Buffett Was Right: Derivatives Are Destructive

"This $500 trillion is an insane number. All the stock markets on the globe are only $100 trillion." Wrong, derivatives are indeed over $500 trillion. Unlike stocks, they have no inherent value: they are based on the value of other commodities. Futures, for example are a type of derivative. Hence,the total derivatives market can be exponentially higher than the value of the underlying commodity. They can expire worthless, and often do. Playing them is a lot like placing a bet so the really scary thing is that the entire US financial system is based on gambing. One bad bet leads to another as institutions hedge against hedges then the whole house comes down.

Leverage is great! Leveraged destruction even greater!! I am sure WMD's will be coming out of the woodworks now. Blaming derivatives because "I always knew Buffet said so". Derivatives, like nuclear energy - have always existed - and can be both used and misused. If they have been used to "hide" bad lending practices - what's the point in blaming derivatives? At the end of the day - Buffet will continue to hedge his own positions using derivatives. And he will still continue to be a prudent investor (who also doesn't invest in technology, by the way). Also - even if derivatives are banned, bad business practices will bring any economy down. Ultimately it is back to the basics - greed (= making loans to kids yet to be born, buying bad long term loans with good short term loans) and fear (=lack of confidence=illiquidity) that brings things down. What do derivatives have to do with this?

If you can't value something with enough certainty, don't even bother with it. If you can't understand it clearly, screw it.

The problem is the SEC which registers ANYTHING including garbage debt that is not secured, not asset backed and not insured. Since at least 2005 instruments creating things such as Lehman's CODES registration #333-121067 have given these OFF THE BOOKS garbage debt a veneer of solvency. It would help if the SEC ADOPTED THE SAME STANDARDS AS BANKS DO FOR CHECKS - LIKE USE OF DECIMAL POINTS AND A WRITTEN AMOUNT. I think one of these offerings is for FIVE BILLION. LAST WEEK Bear, Goldman and Lehman were registering offerings of millions in "NOTES". Since many of these are OFF BOOK then earnings reports are Worthless. Pension funds and charities are big buyers and losers. I have a law degree, masters in Political Science and was a tax consultant, Foreign Service Officer and publisher. For two years I have been trying to get an explanation can someone help me? Marsha 415-421-1412.

The problem is the SEC which registers ANYTHING including garbage debt that is not secured, not asset backed and not insured such as Lehman's CODES registration #333-121067. It would help if the SEC ADOPTED THE SAME STANDARDS AS BANKS DO FOR CHECKS - LIKE USE OF DECIMAL POINTS AND A WRITTEN AMOUNT. LAST WEEK BSC, GS and LEH were registering millions in "NOTES". Many of these are OFF BOOK making earnings reports Worthless. Pension funds and charities are big buyers. For two years I have been trying to get an explanation can someone help me? Marsha 415-421-1412.

This is the time for someone to stand up to the Fat Cats and I've found the guy willing to do it: www.crazymanseconomics.blogspot.com

Funny, but isn't Warren Buffet in the re-insurance business? You know, selling naked out of the money puts. He's in this business through General Re, and is now trying to insure muni's. Why is he in this business? Municipal revenues are ultimately backed by property taxes, which is ultimately backed by property assessed value. Apparently the yield (ie insurance premium) is too rich for Warren to follow his own advice.

hah, 5% will make you a million air! We are going into a recession as much as the FED cuts rates, the problem is not getting solved, just delayed. Now we should be worried about another problem, Inflation!!!!!

LEH , GS, mer , c should all go bankrupt and I will have a blast!

haha to wall st greed. financial armageddon is in its 2nd inning...

I'm disappointed the former derivatives trader from MS didn't tell us what types of derivatives Bear Stearns is losing so much money on and why. Interest rate swaps? Forwards? Futures? Credit default swaps? Options? Are they losing money because of interest rate movements - the Fed's cuts COULD make interest rate swaps extremely costly to certain counterparties... I'm also disappointed in some readers' comments. You're just lazy if you think that anything which is too complex to understand in less than half a page is 'too good to be true.' It might be time to turn in your computer unless you can explain to me how my digital camera can snap and then upload pictures of my children in such excellent clarity...

Try a micro approach. It's not just sub-prime mortgages. It's a huge swath of mortgages at all income levels. It's worse here in Michigan, but its coming to your neighborhood. Housing values dropping to 40% of what they were a year ago. Wages dropping to where a regular guy cannot afford a house in the suburbs and a reliable car to get to work, so there are simply no buyers for houses. You can't sell your home for more than your mortgage, if you put 20% down within the last 15 years and made all your payments. So people squeezed by increased commuting costs and larger health care co-pays walk away from those mortgages. Each foreclosure should immediately cause a $50,000 to $100,000 loss to the bank, since they should list the home at current FMV on their balance sheets, and more money leaks away each month in carrying costs while the home remains unsold. Each foreclosure further depresses home prices in a downward death spiral. At least some of the banks have finally figured this out. They now beg bankrupt people to stay in there homes even after the house note has been discharged in bankruptcy. Other banks are still slow to accept this new reality in realty. So, mix this in with the highly leveraged Wall St. gang, and you've got a recipe for a collapsing house of cards.

I predicted the crash on August way back in March of last year. However, I didn't think we'd be in this bad.

If Mr. buffet doesn't understand this stuff how can the ordinary folk. 519 trillion that is really the crux of the problem no one knows whts going to happen I would say just buy gold stocks and put them away. also silver.

This whole debaucle is very troubling, I am afraid Lehman Bros, is next. Did to the previous blogger, did you consider if no one were to invest, there would be no place for your 5% return to come from. There will always be the ones losing money and the ones earning. Try to be on the right side of that equation. You will never get rich if you don't put your money to work for you. It is a neccessary risk. =(

lets see govt bail out retirement plan : A. rob bank get caught (make sure its a federal bank) at age 65 you'll have 3 squares a day roof over your head and all the excesscise u want, and at 65 u dont have to worry about dropping the soapLOLLOLLOL So thats why all the enron (insert CEO name here) got caught duh LOL

I meant excercise and dropping soap in the shower, I heard this one from a co-worker the other day and couldnt stop laughing.

the funniest part of the whole story is.... the major investment banks & financial institutions recruit the best of the breed MBA's and pay them the best salaries to safegaurd our hard earned money.... and collectively they (investment banks & financial institutions) did the very opposite ..... at the end of the day, the common man lost his / her whole life savings .....

Can 5% ROI pay your bills? if you pay 22% income tax, 18% interest on your credit card bills, 8% sales tax, 3% inflation, which leaves less half of what you are making to invest for the 5% Profit Return (oops! we forgot that we live in America, we dont pay $1 for the meal and $100 for the rent...) so what about using 10% of whatever was left to invest...10% x 5% = 0.5% of your total income, how much you making a year? can 0.5% ROI pay your bills? Of course, Mr. Buffett is right...he is alwayssss right! as the world's richest person, ($60 billion x 0.5% = $0.3 billion), he doesnt have to be the smartest person in the world, coz he doesnt have to worry about his bills and compare which credit cards offer the lowest APR, but we do! So try to pay off your credit cards in order to save 18% interest, which makes 36 times or more than the investment you make today or yesterday!!! btw, if you are lucky enough not to buy BSC last week!

Can 5% ROI pay your bills? if you pay 22% income tax, 18% interest on your credit card bills, 8% sales tax, 3% inflation, which leaves less half of what you are making to invest for the 5% Profit Return (oops! we forgot that we live in America, we dont pay $1 for the meal and $100 for the rent...) so what about using 10% of whatever was left to invest...10% x 5% = 0.5% of your total income, how much you making a year? can 0.5% ROI pay your bills? Of course, Mr. Buffett is right...he is alwayssss right! as the world's richest person, ($60 billion x 0.5% = $0.3 billion), he doesnt have to be the smartest person in the world, coz he doesnt have to worry about his bills and compare which credit cards offer the lowest APR, but we do! So try to pay off your credit cards in order to save 18% interest, which makes 36 times or more than the investment you make today or yesterday!!! btw, if you are lucky enough not to buy BSC last week!