Warren Buffett defends the use to derivatives at Berkshire Hathaway

March 2, 2009 by · Leave a Comment
Filed under: Stock Market News 

Warren can defend these all he wants but he was also the one who coined them as “Weapons of Financial Mass Destruction”.  I am surprised that he has so much exposure ($67 billion) to these products.  I hope he has been doing the right thing and keep reserves for these insurance contracts like a normal regulated insurance product would normally be.  

I really don’t have much issue with the concept of a financial product like this, but be unregulated and a industry that did not have the foresight to self-implement some sort of reserve requirement is no good and as a important lesson, we should not bailout any of these companies that are taking losses like these, the fees were easy in the boom years so companies got greedy, now its time to instill fear back to these markets to keep the balance between fear and greed.


Saying “derivatives are dangerous,” Warren Buffett defended his use of them after they played the main role in driving Berkshire Hathaway Inc annual profit to a six-year low.

Buffett devoted one-fifth of his 21-page annual letter to Berkshire shareholders to explaining how he uses derivatives to make long-term bets on stock markets, corporate credit and other factors.

“It’s part of a portfolio of risk assumption that people appreciate in capital markets, and helps cement relationships that lead to more business for Berkshire down the road,” said Bill Bergman, senior equity analyst for Morningstar Inc in Chicago and a former Federal Reserve economist.

As regulators had requested, Buffett provided far more detail on the 251 derivatives contracts that Berkshire has, which the company said in theory could require $67.29 billion (47.36 billion pounds) of payouts in the event every bet went 100 percent wrong.

He also said investors should distinguish Berkshire’s derivatives from others that dramatically increased financial leverage, made banks “almost impossible for investors to understand,” and threatened the collapse of financial services companies such as investment bank Bear Stearns Cos and mortgage financiers Fannie Mae and Freddie Mac.

“I believe each contract we own was mispriced at inception, sometimes dramatically so,” he said. “I both initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the chief risk officer as well. If we lose money on our derivatives, it will be my fault.”

Source: Reuters

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