BBC: Warren Buffett warns derivatives are “financial weapons of mass destruction”

warren buffett warning about derivatives

Warren Edward Buffett is an American investor, businessman and philanthropist. He is regarded as one of the world’s greatest investors and is the largest shareholder and CEO of Berkshire Hathaway. With an estimated net worth of around US$62 billion, he was ranked by Forbes as the richest person in the world as of February 11, 2008.

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk‘ for the economy”

“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.”

“Derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares – without buying the underlying investment.“

In other words, they’re based on NOTHING. They’re a gamble on a gamble.  They turn Wall St into a casino.

“Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years.”

“Outstanding derivatives contracts – excluding those traded on exchanges such as the International Petroleum Exchange – are worth close to $85 trillion.”

They’re actually throwing a number around which is closer to $1.14quadrillion, or $1,140,000,000,000,000.  In other words, a financial bottomless pit, a black hole, which no Fed bailout can fill.  It’s an unfathomable number.  To compare it to something real, the US Gross Domestic Product for 2007 was $1.44trillion.  In other words, it would take 80 years to pay that much if we put 100% of our GDP towards it.

pdf of original BBC article: 20030304-bbc-buffett-warns-on-investment-time-bomb