(professional.wsj.com) Berkshire said Friday in its second-quarter financial filing with regulators that it reached an agreement to terminate contracts with a notional value of $8.25 billion, or about half the total outstanding. It didn't name the party on the other side of the deal or say when it reached the agreement, other than to say it came after June 30.

The move effectively reduces Berkshire's exposure to defaults by state and
local governments, many of which have been under intense budget pressure at a
time of weak employment and soft housing prices, which have hit tax
collections. Three California cities sought bankruptcy protection last month,
and a state budget task force issued a report calling current municipal finance
arrangements unsustainable.

"The stigma has probably been reduced when you get very sizable cities
like Stockton or San Bernardino to do it," Mr. Buffett said last month on
Bloomberg Television in reference to municipal bankruptcy filings, which can
expose bondholders to losses.

Before the financial crisis, the billionaire
investor's Omaha, Neb., conglomerate sold insurance-like contracts on over $16
billion in debt issued by over 500 states and municipalities. In exchange for
payments upfront, Berkshire in essence agreed to make payouts if these
municipalities default on their debts. So far there have been few such
defaults.

Even before the latest move, the size of Berkshire's derivative bet on
municipalities paled in comparison to its $33 billion wager on four of the
world's major stock indexes, including the Standard & Poor's 500. That bet
forces Berkshire to pay its trading partners if the stock indexes lose value
over the term of the agreements, which don't begin to expire until 2018. Mr.
Buffett has said he expects the derivatives to be profitable for Berkshire, in
part because the $4.8 billion Berkshire was paid to take on the risk has been
his to invest for several years already. Mr. Buffett and an unnamed
counterparty agreed to cancel some of those bets in late 2010.

Mr. Buffett has long warned about potential defaults by municipalities, in
part because of rising pension obligations.