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2010: How will new financial regulations affect Berkshire?
BECKY QUICK: We received a lot of questions about the financial regulatory impending legislation. This question comes in from Jay Gelb, who wants to follow up on the point that Mr. Pope just made.
“What’s the anticipated impact of pending financial reform legislation on Berkshire? In particular, how much additional collateral may need to be posted on Berkshire’s existed $63 billion of derivative contracts? And could Berkshire get too close to its minimum requirement of $20 billion of cash on hand as a result?”
WARREN BUFFETT: Yeah. As I understand the bill now, the one that got presented a couple of days ago — and I could be wrong but I think I understand it and I’ve read the sections — the requirements would be zero.
If we were found — Berkshire were found — to be a — and I don’t know the exact term in the bill — but basically, dangerous to the system, by the secretary of the treasury, or I believe some commission, then we could be required to post collateral on retroactive contracts — on contracts that were written in the past.
I think the chances of us being regarded as a danger to the system when we have 250 contracts and other companies have a million contracts — our position was described in the Journal not long ago as “huge.”
You know, our position is 1 percent, in terms of notional value or liabilities or a lot of ways of measuring. It’s 1 percent of that of several other very large institutions.
So I — I’ve really wondered if you use the word “huge” to describe our position, what you would use for 100 times that position?
That must be some adjective that lurks out there someplace to be attributed to those other positions.
We had 23,000 positions 10 years ago when we bought Gen Re. And we proceeded promptly to get rid of all but less than a hundred that are left.
So we have absolutely, in my view, we have no problems.
If for any reason though, the Treasury or this commission should go back and maybe in some more sweeping declaration decide that they wanted all past contracts to be collateralized, we would comply, obviously.
We also would feel that we were due substantial money because, in negotiating those contracts, there was one price for collateralized contracts and there was another price for un-collateralized.
So if I sell my house to you for $100,000 and wanted $120,000 if it were furnished, but you said, “I’ll take it unfurnished for $100,000,” and then Congress comes along later on and says, “All houses have to be sold furnished, and by the way, that’s retroactive,” if I give you the furniture now I want something for it. A little unreasonable, maybe.
We do think — well, just a week ago we were offered an equity put contract that’s identical, basically, it’s a 10-year contract, by one of the very largest investment banking houses.
The price that they would pay us was 7 1/2 million un-collateralized and $11 million collateralized. So there’s a very different — there’s a price to be paid for having a collateralized contract.
And we elected to forgo probably a billion dollars of extra premiums we could have received in the past for our contracts if we had agreed to have them collateralized.
And with a few exceptions, we declined that. And we would feel, if we ever had to collateralize them, we would be entitled to fair compensation for it, and we would like that language to be in the bill.
And incidentally, Secretary Geithner — we’ll put up slide number 7. We have his testimony before the Senate Ag Committee on December 2nd. And as you can see, he testified very strongly, in terms of the sanctity of past contracts.
But if the bill passes tomorrow, the way it reads to us and to our attorneys, we would not have to put up a dime.
And I would think there might be some other companies that would be determined to be dangerous to the system before Berkshire Hathaway would be.
So I really — I don’t see any — I don’t see any consequences unless there’s some sweeping declaration that any company of a certain size that has derivatives shall be required to put up collateral.
And if that’s required, we will, and it would be no problem. It would — it would have a cost to us in terms of the opportunity cost, but then of course we would argue about what collateral was proper and so on.
And if we could put our Coca-Cola stock, you know, we’re going to hold our Coca-Cola stock anyway. So it really changes nothing. We still get the dividends from the Coca-Cola stock if it’s placed as collateral, we get the profit if it goes up.
CHARLIE MUNGER: Well, yes. If collateral requirements were inserted by fiat of the government into existing contracts, it would be just like having a contract to buy a house for a million dollars, and the government passing a law saying, “No, you’ve got to pay $2 million.”
I mean, it would be of dubious constitutionality, and it would be both unfair and stupid. I don’t think the government is that crazy. (Laughter)
WARREN BUFFETT: Plus, I think what they would see — there’s a whole list, in fact I think I’ve got a page even for that. Yeah, let’s put up slide number 8.
And this is just a sample page of people who oppose putting up collateral — being required to put up collateral — prospectively. And you’ll see IBM, you’ll see Ford Motor, you’ll see 3M, you’ll see HCA.
I mean, there’s all kinds of companies that don’t want to do it in the future. We don’t care what we do in the future as long as we get paid for it.
So this is not anything that is peculiar to Berkshire at all. In fact, we happen to be in a different position than the IBMs and the 3Ms and those of the world, in respect to this. As long as we get paid for it, we’re indifferent to what the rules are going forward.
But considering the fact that we took lesser premiums in the past, we would not like something retroactively to take money out of our pocket.
But bear in mind, Burlington Northern, when we buy it, it has some fuel contracts. MidAmerican has energy contracts.
There was a story in Businessweek about Anheuser-Busch a couple of weeks ago. And, you know, they say, “We don’t want to take money out of our business and send it to Wall Street as a deposit on collateral.”
And I think when — if they really saw that the net effect of this would be to send a whole lot of money to be held by Wall Street that was otherwise employed in operating businesses, there might be a little less congressional enthusiasm.