"I view derivatives as time bombs, both for the parties that deal in them and the economic system..
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear..
In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal"
- Warren Buffet, 2002
* For Buffet's detailed view, or if you care about the upcoming collapse of the financial system, go here. You'll be sad, but happy, that you did.
March 05, 2008
"I view derivatives as time bombs, both for the parties that deal in them and the economic system"
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7 comments:
Thank you for finally posting something about these instruments. Anybody here who is constantly calling for a deflationary scenario, please do some reading on these things. The $550+ TRILLION mountain of these things is shaking hard. Heli Ben HAS TO print, and at unprecedented paces, or these things unwind and renders the current banking system insolvent. Folks, inflation we will have.
The irony is that given Buffet's feelings toward derivatives... what is his company doing? Writing more derivatives:
http://ftalphaville.ft.com/blog/2008/03/03/11303/the-sage-again-on-financial-weapons-of-mass-destruction/
500 trillion derivative market.
We are so screwed when that implodes.
As we enter the ultimate worldwide
exposé and margin call … follow the
"money"… M0 to M3, bullion, gems …
You cannot "mark to market" what has no value. And at the moment, that would be every derivative fund/bond/cdo written off of 99% of mortgages.
I saw this mentioned earlier but here is another tidbit. I am a happy BRK/A stock holder and found on page 16 of his annual report to owners he himself manages a portfolio of derivatives for Berkshire that he cautions, due to the new Mark to Market accounting methods can fluctuate in the Billions, quarter to quarter and not to be worried. Kind of makes you wonder that maybe all these bank "write downs" may be suspicious. Also seems like he is viewing some derivatives as bad and some as good. Like anything else, you have to read the fine print to get the true story. Derivatives backed by a good revenue stream, or Muni bond are good, derivatives backed by a sub prime mortgage are bad. Not all derivatives are created equal.
And what are these derivatives derivatives of??? Why, the Armed Mortgage. In a previous posting I described the armed mortgage (adjustable rate mortgage and its derivatives) as a financial WMD akin to a fleet of car bombs parked in the garages of homedebtors' homes with the timers set.
As we see now, Greenspan is more of a terrorist than Osama bin Laden. Greenspan needed only give the lenders a wink and nod to plant his WMD and let greed do the rest. No need to get 19 idiots to play Flight Sim.
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