Berkshire Presses Lawmakers to Roll Back Proposed Curbs, Avoiding Potential Hit
WASHINGTON—Democrats took a step toward their goal of overhauling financial regulation, reaching a tentative deal to set restrictions on trading in exotic financial instruments known as derivatives.
Among the considerations still in the balance: A big provision being sought by Warren Buffett in recent weeks. A key Senate committee had changed its proposed overhaul of derivatives regulation after lobbying by Mr. Buffett's Berkshire Hathaway Inc., potentially helping the famed investor avoid a financial hit, congressional aides say.
Sunday night's deal, hammered out by Senate Banking Chairman Chris Dodd (D., Conn.) and Senate Agriculture Chairwoman Blanche Lincoln (D., Ark.) reflects the populist, anti-bank sentiments simmering on Capitol Hill. A Senate Democratic official said the two have "worked out a deal," which is expected to be folded into a broader Democratic measure that revamps the U.S. system of financial regulation in the wake of the catastrophic financial collapse that occurred in 2008. The agreement includes a proposal that could force banks to spin off their lucrative derivative trading operations, reshaping Wall Street.
The fate of Berkshire's effort to influence the legislation remains uncertain. Senate officials said Sunday night that most of the details of the agreement haven't yet been finalized.
The provision, sought by Berkshire and pushed by Nebraska Sen. Ben Nelson in the Senate Agriculture Committee, would largely exempt existing derivatives contracts from the proposed rules. Previously, the legislation could have allowed regulators to require that companies such as Nebraska-based Berkshire put aside large sums to cover potential losses. The change thus would aid Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.
Mr. Buffett's push is especially notable because he has warned of the potential dangers of derivatives, famously branding them "financial weapons of mass destruction."
The White House has been trying to kill the Berkshire provision on the grounds that it would weaken the government's ability to regulate the enormous market for derivatives. Berkshire Hathaway argued that it shouldn't be made to redo existing contracts and that it is already healthy enough to cover its obligations. The battle over the provision shows how lobbying by businesses and lawmakers to insert just a few words into a complex bill can have a major impact on the country's biggest companies.
2. Goldman and Tourre mails pretty much confirm their criminal agenda and some excellent research from zerohedge posted later today proves that Goldman executives are lying bluntly about their risk exposure or overall trading strategy involving their clients. The point is how much justice can we expect from a government who does exactly the same.
Goldman’s Tourre E-Mail Describes ‘’ Derivatives
By Christine Harper
April 25 (Bloomberg) -- Fabrice Tourre, a Goldman Sachs Group Inc. executive director facing a fraud lawsuit in the sale of a mortgage-linked investment, said an index that facilitated derivatives trading in the market was “like Frankenstein.”
The so-called ABX index is “the type of thing which you invent telling yourself: ‘Well, what if we created a ‘thing,’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?’” Tourre said in a Jan. 29, 2007, e-mail released yesterday by Goldman Sachs. Watching the index fall is “a little like Frankenstein turning against his own inventor.”
Goldman Sachs, the most profitable securities firm in Wall Street history, released more than 70 pages of e-mail and other documents yesterday ahead of a U.S. Senate subcommittee hearing on the firm’s actions throughout the mortgage meltdown. The firm disputes the U.S. Securities and Exchange Commission’s claim that Goldman Sachs and Tourre, now 31, misled investors in a 2007 collateralized debt obligation about the role played by hedge fund Paulson & Co., which bet the CDO would collapse.
The ABX index enabled investors to trade derivatives known as credit default swaps on different portions of the subprime mortgage market without actually owning loans or securities.
Widows and Orphans
In a March 7, 2007, e-mail Tourre describes the U.S. subprime mortgage market as “not too brilliant” and says that “according to Sparks,” an apparent reference to Daniel Sparks who ran Goldman Sachs’s mortgage business at the time, “that business is totally dead, and the poor little subprime borrowers will not last too long!!!”
The timing of the e-mails overlaps with his work on the Abacus 2007-AC1 bond that is at the center of the SEC’s lawsuit. The Abacus deal was sold to IKB Deutsche Industriebank AG and ACA Management LLC between January and April 2007.
A few months later, a June 13, 2007, e-mail shows Tourre claiming, “I’ve managed to sell a few Abacus bonds to widows and orphans that I ran into at the airport, apparently these Belgians adore synthetic ABS CDO2,” using short-hand for asset- backed collateralized debt obligations squared, or CDOs made up of tranches of CDOs containing asset-backed securities.
Pamela Chepiga, an attorney at Allen & Overy LLP in New York who represents Tourre, didn’t reply to a voicemail seeking comment.
‘Trigger the Crisis’
Tourre and Sparks are among seven current and former Goldman Sachs executives who are scheduled to face questioning by the Senate’s Permanent Subcommittee on Investigations, led by Michigan Democrat Carl Levin, on April 27. Levin, 75, issued a statement yesterday saying his panel’s investigation shows that Goldman Sachs and other investment banks “were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis.”
One of Goldman Sachs’s legal advisers is K. Lee Blalack II, a partner at the law firm of O’Melveny & Myers LLP in Washington and a former chief counsel and staff director of the Permanent Subcommittee on Investigations, according to his biography on the firm’s Web site. Blalack fired off a letter to Levin on April 23 after Levin made similar comments about Goldman at a hearing.
“The statement suggests that you and the subcommittee have already drawn conclusions about the conduct of Goldman Sachs,” the letter said. “We strongly disagree with your statement at today’s hearing and believe that, if we were provided an opportunity to respond to your specific findings, Goldman Sachs could produce to you information that establishes that your findings are incorrect.”
Uncertain About Market
Goldman Sachs also released e-mails yesterday that supported its argument that senior executives at the company didn’t have a uniform view of the mortgage market’s direction in 2007. The e-mails show that the firm adopted a cautious position on the subprime mortgage market in early 2007 and had more trades that would benefit from a decline in the market than from an increase in prices.
“Of course we didn’t dodge the mortgage mess,” Goldman Sachs Chairman and Chief Executive Lloyd Blankfein wrote in an e-mail dated Nov. 18, 2007, that was also among eight pages of documents made public by the Senate’s Permanent Subcommittee on Investigations. “We lost money, then made more than we lost because of shorts. Also, it’s not over, so who knows how it will turn out ultimately.”
Some e-mails indicate that selling securities to customers was part of the firm’s effort to get rid of its mortgage risk and take a negative stance on the market.
“My basic message is let’s be aggressive distributing things because there will be very good opportunities as the markets goes (sic) into what is likely to be even greater distress and we want to be in a position to take advantage of them,” Chief Financial Officer David Viniar wrote in a Dec. 15, 2006, e-mail to a colleague.