(2003-03-04) Buffett On Derivatives

Warren Buffett on the dangers of FinancialDerivatives. We view them as time bombs, both for the parties that deal in them and the economic system... I can assure you that the marking errors (Mark To Market) in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multimillion-dollar bonus or the CEO who wanted to report impressive "earnings" (or both)... Indeed, in 1998, the leveraged and derivatives-heavy activities of a single Hedge Fund, Long Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort (Bail-Out). In later congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM--a firm unknown to the general public and employing only a few hundred people--could well have posed a serious threat to the stability of American markets.