress to ensure that any new legislation won't require it to put up funds as security against default on previously written contracts.

"If for any reason the Treasury should go back and, in a more sweeping declaration, decide all past contracts be collateralised we would comply, naturally," Buffett said. "And it will be no problem."

Buffett's characterisation of derivatives in 2003 as "weapons of mass destruction" was seized upon by President Barack Obama in a speech last month to rally support for reform.

The plan for new regulation could require Berkshire to post billions of dollars if there is no exemption for previously written contracts involving stronger companies, said David Sokol, one of Buffett's top lieutenants, in an interview on Saturday.

The derivatives proposal was designed in the Senate to establish collateral standards that ensure there is cash backing bets on the direction of stocks and commodities prices. American International Group needed a $182.3 billion US bailout after failing to reserve for obligations on credit-default swaps.

Derivatives, which allow farmers to hedge against declines in the price of wheat and airlines to protect themselves from rising fuel costs, are used by investors to make bets on stocks and bonds without buying the securities.

"If you give human beings flexibility to do anything they damn well please, they will go plum crazy," Berkshire Vice- Chairman Charles Munger said at the meeting.

Berkshire lost $404 million through 2005 reducing General Re's derivatives book from 23,218 contracts to 741, Buffett has said. The derivatives were mostly written by traders who weren't adequately penalised for poor long-term performance, he said.

"He understands stupid derivatives because he got out of them at Gen Re," said Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which holds Berkshire stock.

Berkshire's book of derivatives, constructed by Buffett, doesn't pose the danger that portfolios at AIG or General Re did, Russo said.