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Remember the Cornhusker Kickback?

Thumbnail image for nelsontape.JPG

Well, we almost had the Buffett Buy-Off. Buffett, here, is Warren Buffett, the Omaha-based investor who prevailed on his state's senior senator to insert a provision exempting existing derivatives contracts from the new collateral requirements. Sound complicated? All you need to know is that this language is worth $8 billion to Buffett, and Sen. Ben Nelson was happy to help him out.

The rest of the Democrats, however, were not so happy once they got wind of this deal, and they stripped it out of the bill. Nelson then voted with the Republicans to filibuster the motion to move to debate. "Has Nelson forgotten how the Cornhusker Kickback saga played out?" asks Matt Yglesias. "That it became a huge embarrassment for him personally, for his party, and for his state?"

It's worth saying that this derivatives language would have applied to all companies, not just Buffett, so it's a bit less egregious than the Nebraska deal. But this does give you a sense of the problems Nelson has created for himself by embracing a buy-me-off approach to legislating. It's probably that dozens of senators have inserted provisions just as parochial and unseemly as Nelson's attempt to protect Buffett, but because everyone is on the lookout for this stuff with Nelson, his provision got tossed out of the bill and became an embarrassing news story.

By Ezra Klein  |  April 27, 2010; 9:12 AM ET
Categories:  Financial Regulation  
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Next: The 'might-speak-Spanish' exception

Comments

what in G-d's name is wrong with these people?
how, really how, can people look around them at the sufferings of people all around them, and believe that they alone, live in a world of free license and entitlement.

and even now, with glaring headlights on them, they remain just as petulant and demanding.
they clearly stop at nothing.


Posted by: jkaren | April 27, 2010 9:25 AM | Report abuse

to act like this, they must be two year olds, in adult bodies.
what else can it possibly be?

Posted by: jkaren | April 27, 2010 9:27 AM | Report abuse

You know what? I think Sen. Ben Nelson is just dumb as a rock. I have no idea how someone this dumb was elected Senator.

How in the world has he survived politically all these years? By "out-dumbing" the other candidate? What the heck is up with Nebraskans??? Are they all like this???

Damn, I'd prefer Joe Lieberman to this guy. Joe might be a 150% self-absorbed & vindictive *****, but at least he has a brain in him.

Ben Nelson looks like he has strings attached to his arms and legs, and just sits there, looking lost, a confused look on his face, a bit of drool in his chin, until the next marionette player comes around. Seriously. WTH.

Posted by: JERiv | April 27, 2010 9:46 AM | Report abuse

The Democrats better watch out or they will go so far as to turn Warren Buffett into a Republican.

Posted by: lancediverson | April 27, 2010 9:54 AM | Report abuse

If you're pissed at this, you don't understand what was actually involved. Berkshire, and many other companies, wrote derivatives contracts in the past with Wall Street. Berkshire, being as financially and historically strong as it is, didn't need to post collateral--it pays its promises. Conversely, the other side of the contract would need to buy insurance if it wanted protection (the other side being Wall Street). The language, as it is, rewrites contracts--which is as legal dubious as it sounds--while also giving Wall Street a huge kickback because they no longer need to purchase insurance.

Posted by: rglvr | April 27, 2010 9:58 AM | Report abuse

Too bad that Ben Nelson's term is tili 2012 so as he will not face a primary challenge. Look at how transformed Blanche Lincoln is on the tonic of 'a serious primary challenger'.

This dum* a** will face it in next 2 years. Too bad Obama's Dem Party have to carry along with such stupid folks....

Can Dems not find anything else to make Ben Nelson's life 'hard'?

Posted by: umesh409 | April 27, 2010 10:02 AM | Report abuse

"If you're pissed at this, you don't understand what was actually involved."

sometimes, i read things and i wonder if people are joking, or being sarcastic.
do you think that your explanation makes any of this sound better?
or are you just joking?

Posted by: jkaren | April 27, 2010 10:04 AM | Report abuse

Not joking. It rewrites contracts and cuts Wall Street a big break. What if the legislation says your mortgage didn't provide the bank with enough of a down payment and forces you to put up more cash? I can see why you'd be pissed at Nelson's moves, but it's coincidence that Berkshire is based in his state--their CEO happens to be incredibly famous and based in Nelson's state. Buffett could have probably swayed any Senator to do this, because it makes sense.

Posted by: rglvr | April 27, 2010 10:27 AM | Report abuse

The worst part is that it's not even worth $8 billion to Buffett. It's not as if the money goes 'poof', it just goes to back promises Berkshire made to it's counterparties. That money will presumably come out of the $20 billion in cash and equivalents, and so the cost to Buffet is probably something like money market interest - maybe $80 - $160 million (more if Berkshire's desired cash balances are higher than $12 billion and it has to take money currently at work and park it in cash, but not much too much more). Yes, it's real money, but peanuts compared to the benefit of actually having money set aside to cover losses.

By the way, can you imagine Buffett trying to do the same with with GEICO? Putting a provision into a bill that exempted existing insurance contracts from having money set aside to pay out claims?


rglvr, you said
"Berkshire, being as financially and historically strong as it is, didn't need to post collateral--it pays its promises."

AIG had great ratings too. Then its ratings and its cash both went away. Now $63 billion worth of derivatives isn't nearly AIG levels of risk, but in general you need to get collateral cash posted when ratings are strong - when ratings are being cut, the cash needed to post collateral is often unavailable.

Posted by: justin84 | April 27, 2010 10:57 AM | Report abuse

"Mr. Buffett's push was notable because he has warned of the potential dangers of derivatives, famously branding them "financial weapons of mass destruction."

i guess he should have taken his own advice.
but....on the bright side,i am sure there is some loophole somewhere, that his legion of legal, tax and financiall advisors can find, to get him around this inconvenience.
after all, that is what they get paid for.
and they will be well rewarded for their brilliance, when they do.
they must be working on it, right now.

Posted by: jkaren | April 27, 2010 10:58 AM | Report abuse

Every time I see a photo of Ben Nelson, I think that he could pursue a lucrative second career in cinema playing a slightly sleezy self interested member of Congress.

Posted by: bdballard | April 27, 2010 11:04 AM | Report abuse

The Broders and Gergens of the world love to fetishize the moderate, independent, bipartisan, principled voices of the Senate like Ben Nelson, Mary Landrieu, and Joe Lieberman. The truth is, these folks are just keeping their options open -- being in the middle allows you to be available to be sold to the highest bidder, whether it's right or left. When you have leverage, the money pours in from all sides. And being a "moderate" means you can change your principles and no one will question you since you're "independent-minded". It's a pretty sweet deal.

Posted by: vvf2 | April 27, 2010 11:11 AM | Report abuse

If Buffett could have convinced any senator, why didn't he? Why was Ben Nelson left voting against debate if the arguments are so strong? I'm nowhere near an expert in this stuff, but when the only one convinced by the argument is a Senator with a parochial interest in pleasing a really really rich constituent, I'm not sure I buy that the argument is that strong.

Still, even if it's right on the merits this thing looks extremely fishy, and given Nelson's history with fishy seeming deals you'd think he'd have thought twice about being thrust back into the spotlight on this.

Posted by: MosBen | April 27, 2010 11:23 AM | Report abuse

greed and avarice poke their heads up, at every turn.
for every snake that is downed, two more appear.

good work is just a moment in time,
and the work is never completed.
this is truly a neverending story.

Posted by: jkaren | April 27, 2010 12:09 PM | Report abuse

jkaren, you clearly have no clue what you're talking about, so you decided to write a poem instead. How about you actually address the points rglvr made rather than just spewing more uninformed gibberish.

Posted by: ab13 | April 27, 2010 12:39 PM | Report abuse

"-while also giving Wall Street a huge kickback because they no longer need to purchase insurance."

The point is that Wall Street was unable to properly price the risk of that insurance. That's what blew up AIG, and that's what we're trying to avoid.

Posting bets without collateral is just plain irresponsible.

Posted by: jsrice | April 27, 2010 12:49 PM | Report abuse

rglvr,

thank you for your explanation.

So basically what you're saying is that since Mr Buffett was responsible and didn't over-extend himself, he's being hurt by this.

Kind of like how responsible homeowners who lived within their means and didn't over-extend themselves are in a roundabout way getting shafted by not getting their mortgages "adjusted" (because they don't need it)

Posted by: visionbrkr | April 27, 2010 12:55 PM | Report abuse

justin84 said:
"By the way, can you imagine Buffett trying to do the same with with GEICO? Putting a provision into a bill that exempted existing insurance contracts from having money set aside to pay out claims?"

A good analogy for the need for derivatives collateral requirements, except I can't imagine him doing that, because auto insurance regulations(and I think most products with the name insurance in them), ALREADY require "statutory reserves" to be set aside for claims. Since the derivative contracts he wrote, which are insurance contracts, didn't require collateral when he wrote them, post-hoc collateral requirements would greatly alter the business sense. So, good analogy for the need for derivatives collateral requlations i.e., "statutory reserves", but doesn't quite equal what Buffett is trying to prevent.

Posted by: rglvr | April 27, 2010 12:57 PM | Report abuse

MosBen wrote: "If Buffett could have convinced any senator, why didn't he? Why was Ben Nelson left voting against debate if the arguments are so strong?"

I'm sure many companies are trying to prevent the rewriting of contracts. In Buffett's case, I don't think he has a relationship with other Senators as much as he would with his (and his company's) home state Senator. Also, usually Buffett's opinions, especially when they concern business and investing, carry great weight. To Ezra's point, "but because everyone is on the lookout for this stuff with Nelson, his provision got tossed out of the bill and became an embarrassing news story" is probably the reason Buffett's opinion was made to look incorrect or unethical.

Posted by: rglvr | April 27, 2010 1:03 PM | Report abuse

More on Justin84's comments:

Buffett's cash hoard at Berkshire is precisely to back up all his potential liabilities. He prefers to keep, at the very least, $10 billion on hand to cover the unexpected, which I believe is more than we can say for AIG's liability management practices back in the day.

AIG's derivatives positions were much, much larger than Buffett's $63B and I believe the majority of Buffett's deriviatives don't require any sort of claims payout for 15 years from the time he wrote them (AIG's payout claims were on credit events that could happen swiftly and immediately after contract signing).

I'm not sure how collateral-posting would work but I think the other side holds the collateral (or, it would go into escrow?). Yes, that loses Buffett the interest on Treasuries he would put the cash in (same as cash), but it also makes that cash disappear for any event that happens now (when most of his derivatives don't allow payout for another 10 years). He probably wouldn't have written the contracts if collateral was required, at least not at the cheap rates derivatives were being sold back when he wrote them.

If collateral is required on old contracts that had stipulated no collateral was required, that pretty much bails out the other side (Wall Street) from their underwriting laxness (stupidity).

Posted by: rglvr | April 27, 2010 1:17 PM | Report abuse

"Also, usually Buffett's opinions, especially when they concern business and investing, carry great weight."

Yes they do. So if there is an argument to be made on changing the derivatives language, that argument should have been made in the form of debate over an amendment. But this filibuster prevents the Senate from debating and amending the legislation at all, and is designed to force Chris Dodd to cut deals with Republicans before the legislation can be brought forward and debated in public.

If there is any merit to Buffet's opposition, stopping the bill in its tracks is not the right way to press for modification, but it certainly is a well-worn path for Ben Nelson.

Posted by: Patrick_M | April 27, 2010 1:31 PM | Report abuse

I agree with Patrick_M. I don't think it will be in the final bill. Nelson certainly made it harder, but I think an "exemption" (as this is being portrayed) would have encountered the same pushback on the floor. They probably wanted the fix to be quietly done, to prevent casting it in the "exemption" light, but has ended up in about the worst light you can put it in.

Posted by: rglvr | April 27, 2010 1:41 PM | Report abuse

rglvr,

I agree with you the analogy isn't perfect. It's unfortunate for Buffett that he needs to back promises made via derivatives contracts with actual cash given that those contracts were entered into before the requirement existed, but I still think it needs to be done.

Buffett can always unwind his positions if he's concerned the collateral requirements will tie up too much of his cash.

AIG is planning on keeping up to $500 billion worth of notional after the unwind completes. I don't want to risk the possibility of AIG's ratings improve enough so that it barely has to post any collateral on the legacy stuff, or for that matter see any other major player in the CDS market run around without posting collateral.

http://www.reuters.com/article/idUSTRE63B0GJ20100412

I generally don't prefer government intervention and rule making but I certainly don't want a repeat of the AIG scenario if we can avoid it and I don't want to leave an obvious loophole in the collateral requirement.

Posted by: justin84 | April 27, 2010 1:42 PM | Report abuse

I should add, Buffett likes to keep at least $10B on top of statutory reserves, and he is very stringent with his insurance underwriting (he can usually makes a profit after premiums - claims, which doesn't even include the investment income from the premium float), so if you want to think of that as another sort of "reserve", I think that's ok.

Posted by: rglvr | April 27, 2010 1:45 PM | Report abuse

rglvr,

And yes, I agree that bails out the other side on Wall Street from not requiring collateral, but on the other hand I prefer a 'posting collateral' bailout to a TARP bailout.

Posted by: justin84 | April 27, 2010 1:46 PM | Report abuse

I think I should add that this part in Ezra Klein's post is pretty misleading: "Sound complicated? All you need to know is that this language is worth $8 billion to Buffett, and Sen. Ben Nelson was happy to help him out."

He partly clarifies himself by saying it would apply to all companies, but that wasn't enough. That is cable news simplification.

And it's not worth $8 billion to Buffett, it's worth much more. Since most of his contracts don't require payout for over a decade, he has already invested the premiums, in common stocks or buying companies or providing liquidity to the frozen financial sector in 2008 or loans to his subsidiaries, etc.

Buffett + $8B + >10 years = you can do the math

Buffett wasn't the only person in the world who wrote financially-sound derivatives contracts, not by a long shot.

As with most things that could affect decisions made in the past, new rules should be grandfathered in. Being that the derivatives market grew to insane heights, that probably isn't practical. That doesn't help the fact that lots of people, including Buffett, who were able to write derivatives contracts in a smart and safe way for their company, are going to pay dearly for smart decisions made in the past.

Posted by: rglvr | April 27, 2010 1:48 PM | Report abuse

rglvr,

One more thing. Like you, I generally trust Buffett to manage his business prudently. There's nothing to say he doesn't have a heart attack tomorrow and his successor might not have the exact same view of the cash reserve that Buffett had.

Again, it's not entirely fair to the existing contract holders but in a bailout prone world it's the decision I'm most comfortable with.

Posted by: justin84 | April 27, 2010 1:53 PM | Report abuse

Yea, Justin84, I think I've come to the same conclusion. It's better overall.

But it still sounds legally questionable to me.

Posted by: rglvr | April 27, 2010 1:55 PM | Report abuse

As little as I read the Atlantic online, I think their comments board, which allows/shows threads, is superior. A thought for WaPo.

Posted by: rglvr | April 27, 2010 2:00 PM | Report abuse

rglvr,

Do you happen to know what types of contracts Buffet's involved in? I've been talking as if they were credit default swaps, but most CDS are typically 5yr contracts.

Posted by: justin84 | April 27, 2010 2:03 PM | Report abuse

Good Reuters article, justin84. It mentions the protection Goldman bought on its Abacus CDO. The article is before the lawsuit by the SEC against Goldman was launched.

Posted by: rglvr | April 27, 2010 2:07 PM | Report abuse

Equity index puts--that was one of the biggest. If the S&P500, in 15+ years, was at the level it was when he wrote the contract (I think in 2006), he would have to pay out a little. If it was substantially less, he could still make a profit, or so he said in the 2008 annual letter to shareholders.

Posted by: rglvr | April 27, 2010 2:11 PM | Report abuse

"..you clearly have no clue what you're talking about, so you decided to write a poem instead. How about you actually address the points rglvr made rather than just spewing more uninformed gibberish."


I vote for more poetry in any discussion of derivatives (and of the Senate's procedural arcana), and less of the sort of hostile invective contained in the above-quoted comment.

Posted by: Patrick_M | April 27, 2010 2:33 PM | Report abuse

Patrick_M: Your ideas intrigue me. I'd like to subscribe to your newsletter.

Posted by: rglvr | April 27, 2010 2:40 PM | Report abuse

@Patrick_M: "I vote for more poetry in any discussion of derivatives (and of the Senate's procedural arcana), and less of the sort of hostile invective contained in the above-quoted comment."

I'm usually not hostile (though I'd say that comment is only marginally hostile), but certain commenters like to fill up the threads with comments that have zero insight or relevant thoughts, while claiming some sort of moral high ground over their ideological opponents. If jkaren thinks she is such the better person than those on the other side of the ideological spectrum, as her comments regularly imply, she ought to be able to demonstrate that with some rational thoughts on a subject rather than 8th grade poetry. I'd also note that jkaren's ratio of hostile invective to poetry in this very thread is 3:1.

Posted by: ab13 | April 27, 2010 3:23 PM | Report abuse

rglvr,

I enjoyed your exchange with justin84 and learned a few things about a very complicated subject along the way.

I get the sense that there will be plenty of twists and turns along the way with this bill, especially toward the very end, when it has to be merged with the House language. The fact that the Federal Reserve is now also seeking changes in the approach on derivatives adds considerable additional moving parts to the legislative machinery.

I think that you are right that Nelson's vote now places any potential changes to meet Buffet's concerns in the worst possible light, and it is especially ironic when one considers the fact that Nelson could have voted with his own caucus. The Republicans stayed together, so Nelson's vote was completely unnecessary to stop the bill, and he could have stayed behind the scenes and quietly worked to change the language.

Nelson certainly has proven himself to be one of the least skilled politicians in the Senate.

Posted by: Patrick_M | April 27, 2010 3:46 PM | Report abuse

And how. It seems he could have gotten a consensus on this if he framed it as not rewriting contracts. If not, he shouldn't have let his obvious conflict of interest tar any chance of debate on the important matter.

Posted by: rglvr | April 27, 2010 4:52 PM | Report abuse

." I'd also note that jkaren's ratio of hostile invective to poetry in this very thread is 3:1."


i spend time during the week, working in a homeless shelter, and some time working on a suicide and crisis hotline.
there are real people that are very hurt by what is happening.
maybe i understand their suffering better than i understand the subject of derivatives.
what i understand, is that the selfishness and careless high stakes that happened on wall street, has put children in shelters and good people on the phone to crisis hotlines, and caused a lot of suffering. they dont have medical care, lights in their house, or gas for their car, and they cant find jobs.
here is my rational thinking:
many people have fallen through the cracks of the economic crisis, and are really suffering.
and yet, the people who made these deals are getting away scot-free, with all of their fortunes intact.
and though the way i express this may sound like gibberish to you, it is an important part of this whole story.
there is a human side to the sufferings that have been caused to a lot of good and innocent people.
sorry if i express it in my own way, but even in a complicated discussion about derivatives, it is a very real part of the story.
innocent people are paying.
what about the people who made the deals,
who have the lawyers and accountants to defend themselves, as opposed to the little girl sitting in a shelter, through no fault of her own....but indirectly because of what happened to the economy and on wall street, by some of these very people.

i dont see any of this as being unrelated.
and it does create a lot of anger that the people paying for these actions, are mostly not the ones who caused them.



Posted by: jkaren | April 27, 2010 5:54 PM | Report abuse

" How about you actually address the points rglvr made rather than just spewing more uninformed gibberish."

"Mr. Buffett's push was notable because he has warned of the potential dangers of derivatives, famously branding them "financial weapons of mass destruction."
i think that addresses the point.

i worked on the crisis hotline today, and here is a description of the calls, as a backdrop to mr buffet's comment and the predicament he finds his company in, for which he may have to use his reserves, and the actions of ben nelson....
you tell me which is the gibberish.....

~a woman called and asked for prayer for her daughter, who is overworking on a night shift, and is under terrible financial stress. the mother is worried about her daughter's health, and her raise didnt come through. could we please pray for her raise to come through... she is worried about how hard she is working, and could we also pray for her to have the money to be able to afford her car repairs.
~ a man called for prayer because his contracting business is falling apart from the economy after 25 years in business, and he is out of ideas, and has cut his family's lifestyle down to the bone. his wife's work is also suffering.
~ a woman living in a motel called, because she cant keep her pet with her, but it is with a family, and its bowl cracked, and she wanted prayer to be able to afford a new bowl for it.
~ someone called for prayer that their loan modification would come through in the next few months.

i am sure that buffet's economic and legal team, will figure out how to work through his problem now.
but i am not sure about the people i spoke with on the lines.
who is going to help them?
senators like ben nelson, are more concerned with saving the skins of the rich and powerful, than these folks.
it isnt gibberish.

Posted by: jkaren | April 27, 2010 6:36 PM | Report abuse

"It seems he could have gotten a consensus on this if he framed it as not rewriting contracts. If not, he shouldn't have let his obvious conflict of interest tar any chance of debate on the important matter."

I agree. One would think that making sure a law would not have a retroactive impact on contracts that were formed before the law was passed (by persons who could not foresee the law) would always be a powerful fairness argument, as doing otherwise violates at least the spirit of the prohibition of ex post facto laws in Article 1, Section 9 of the Constitution. For that reason I wonder if Ben Nelson may have had some other reason in addition to Warren Buffet's concerns for voting the way he did, or if Nelson really is every bit as inept as he seems.

"there is a human side to the sufferings that have been caused to a lot of good and innocent people.
sorry if i express it in my own way, but even in a complicated discussion about derivatives, it is a very real part of the story."


Agreed, jkaren. The "collateral damage" that the "Great Recession" has brought upon innocent human lives in this country is enormous, and too often completely bypassed in policy discussions by the financiers and politicians whose actions led to the collpase.

Trying to prevent such damage from happening again is what "FinReg" (and discussing all of the mind-numbing details of these strange financial instruments) is all about. Or (at least) it should be.

I again express my support of your poetry and your heartfelt passion on this blog.

Posted by: Patrick_M | April 27, 2010 6:50 PM | Report abuse

Trying to prevent such damage from happening again is what "FinReg" (and discussing all of the mind-numbing details of these strange financial instruments) is all about. Or (at least) it should be.

yes, thanks, patrick_m.
i have great faith in the administration of president obama.
first, health care reform....now, finreg.
we are making progress....inch by inch, we are moving in a better direction.

thank goodness that he was elected.


Posted by: jkaren | April 27, 2010 7:31 PM | Report abuse

Ezra said: [Probably] "dozens of senators have inserted provisions just as parochial and unseemly as Nelson's attempt to protect Buffett, but because everyone is on the lookout for this stuff with Nelson, his provision got tossed out of the bill and became an embarrassing news story."

Um, no. Nelson is being embarrassed not because he tried to insert the provision and got caught, but because he, unlike these other dozens, threatened to filibuster on behalf of it when it got thrown out.

Posted by: dpurp | April 27, 2010 9:31 PM | Report abuse

jkaren, it doesn't matter if you work in a homeless shelter or if you spend every waking moment nursing dying animals back to life and feeding starving african babies. That's great, I'm glad that you spend time helping the less fortunate, but it does absolutely nothing to change the fact that rglvr had highly informed and rational points to make about this issue, and rather than address those points you instead implied that he was wrong without even a shred of an argument, or even any attempt to address his points. You simply attempt to appeal to emotion, just as you've done with your completely irrelevant ranting about the people on the crisis hotline. Here in the real world the adults recognize the fact that sometimes bad things happen to people, and people find themselves in terrible situations. Nothing the gov't can do will ever prevent that. So if you think the gov't needs to take this specific action to solve this specific problem, you need to make the case for that, which would include taking on rglvr's points on their merits, not writing poems and telling us sob stories about people who have been hurt by the recession. If you honestly think that "Cindy on the crisis hotline couldn't afford formula for her baby" is a credible argument for this specific derivatives regulation, you are extremely naive.

Posted by: ab13 | April 27, 2010 11:08 PM | Report abuse

"Um, no. Nelson is being embarrassed not because he tried to insert the provision and got caught, but because he, unlike these other dozens, threatened to filibuster on behalf of it when it got thrown out."

dpurp,

Nelson's other problem here is that he put out a statement explaining his vote on the filibuster whixh said:

"We need to regulate Wall Street without doing harm to Main Street, and I’m hearing from Main Street businesses in Nebraska that have concerns about the current bill adversely impacting them."

Then the story broke that his "Main Street businesses" and their "concerns" were really only one very famous and wealthy constituent looking for an exemption to save himself 8 billion dollars in collateral on Berkshire derivatives.

This can't help but remind us of the fact that Nelson's hold-out on supporting health care was supposed to be a principled pro-life stand, but ended up being resolved by the Cornhusker Kickback.

As a said before, I think a reasonable argument can be made that to require collateral on contracts that were already in effect before the law was drafted is somewhat akin to an ex post facto law. I would not agree with that argument, but I don't think it is unworthy of debate. So I don't think it is all that sleazy to fight for a constituent's interest, even a mega-wealthy constituent like Warren Buffet, where there is a credible argument to be made. What makes this episode so sleazy is Nelson's failure to be truthful to all of his other constituents about the real reasons behind his vote.

And Ben Nelson is not easily embarassed, because he voted for the filibuster again today, despite all the publicity about the Buffet exemption.

Posted by: Patrick_M | April 27, 2010 11:45 PM | Report abuse

ab13

i wrote a response to your many points and flippant observations, but it might be too long to go through.

in short....

warren buffet warned against derivatives as financial weapons of mass destruction. rglvr made the point that he was being penalized because he "could pay on promises."
well, it turned out that he couldnt.
had he been more prudent, he would have not taken that wave.
rglvr, you said
"Berkshire, being as financially and historically strong as it is, didn't need to post collateral--it pays its promises."

AIG had great ratings too. Then its ratings and its cash both went away. Now $63 billion worth of derivatives isn't nearly AIG levels of risk, but in general you need to get collateral cash posted when ratings are strong - when ratings are being cut, the cash needed to post collateral is often unavailable.

Posted by: justin84 |

you dont do yourself any favors with your flippant comments about women not having money in shelters to buy formula.
and if you dont see the interconnections between buffet, nelson, blankenfein and others whose dealings result in the economic misfortunes that direct people directly and indirectly, than you are the naive one.

Posted by: jkaren | April 28, 2010 12:50 AM | Report abuse

" So if you think the gov't needs to take this specific action to solve this specific problem, you need to make the case for that,"


i did make the case for it.
i think that derivatives are really hard to understand well, without a background in economics. so i voted for barack obama. that is how i made my case, as a regular citizen. i put someone in office who i trust to do the things that i believe in.

"You simply attempt to appeal to emotion, just as you've done with your completely irrelevant ranting about the people on the crisis hotline."

the emotional aspects of what this economic meltdown has done to people, is what it is all about. how does that elude you?

" Here in the real world the adults recognize the fact that sometimes bad things happen to people, and people find themselves in terrible situations. Nothing the gov't can do will ever prevent that. "

what??? the government has many safety nets and social programs in place to prevent catastrophe for all of us?
how else would you characterize the new health care reform law?

Posted by: jkaren | April 28, 2010 1:00 AM | Report abuse

That's the thing, jkaren--Buffett can, could, would, and, will pay the contracts he wrote. His company has honored every financial committment since he took over and began transforming a staid textile mill into an insurance company. You don't take a tiny company and turn it into one of biggest in history without even some flashy invention unless you maintain strong discipline and trust. If you can find a manager with a better record in ethics or integrity over a similar period, let me know.

Take his position on the merits, not the politics. He can't fix the world, but he can be a good model for manager behavior, and he has been the best in that regard.

Posted by: rglvr | April 28, 2010 1:15 AM | Report abuse

"...sometimes bad things happen to people, and people find themselves in terrible situations. Nothing the gov't can do will ever prevent that."

nothing? ever? is this really what ab13 intended to say? I'm with jkaren again on this one.

Although government will never prevent the happening of all bad things in our lives, it certainly can (and often does) take actions that prevent the happening of certain bad things. Two examples:

1). the stop signs placed at appropriate intersections in ab13's neighborhood

2). the Glass-Steagall act of 1933

Hopefully the final form of "FinReg" will bring the same sort of orderly conduct, and prevent bad things from happening, as the Glass-Steagall Act did for our financial system for over 65 years, and like the stop signs near ab13's residence do every day.

On a lighter note, I still think the term "FinReg" sounds like it refers to the regulation of aquatic creatures.

Posted by: Patrick_M | April 28, 2010 1:30 AM | Report abuse

rglvr,

I completely agree that Buffet is a role model for ethical management. I suspect he is probably personally embarassed by the clumsiness (and deception) employed on his behalf by Ben Nelson this week.

It is also true that Warren is ...what?... around 80 years old, and his existing contracts might outlive him (God forbid), and end up under the stewardship of a less capable and ethical manager.

I might well be completely wrong, but I still think there will be opportunities as this bill moves forward to have an open and substantive debate on the question of whether it is more fair to require collateral on all existing derivatives, or only on future derivatives that are written into contract after the bill becomes law. I would certainly welcome that debate.

And for the uninitiated (and on the subject of poetry), the book "The Essays of Warren Buffett" is a true American classic, and a must-read even for people who don't care about business or investments. Buffet is one of a kind, and I wish every manager shared even a fraction of Buffet's wisdom and values.

jkaren is also one-of-a-kind, and I think it is odd that some cranky third party would butt into the thread with a hostile message about the nature of her arguments being insufficiently specific to the topic, given that such a gratuitous criticism is itself entirely off topic.

Posted by: Patrick_M | April 28, 2010 2:12 AM | Report abuse

"You don't take a tiny company and turn it into one of biggest in history without even some flashy invention unless you maintain strong discipline and trust."


i understood your point there....and yes, warren buffet is like the johnny appleseed of american politics (except he is not from ohio:-)) an american legend.

my point here is that he has upheld his reputation by maintaining strong discipline and trust. that is why it is very disheartening to hear him warn others against derivatives, and then engage in them.
that did not show strong discipline and trust.
and when one takes risks, and with money that also belongs to shareholders, you cannot presuppose all of the scenarios that will occur....especially with financial instruments that you strongly caution against.
and though this wont hurt his shareholders, it seems, i think it hurts his integrity.
that is the part that matters here. do you see what i mean?
and that is the part that matters the most in this whole financial meltdown... at least to my way of thinking.
normal people like me, who may not understand the technical aspects of derivatives (even though i have read all of your comments several times,) and what the heck is actually going on with this entire meltdown, understand the difference between honest mistakes and acts of intentional dishonesty and malfeasance.
that was the point.

it is unfortunate that he cant get the terms that he thought he was promised, but maybe he should have followed his own advice and not risked shareholder money on derivatives in the first place.
so he is going to pay the price.
and the whole situation was sullying to him, and certainly to ben nelson.
i worked at a brokerage firm years ago, called drexel, burnham, lambert...during the rise of junk bonds and michael milken.
maybe i didnt understand too well what they were doing at the time, but honestly, you didnt have to be an economist or a rocket scientist to recognize a house of cards when you saw one.
drexel burnham lambert was a company with a good reputation and it was destroyed. a few dishonest men took the whole place down.

Posted by: jkaren | April 28, 2010 2:12 AM | Report abuse

finreg for patrick_m


:-)
http://image24.webshots.com/24/0/29/67/103602967tTljZG_fs.jpg

Posted by: jkaren | April 28, 2010 2:21 AM | Report abuse

jkaren,

Thanks for the colorful fin. Now I am afraid that we'll get the tea partiers convinced that Obama and the Democrats want to outlaw fish (or turn them into socialist fish) with something called FinReg, or Fish Panels, or something like that.

Posted by: Patrick_M | April 28, 2010 2:35 AM | Report abuse

le fin
:-)

Posted by: jkaren | April 28, 2010 2:49 AM | Report abuse

jkaren,

Moving back to Buffet, here is what he has said to the press in recent days:

"[Derivatives] are dangerous to the system,” Buffett said. “That's why I have no objections to the idea that regulation is coming on them.”

However, Buffett said, he wants the legislation to make clear that existing contracts will not be affected by the new collateral requirements. Those would make companies set aside money to offset potential losses to derivatives.

Regardless, Buffett said, the outcome would not hurt Berkshire's finances because he is confident that any retroactive regulation of existing derivative contracts would be defeated in court. But he'd like to avoid litigation.

Buffett said it would be unconstitutional for Congress to essentially rewrite existing contracts and require companies such as Berkshire to post collateral on deals already in place."

(http://www.omaha.com/article/20100427/NEWS01/704279907)

Self-serving? Of course. Irrational and/or hypocritical? I really don't think so.

rglvr conceded early on that "Being that the derivatives market grew to insane heights, ...[grandfathering the regulation] probably isn't practical." But if the regulation will require that Berkshire will need to suddenly freeze $8 billion in reserves, it is not surprising that Buffet (and I suspect others) will test the constitutionality of any such provision in the law. My concern is that if this issue is not debated, Congress may pass something that is indeed "ex post facto."

That would not be a good thing for FinReg.

All in all, for me this episode doesn't really hurt Buffet's reputation as an ethical capitalist, but Nelson has fulfilled the worst possible stereotype of bad behavior by a politician on behalf of powerful monied interests at the highest levels of government.

If Nelson would simply present Buffet's arguments on their own merits for an up or down vote on an amendment, there would be no unpleasant odors here.

Posted by: Patrick_M | April 28, 2010 3:08 AM | Report abuse

jkaren,

le fin? never!

It turns out that the tea party folks already believe that Obama is trying to stop people from CATCHING fish:


http://urbanlegends.about.com/b/2010/03/10/rumor-obama-bans-fishing.htm


...so now I am sure that they will believe that the FinReg means that fish themselves are to be converted to socialism, and that Obama wants to protect the socialist fish, so that they can rebuild ACORN underwater in a strange Atlantis where nobody can cling to their guns and religion....

I also predict that the filibuster on FinReg will collapse on Thursday or Friday of this week, and the Republicans and Ben Nelson will be left looking like the Keystone Kops when that happens. And my final prediction is that Warren Buffet will keep on making good returns for owners of shares of Berkshire Hathaway, no matter what happens with the FinReg bill and with his desired exemption from the collateral requirements.

Now le fin (for Pat for tonight).

Posted by: Patrick_M | April 28, 2010 3:27 AM | Report abuse

patrick_m
i think all of your predictions will be correct also.

have always thought that warren buffett was an interesting person.
i admired sir john templeton. he had an incredibly strong social conscience....he was a rarity in the world of finance.

those were funny urban legends!
finniculi, finnicula!


Posted by: jkaren | April 28, 2010 3:59 AM | Report abuse

"finniculi, finnicula!"

FINally, the FINtastic new logo for regulation of fins:


http://www.thedorsalfin.com/wp-content/uploads/2009/08/shark_fin_soup.jpg


Yesterday evening, O Carolina, I climbed up,
Do you know where?
To where an ungrateful heart can no longer vex me!
Where a fire is burning, but if you flee
It lets you be.
It doesn't chase you, doesn't melt you, with just one glance!
Let's go, let's go, let's go to the top,
Let's go, let's go, let's go to the top,
Funiculì, funiculà, funiculì, funiculà!
Let's go to the top, Funiculì, funiculà!

Posted by: Patrick_M | April 28, 2010 5:38 AM | Report abuse

patrick_m

we have the appropriate logo!
and now, an official theme song!!!
http://www.youtube.com/watch?v=6Im63wVdTmk
in celebration of "finreg,"
we could rename ourselves,......
finland!!!
(sorry!)

Posted by: jkaren | April 28, 2010 9:56 AM | Report abuse

Patrick_M, I agree with your recommendation for The Essays of Warren Buffett, but we can cut the middle-man out (the book) and save people some money: someone took parts of his annual letters to shareholders (all of them are on the Berkshire Hathaway website) and compiled them by topic. It was good, but the actual letters are much better and more numerous.

http://www.berkshirehathaway.com/letters/letters.html

Good catch on the Omaha-World Herald article.

Posted by: rglvr | April 28, 2010 10:01 AM | Report abuse

Sigh. You just don't get it jkaren

-----"warren buffet warned against derivatives as financial weapons of mass destruction."
-----

So? Put some context around that quote. Make an informed case for this specific bill. Did Buffet saying that also mean that he thinks this particular provision of the law is a good one?

-----you dont do yourself any favors with your flippant comments about women not having money in shelters to buy formula.
----------

You referring to it as flippant shows how little you understand the real point, that anecdotes about people struggling in the recession are completely irrelevant. No one has ever questioned the fact that real people are going through hard times given the state of our economy. But you don't debate policy by talking about that, you debate policy by making the case for or against specific policies based on their merits. By your reasoning rglvr or myself could use the exact same tactics. If this is a bad policy for the economy, then we could also give anecdotes about people struggling to make ends meet as an argument against it. But I wouldn't do that, because it's a silly, irrelevant, and naive form of argument.

------- and if you dont see the interconnections between buffet, nelson, blankenfein and others whose dealings result in the economic misfortunes that direct people directly and indirectly, than you are the naive one."
--------------

Why don't you enlighten us as to exactly how this specific policy we are debating will affect people's economic misfortunes. So far all you've given us is "derivatives bad, economy bad, poor people struggling". That's not a coherent argument. rglvr has made the case against it, address those points with something other than the silly "weapons of mass destruction" quote.

--------- "what??? the government has many safety nets and social programs in place to prevent catastrophe for all of us?"
-----------

Yet somehow you've still just described multiple examples of people struggling in the current economy. How can that be? You're missing the point again. There are always going to be people at the bottom struggling in tough circumstances, which is why it's naive to use that as a debating point on a specific piece of policy.

Posted by: ab13 | April 28, 2010 10:35 AM | Report abuse

@Patrick_M: "nothing? ever? is this really what ab13 intended to say? I'm with jkaren again on this one.
Although government will never prevent the happening of all bad things in our lives, it certainly can (and often does) take actions that prevent the happening of certain bad things."

Yes, nothing, ever. Unless you have some utopian vision of society, there will always be people down on their luck struggling to make ends meet. Read the examples that jkaren gave again. A woman struggling to come up with money for care repairs. A man going through hard times because his business is failing. Are there gov't programs that are going to prevent that type of thing from ever happening? Of course not, which is why it is unbelievably naive to suggest that those anecdotes in any way make the case for a specific piece of financial regulation. If the Republicans decided to stop being obstructive and the Democrats could pass whatever legislation they wanted, there are still going to people struggling through the situations jkaren described.

Posted by: ab13 | April 28, 2010 10:42 AM | Report abuse

rglvr,

Yes, I have also gone through the original Buffet letters online and they are great. But I do like the topical organization of the book, and it makes a great little surprise gift for people who are not already aware of Buffet's unique writings. I keep a copy on the bookshelf in our guest room so that people can discover it.

"A man going through hard times because his business is failing. Are there gov't programs that are going to prevent that type of thing from ever happening? Of course not, which is why it is unbelievably naive to suggest that those anecdotes in any way make the case for a specific piece of financial regulation."

ab13,

If you look again at my comment you will see that I did not say that government action can prevent all bad things from ever happening to all people. It would be naive to say that, but nobody here has said that. It is likewise naive to suggest that government policy can never ("nothing...ever") have any effect on the potential for an economic downturn, which necessarily leads to business failures, unemployment, foreclosures, and personal hardship. Policy (or lack of policy) has high stakes outcomes in the real world.

jkaren,

Thanks for putting us over the FINish line.

Posted by: Patrick_M | April 28, 2010 11:37 AM | Report abuse

@Patrick_M: "It is likewise naive to suggest that government policy can never ("nothing...ever") have any effect on the potential for an economic downturn"

I agree, and I never said anything of the sort. What I said was:

"sometimes bad things happen to people, and people find themselves in terrible situations. Nothing the gov't can do will ever prevent that."

Which I stand by 100%. No matter what the gov't does some people will still find themselves in the circumstances jkaren described, which is why it is absolutely ridiculous to use those anecdotes as a rationale for supporting a given piece of legislation. Many very intelligent people believe that some policies jkaren would support would increase the likelihood of economic downturn, but it would be silly of them to use individual anecdotes of people going through hardship to make their case against those policies. Policies should debated on their merits, not by trying to tug at people's emotions.

Posted by: ab13 | April 28, 2010 12:49 PM | Report abuse

ab13,

You remind me of Mr. Spock reacting to Dr. McCoy.

Except that Spock had patience and tact.

If you don't appreciate an occasional reminder of the specific consequences of unsound policy, that's ok. But specific anecdotes will inevitably arise whenever major policies, like the current debate over re-regulating the financial system after the collapse, and the recent debate about improving health care.

jkaren argued that existing derivatives like Buffet's ought to be backstopped by collateral along with future contracts, because the potential risk of carving out exceptions that leave too much leverage in the system is too great not to take a absolutely comprehensive approach to new regulations.

She reminded us of the nature of that potential risk with some real world anecdotes about fellow citizens currently in economic misery. We understand that such anecdotes are entirely unenlightening to you, but some of us appreciate a little discourse along the way about exactly what the otherwise abstract policy is being crafted to prevent.

Posted by: Patrick_M | April 28, 2010 1:34 PM | Report abuse

-----"You remind me of Mr. Spock reacting to Dr. McCoy."

You lost me there.

-----"Except that Spock had patience and tact."

If not having patience when someone wanders into a debate on a subject they are completely ignorant on, and then refuses to actually address the issues, instead writing silly poems, using irrelevant anecdotes, and resorting to arguments by authority, then guilty as charged, and proud of it. It's not as if this is a one-time occurrence. jkaren's MO, going all the way back to Ezra's old blog at the Prospect, is to enter into these discussions without any knowledge of the subject or any valid arguments, usually with some 8th grade level poem about how Obama is such a great man and we should all just believe in him. This is a ridiculous and childish way to debate policy, so I call her on it.

-----"jkaren argued that existing derivatives like Buffet's ought to be backstopped by collateral along with future contracts, because the potential risk of carving out exceptions that leave too much leverage in the system is too great not to take a absolutely comprehensive approach to new regulations."

She did nothing of the sort. She quoted justin saying something like that, but she did not offer any thoughts of her own. She did not address any of the points made by rglvr except to reference Buffet's "derivatives=WMD" quote. In fact she basically said "I don't know anything about this but I like Obama so I support this policy". To quote her:

-----"i think that derivatives are really hard to understand well, without a background in economics. so i voted for barack obama. that is how i made my case, as a regular citizen. i put someone in office who i trust to do the things that i believe in."

From this quote it's pretty clear that she doesn't have any standing to dispute rglvr's points, she's just arguing from authority, "Obama proposed it so I will support it blindly".

-----"some of us appreciate a little discourse along the way about exactly what the otherwise abstract policy is being crafted to prevent."

Then she ought to lay out a case for how this policy she is supporting will prevent these things from happening. "Obama wants it so it must be good" is not that case.

Posted by: ab13 | April 28, 2010 2:08 PM | Report abuse

"-----"You remind me of Mr. Spock reacting to Dr. McCoy."

You lost me there."

I guess that I am not surprised that a popular culture reference was opaque to you.

This discussion has clearly become circular, so I won't prolong it any further. Have a good day, ab13.

Posted by: Patrick_M | April 28, 2010 3:02 PM | Report abuse

patrick_m

thank you for the* fin*tastic dialogue!
you presented your arguments
with great *fin*esse!!!
and i attempted the same,
in my own, *fin*ciful way....
at least,
we did not sit on the fince in this discussion!

Posted by: jkaren | April 28, 2010 3:24 PM | Report abuse

and ab13

here is my good deed for the day....
http://trekmovie.com/wp-content/uploads/immunity/mccoy_spock_dignity.jpg
fyi....you are the one with the pointy ears:-)

Posted by: jkaren | April 28, 2010 3:29 PM | Report abuse

-----"I guess that I am not surprised that a popular culture reference was opaque to you."

Pop culture is not at all foreign to me, but crappy 1980s sci-fi is.

-----"This discussion has clearly become circular"

If by circular you mean "both jkaren and myself refuse to address the issue so I'll just say that I like hearing anecdotes, whether or not they actually have any relevance to the policy debate" then you are correct. This is not surprising to me, since if I recall you were the one defending her a while back when she insisted that her own individual rate increase was somehow relevant to the question of what the actual amount of Anthem's overall increase was. In both cases you're both making the same logical fallacy. This time when confronted with undeniable facts that are in dispute with what you said you just call it circular and check out.

Posted by: ab13 | April 28, 2010 3:30 PM | Report abuse

"Pop culture is not at all foreign to me, but crappy 1980s sci-fi is."

The show ran in the Sixties, and whether or not you think it was crappy, it is now deeply woven into the popular culture.

"This time when confronted with undeniable facts that are in dispute with what you said you just call it circular and check out."

Spock, I could deny your facts, (or present you with another way of looking at them) all day long. But that does not mean the argument will not be going in circles, or that it is a productive use of our time.

Do check out Spock & McCoy some time. Cold analysis vs. the physician's empathy and creativity, right brain and left brain -- the ship benefitted from having both on the crew, but their differing modes of analysis drove one another crazy.


jkaren,

Kirk out. ;-)

Posted by: Patrick_M | April 28, 2010 3:46 PM | Report abuse

For shame, how dare you imply that arguing on the internet is not a productive use of our time ;)

Posted by: ab13 | April 28, 2010 3:57 PM | Report abuse

"kirk out:-)"


"off to the *fin*al frontier!"

hahaha

Posted by: jkaren | April 28, 2010 3:57 PM | Report abuse

""off to the *fin*al frontier!"

hahaha"


You are just too good at this. That's perfect!

BTW, and back on topic, it looks like the great 2 day filibuster has ended (I guess Republicans were terrified by the prospect of sleeping on roll-away cots tonight), so Senator Nelson now will have to make his argument in the form of an amendment, or forever hold his peace.

Posted by: Patrick_M | April 28, 2010 4:12 PM | Report abuse

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