Warren Buffett has called derivatives "financial weapons of mass destruction"
Fitch Ratings downgraded Berkshire from AAA this week citing risks stemming from derivative bets (which incidentally are only negotiated by Buffett himself at Berkshire and happen to be OTC derivatives). The "Oracle of Omaha"'s portfolio includes liabilities of $14 billion (as of Dec. 31) on 251 derivatives tied to corporate junk bonds, municipal debt, and stock indices on three continents.
A couple of points of interest here: Buffett has criticized particularly OTC (over the counter) derivatives which for those that don't know are contracts which are not traded on a centralized exchange like the NYSE or CME for example. The result is a contract the terms of which are created, agreed, and accepted upon by both parties without a central entity (an exchange) guaranteeing the worthiness of both parties involved or standardizing the terms of the agreements. The result is being unable to truly discern the ability of the counterparty to meet its obligations as described in the OTC derivative contract.
Buffett said in a Bloomberg interview this week that he plans to sell more derivatives. Apparently OTC derivatives that he chooses to involve himself in are acceptable. Perhaps, it is just the rest of us who should not have that choice. Anyhow, I sure do appreciate him doing our thinking for us.
Berkshire was not downgraded by rating agencies S&P and Moody's. Incidentally, Berkshire happens to own a 20% interest in Moody's shares. Apparently, Buffett sees no conflict there.
The whole thing frankly makes me want a dip cone from Dairy Queen as I ponder "Jedi Master or Sith Lord?"
Click title above for Bloomberg article
