Saturday, July 24, 2010

presenting the Finance not so "Reform" bill

I posted previoulsy regarding Warren Buffett's deplorable testimony in Washington regarding the rating agencies and specifically his Moody's service. Things are going swimmingly well for Mr. Buffett's agenda if you tally points by trying to benefit from the free cash being doled out by the government and being able to influence government and regulation. Under considered incarnations of the financial reform bill, Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) likely would be required to put up $6 billion to $8 billion in additional collateral on its $63 billion of index derivative contracts. Not to mention requirements on the huge CDS exposure that it has for municipal bonds. I am quite sure you know how this turned out (click here). We got the bill passed so Hathaway did not get a bill and does not need to post additional collateral on those positions. The reality is that Buffett does not have enough money to cover his CDS and other derivatives obligations in the case of a significant market event. The other reality is that is grandpa/uncle Buffett is really a leverage junkie, it will be a sad state of affairs when the tide does indeed go out.
Warren Buffett and other holders of derivatives lobbied hard to exempt existing derivatives contracts from the requirement to post collateral to cover possible losses.
It would now appear that these efforts paid off, with a letter from Senate Banking Committee Chairman Chris Dodd and Senate Agriculture Committee Chairwoman Blanche Lincoln – two of the main authors of the financial regulation bill – saying that the bill "provides legal certainty to those contracts currently in existence, providing that no contract could be terminated, renegotiated, modified, amended or supplemented" ex post facto.
Warren Buffett’s Berkshire Hathaway conglomerate holds $63 billion in existing derivatives contracts, according to Barclays Capital, so the assurance from lawmakers will save the company from having to commit enormous quantities of capital – possibly as much as $8 billion – to meeting collateral obligations.
Reportedly, the majority of the derivatives sold by Berkshire are equity-index puts, hedging against the possibility of a sustained collapse in stock prices.
I think that one of the greatest assumptions of those able to speculate with the shadow money system is based on there being always being a greater fool or a reasonable way to create one. The rating system was one way and Buffett clearly was deceptive or at the least disingenuous in his testimony regarding it.

Ironically, when the tide goes may not only be JP Morgan and Goldman Tax's (not to mention the rest of the crew) lack of underwear we will be observing...(I for one do not particularly want to see Warren without skivvies) In any case, our revolutionary financial reform bill allows any entity to trade derivatives over-the-counter if they are using them for hedging purposes - for example an airline hedging jet fuel. I think we should get ready for quite a few off-balance sheet airline fuel hedging (I mean speculation) entities funded and run by our discount window supplied and over-leveraged pals...this finance bill is great at managing the people who did not need to be managed, while enabling wolves to roam free via big loopholes for types like Goldman and friends including our buddie Warren.

in case you are interested in seeing some of that testimony, here is a video below:

My comments on June 2nd:

Buffett simply dismisses the biggest bubble of all time as a "bubble-et" and that "...since 300 million people never saw it coming why should Moody's have been expected to see it"...on its face that is rediculous.
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