<p>"The rapidly growing trade in derivatives poses a “mega-catastrophic risk” for the economy and most shares are still “too expensive”, legendary investor Warren Buffett has warned.
The world’s second-richest man made the comments in his famous and plain-spoken “annual letter to shareholders”, excerpts of which have been published by Fortune magazine. </p>
<p>The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk. </p>
<p>But Mr Buffett argues that such highly complex financial instruments are time bombs and “financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system."</p>
<p>Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient. Alan Greenspan in 2004</p>
<p>"George Soros, the prominent financier, avoids using the financial contracts known as derivatives because we dont really understand how they work. Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential hydrogen bombs. </p>
<p>And Warren E. Buffett presciently observed five years ago that derivatives were financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.</p>
<p>One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldnt be taking it to those who are willing to and are capable of doing so, Mr. Greenspan told the Senate Banking Committee in 2003. We think it would be a mistake to more deeply regulate the contracts, he added."</p>
<p>Mapesy, great article, thanks for posting it.</p>
<p>It’s too early to tell and 11 plus years is a long time, but Buffett didn’t totally listen to himself. At the very least, Buffett could have gotten a better price if he waited to put on the following trade.</p>
<p>“Buffett’s Berkshire, meantime, fell sharply last week, as its class A shares dropped over $25,000, or 18%, to $113,100. Berkshire’s equity portfolio, which stood at $69 billion on June 30, is falling in value, although it’s ahead of the major averages this year. Berkshire has written, or sold, long-dated put options on some $40 billion of equity indexes, including the S&P 500. Those put sales, which amount to a bullish market bet, are deep in the red, although Berkshire doesn’t have to post collateral against any paper losses. We estimate those puts could have cost Berkshire as much as $2 billion in the third quarter and several billion more dollars this quarter, with the S&P down over 20%. Berkshire ultimately may score with these puts if they expire worthless at maturity between 2019 and 2027. But the normally savvy Buffett made a mistake investing in financial derivatives, about which he has long warned. Berkshire had no comment.”</p>
<p>A mortgage, margin purchase, a student loan, loan for that matter, is nothing more than a selling of a put. (obligation to buy at given price, at a certain time).</p>
<p>Warren B. also was NOT in favor of W’s tax cutsssss. Thing again he doesn’t pay all that much in taxes in relation to his wealth and wages. Its a 1099 World.</p>